• Donaldson : `Hedge funds are an accident waiting to happen`
• Audio File of Donaldson Speech on Analyst Supervision, Hedge Funds
• Max Re`s alternative investment profits up 76% in Q1
• Buffett Warns of `Huge` Derivatives Problem
• Quattrone Guilty on All Counts
• Spitzer sees decision on Grasso in `very near term`
• Major Probe Continues, SEC Chief Says
• Foundation revises alternative asset allocation, may seek hedge fund managers
• Mutual Funds Neglect Weapon In Market-Timing Fight
• Hedge Fund Tech survey – link corrected
• CCorp and Eurex Clearing finalize terms of Global Clearing Link
• Six Agencies Launch Formal Probes of Oppenheimer`s Sassano
• Nick Leeson tells his story: Behind the Barings collapse
• Google`s Sale of Its Shares Will Defy Wall St. Tradition
• Managed accounts with low minimums hot on Wall Street
• UBS Posts Highest Quarterly Profit Ever on Trading
• Man Group`s Fink Duels Skeptics Who Predict Shrinking Returns
• South African Hedge funds report positive months for 2 years

• Close-Up: Kevin Ferro, Chief Executive Officer and Chief Investment Officer, Ferro Capital LLC
• 11th Annual Hedge Fund Forum New York City - Save up to $500
• Asset Allocation Summit London - 10% discount for subscribers
• FOF World ASIA and Hedge Funds World Singapore - 10% Discount for subscribers
• Institutional Investor invites for second annual Hedge Fund Awards Dinner in NY on June 24, 2004
• gaim 2004 - ICBI`s 10th Annual Global Alternative Investment Forum
• Advertise in this newsletter
• Contact

Can you go into more detail about your investment philosophy?
Ferro Capital’s overarching philosophy is to build diversified portfolios that pursue consistent returns with relatively low correlation to major equity and bond markets, and low volatility. Our focus is to offer our investors a tool to improve the risk-return profile of their overall investment portfolios through an allocation to high Sharpe Ratio fund-of-hedge funds programs.
In order to achieve this, we have designed and implement very thorough diversification across many factors. The firm’s portfolios are typically both multi-strategy and multi-fund. We seek to invest with unique and particularly accomplished fund managers, pursuing a range of hedge fund strategies that often exhibit low correlation to one another, including among others: convertible bond arbitrage, equity arbitrage, fixed-income arbitrage, event-driven strategies, systematic futures strategies, long/short strategies and global macro strategies.
Within each strategy, we seek to allocate to individual managers that are more or less uncorrelated to one another, depending on the risk-return objectives of the client. In general, though, we are biased toward managers that exhibit more “systematic” and more “repeatable” processes, and we are always looking for managers that are in at least one way distinguished from their peers. We describe our goal as the identification of “super-premium” managers.

What do you think explains your success?
I think at least one of the keys is that I and other members of my team have experience working inside hedge funds. For instance, I started out with a quantitative hedge fund firm, D. E. Shaw & Co., in 1994. I became involved in D. E. Shaw’s fund-of-funds, which was based on the concept that, as a hedge fund manager ourselves, we were uniquely positioned to identify and evaluate other hedge fund managers in our chosen strategies. An intimate familiarity with hedge fund strategies and operations is surprisingly rare in this industry, and we believe gives a real edge in identifying, analyzing and selecting “super-premium” hedge funds.

Kevin, congratulations on being named Best Specialist Provider for Hedge Fund Investments in Germany by Euromoney. Can you tell me about your involvement in Germany?
While I was the Global Head of Alternative Investments at Commerzbank, among other things, my team and I spent a great deal of time focusing on the bank’s German clientele, and in fact created the first hedge fund Certificate for German investors at the beginning of 2000, called “COMAS I”, which went on to gain an excellent reputation in the German market for its novel structure and risk-adjusted performance. After leaving Commerzbank to found Ferro Capital in 2001, we discovered that a large audience of investors in Germany had followed our successes at Commerzbank, and wanted access to our programs, so in December 2002 we launched the first of a series of Certificates for the German market in partnership with Merrill Lynch, and have been pleased and flattered by the enthusiasm of German investors for these products. Our firm has a global focus for our products, but we also feel we have a special relationship with Germany, which we expect to get stronger over time.

So I guess you could say that you are the father of the German hedge fund Certificate! What do you think are the most important developments/trends for you in the hedge fund industry?
I believe that one of the most significant trends in the hedge fund industry is that the percentage of “super-premium” hedge fund managers is declining on a percentage basis. That is, new hedge funds are established everyday, but the growth in the number of high quality hedge fund management firms is much smaller than that of the overall industry. This trend of increasing numbers of “average” quality hedge funds puts a premium on careful due diligence processes, like the one Ferro Capital strives to conduct, in order to identify the best managers.
With this said, Ferro Capital has access to what is believes is a sizable amount of “super-premium” hedge fund capacity, due to its years of research and the quality of its relationships. In addition, the Ferro Capital team interviews hundreds of hedge funds every year in an effort to identify new developments among existing funds and new talent.
Finally, we are committed to accepting no more capital than we can allocate to what we believe are “super-premium” hedge funds, as we are entirely focused on delivering the best risk-return profile possible to our clients.

What are the most significant challenges the hedge fund industry has to deal with?
Setting proper client expectations is probably one of the most important issues the hedge fund industry has to deal with at the moment. As people become increasingly interested in hedge funds, it is important for them to understand that different hedge fund managers, strategies and hedge fund products (such as funds-of-hedge funds) can have very different risk-return profiles. There seems to be a tendency for over-simplification and over-generalization with hedge funds—and many are under the impression that all hedge funds, regardless of philosophy, strategy or implementation, are striving to deliver a homogeneous risk-return profile. The fact is, very different risk-return profiles can be targeted—some more speculative, some more conservative. In addition, some managers of hedge fund products aim to focus their clients purely on the return potential of their programs. Others, such as Ferro Capital, attempt to focus clients on risk-adjusted returns or more specifically the “risk characteristics” of their programs—e.g., focusing on low volatility relative to the equity market and/or low correlation/beta to the equity or bond market. We think that setting correct expectations and delivering these results over time have been among the most important factors that have helped set our firm apart from the competition.
Company website: www.ferrocapital.com

Convertible Arbitrage: Insights and Techniques for Successful Hedging
Nick P. Calamos
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To the Recommended Reading Archive

"Hedge funds are an accident waiting to happen," Donaldson, the chairman of the Securities and Exchange Commission, said Sunday. After the corporate scandals of Enron and WorldCom, after the investigations into mutual funds that gave clients favored treatment, hedge funds are looming large on William Donaldson's horizon. "There's not a pension fund in the country that's not using hedge funds," he said. Source

Bloomberg makes a audio file available with Donaldson’s speech. SEC Chairman William Donaldson speaks in Fort Worth, Texas, about the regulator's probe into potential failures by Wall Street firms to supervise analysts, and its approach to hedge-fund and mutual-fund industries. Source

Insurer Max Re, a long time hedge fund investor, reports net gains on alternative investments $38,4m in Q1 2004, up from $21,8m last year. Source

From Asia.Reuters.com: Billionaire Warren Buffett warned of the risks of derivatives on Saturday, and said that the financial instruments could lead to a "huge problem" within the next 10 years. Speaking at the annual shareholder meeting of his Berkshire Hathaway Inc., Buffett cited the example of mortgage financier Freddie Mac to illustrate the risks of derivatives. He said that despite Freddie Mac having intelligent board members, being chartered by the U.S. Congress, and being followed by dozens of Wall Street analysts, it couldn't get a hold on the complexity of derivatives transactions. "With an auditor present, they managed to misstate earnings by $6 billion," More: Source

Reuters reports Frank Quattrone, a former banker famous for taking hot technology companies public, was found guilty on Monday of obstructing federal investigations into some of the most popular stock offerings of the 1990s. Jurors delivered their verdict after deliberating about seven hours over two days, concluding the ex-banker tried to block grand jury and regulatory investigations by forwarding an e-mail to co-workers reminding them to "clean up" their files. It was the second trial for Quattrone, 48, who will likely face one to two years in prison at his sentencing, set for Sept. 8. The first trial ended in a hung jury. In 2000 investigation started whether CSFB had doled out shares of the most popular initial public offerings to hedge funds in exchange for kickbacks. This was when Quattrone got caught endorsing that fatal email… Source

New York Attorney General Eliot Spitzer on Monday said he expected to make a decision in the "very near term" on how to conclude an investigation into the pay of former New York Stock Exchange Chairman Richard Grasso. Source

A Securities and Exchange Commission probe into potential failures by Citigroup Inc., Merrill Lynch & Co. and eight other Wall Street firms to supervise analysts remains active, SEC Chairman William H. Donaldson said Sunday. "Traditionally the SEC doesn't comment on regulatory actions," Donaldson said. "We continue to look at the supervision area. It's not a closed door as far as we're concerned." The SEC began the investigation into analyst supervision in 2003, two months after Citigroup analyst Jack Grubman and Merrill Lynch's Henry Blodget were barred from the industry in a $1.4-billion research-conflicts settlement that covered 10 Wall Street firms. In May, the federal securities regulator issued subpoenas to the brokerages for e-mails and other documents written by people who supervised stock analysts and bankers. Since then, Donaldson hasn't commented on the status of the investigation. Source

PIOnline.com reports the Lumina Foundation for Education, Indianapolis, revised its alternatives allocation, said Nathan Fischer, vice president-investments. More: Source

Mutual funds rarely use one of the biggest guns in their arsenal against abusive market timers, and some have even disarmed themselves, fund critics say. The weapon: redemptions "in kind," which allow funds to give securities in place of cash to investors redeeming shares. Although intended for funds with liquidity problems, in-kind redemptions can target market timers whose rapid buying and selling of fund shares may lower performance and raise costs for long-term holders. Some funds have used in-kind redemptions to fight market timers, "but not enough”. Source

Today the link under “Sources” is actually taking you to the survey (we had an error when publishing this yesterday). If you run a hedge fund, consider forwarding the newsletter with a brief note to your COO, he may be interested in participating and getting the PA Consulting report on hedge fund technology.
A new survey launched by PA Consulting Group (PA) will investigate how alternative investment managers are using technology to support the investment process. The goal of the survey is to provide senior hedge fund managers with industry benchmarks on spending for technology that supports pre-trade, execution and post-trade processes. The report will also include a review of risk management, position keeping and portfolio management features of leading technology vendors.
To participate in PA’s Hedge Fund Survey, please complete the online form, available at www.hedgefundsurvey.org. The form will take between fifteen and twenty minutes to complete and all responses will be kept strictly confidential. Funds that complete the survey will receive a complementary copy of the final report. The survey will remain open until May 12th and the report will be completed in June 2004. To the survey: Source

The Clearing Corporation (CCorp) and Eurex Clearing have finalized terms of their Global Clearing Link and CCorp has requested that the Commodity Futures Trading Commission (CFTC) take action to permit implementation of the first phase of the Global Clearing Link.
The Global Clearing Link, when fully implemented, will allow customers of Eurex and Eurex US to choose their clearing house and will provide fungibility of certain products between the two exchanges. This will result in collateral pooling, portfolio margining opportunities and cost savings through streamlined processes, greatly enhancing capital efficiency. On an operational level, customers will have the ability to leverage existing clearing relationships and increase market efficiencies and opportunities. Source: press release. No online Source

Michael Sassano, one of Wall Street's most successful mutual fund brokers, is being formally investigated by at least six agencies over allegations he helped clients at Oppenheimer & Co. carry out abusive trading strategies, including the illegal practice of buying and selling funds at stale prices after the market closed. Source

“I can be a controversial choice of speaker and some of you may have had reservations about attending this evening. I do believe that I have a story to tell and that many of you will agree that it is a fascinating story, if not one that you would like to repeat at your own firm. The story in its simplest form combines high levels of risk with complete mismanagement…. More: Source

The initial public offering, in the form of a five-stage auction, is expected to make the company's founders instant billionaires. Virtually everything about Google's decision to go public is a departure from standard practice. Source

From the NY Times: One of the hottest investments on Wall Street owes a nod to the discounters and outlet stores that sell factory seconds and slight irregulars at sharply reduced prices. Financial firms are having an easy time selling a new breed of managed accounts, which previously required $1 million minimums, for as little as $25,000 to $100,000. For that sum, a financial adviser can now invest a client's assets in a program that provides access to money managers who typically cater to people with seven-digit portfolios, at a minimum. Source

UBS AG, Europe's biggest bank, had its highest quarterly profit ever, driven by fixed income and equities trading and higher fees from wealth management. Equity trading rose to $10.7 trillion, the highest level since the second quarter of 2001, helped by higher share prices and more hedge fund trades. Source

From Bloomberg.com: Some investors now say Fink will need miracles to continue his winning streak. ``Our concern is that the growth rate isn't sustainable,'' says Brian Moretta, a fund manager at SVM Asset Management Ltd. in Edinburgh, Scotland, who helps manage $1.6 billion. SVM sold its Man Group shares at the end of last year. Man has also attracted the attention of short sellers such as James Chanos, president of Kynikos Associates Ltd., a New York-based hedge fund firm, who's betting the company is headed for a fall. Source

Hedge funds participating in a survey compiled by Nedcor Retail Investments had not delivered a single month of negative returns over the past two years, Lizelle Steyn, a technical product manager at Nedcor, said yesterday. Nedcor launched the survey in December with nine funds, to raise the profile of the local hedge fund industry and improve the transparency of strategy and performance reporting. Source

From the team that brought you GAIM USA, the only must-attend event of the summer on key regulatory and investment issues in the heart of New York City. **Register Today and Save up to $500**

• Special track specifically for investors looking to make an early allocation to hedge funds - plus the opportunity to meet leading institutional investors including - Verizon Investment Management, Stanford Management Company & the Ford Foundation
• Opportunity to meet face to face with several leading consultants advising on major alternative investment mandates
• A mid year update on regulatory issues - registration, inspections, cap intro conflicts of interest, AML update, short selling rules and more.
• Expert advice on how to prepare for and manage an SEC inspection - unmissable information given the additional resources the SEC will be dedicating to inspecting hedge funds.
• Outlook for alpha roundtables - face to face time with leading managers to discover their perspectives on alpha opportunities in each of the major hedge fund strategies.

For more information, visit: www.iirhedge.com or contact Marc Weitzman at the Institute for International Research p: 212.661.3500 ext.3092

At this critical juncture for the development of the world's equity and bond markets, this conference will be examining strategic and tactical asset allocation, current strategy and alternative investing. Our conference in October 2003 attracted over 300 participants to the Inter-Continental Hotel.

"THE BIG EVENT FOR THE BIG PICTURE"

The theory and practice of asset allocation is undergoing dramatic change. The dominant position of equities in pension schemes is under question and investment consultants are putting forward new ideas regarding the structure of asset allocation benchmarks. Multi-asset mandates are coming back into fashion. Asset allocators are grappling with uncertain economic and market conditions, and the correlation between equity and bond markets has reversed. Alternative Investments are seeing record new money flows. The Asset Allocation Summit features speakers at the very heart of these key developments. For anyone involved in asset allocation, this could be the most significant investment conference of 2004.

OVER 300 DELEGATES IN 2003

ASSET ALLOCATION SUMMIT 2004 features presentations on:

• Current investment strategy
• Dynamic asset allocation strategies
• Liability driven benchmarks and risk budgeting
• Tactical asset allocation
• Using style analysis
• Investing in hedge funds
• Investing in private equity
• Gold, commodities and other alternatives
• Portable alpha strategies
• Currency overlay strategies
• Derivative overlays and structured products
• Implementation tools and strategies

First ever - Asia's ONLY and foremost conference for the hedge fund of funds industry!
Due to the increasing appetite by Asian institutional investors for fund of hedge funds investments, Terrapinn, the producers of Hedge Funds World Asia and 12 other hedge funds events worldwide, are proud to announce the inaugural Fund of Funds World Asia 2004!

Asia's first ever fund of funds conference is aimed to educate both managers and investors in this growing area of hedge fund opportunities. Fund of Funds World Asia will showcase the leading fund of fund managers and investors from across Asia and internationally, in an interactive forum.

Also incorporating the 3rd annual Hedge Funds World Singapore 2004
On Day 3, we bring together the leading minds of more than ten single strategy managers and best-performing Singaporean and global hedge funds.

EVENTS AT A GLANCE

Tuesday, 18 May:
9am -- Fund of Funds World Asia 2004 conference
6pm -- Bank of Bermuda cocktail reception

Wednesday, 19 May:
9am -- Fund of Funds World Asia 2004 conference
7pm -- AIMA dinner by invitation only

Thursday, 20 May:
9am -- Hedge Funds World Singapore 2004 conference
7pm -- The Asian Masters of Hedge Awards, The Ritz-Carlton Millenia Singapore

Click here to view our latest conference programme!
Register today and enjoy a 10% discount off the conference fees by contacting Wendy Tay at wendy.tay@terrapinn.com. Please state Opalesque in the email subject when registering.

This gala, black tie affair – held in conjunction with Institutional Investor’s Spring Hedge Fund Investment Roundtable, June 23-24, 2004 – will bring together the hedge fund industry to recognize and applaud the achievements of their peers. The awards dinner will include key industry players – hedge fund managers, funds of funds, endowments, foundations, and corporate and public pension funds.

Nominees for the awards are selected by the editorial team of Alternative Investment News. Subscribers, readers and other industry members are encouraged to visit our website to offer their input and comments on the nominations. Winners will be selected by the editorial team of Alternative Investment News and the editorial advisory board. Winners will be announced at the event.

2004 Alternative Investment News’ Editorial Advisory Board:
Leroy Cody, American Express Alternative Investments
Joel Katzman, J P Morgan Alternative Asset Management
Richard Lindsey, Bear Stearns Securities Corp
Nick von Speyr, Optima Fund Management
Kent Clark, Goldman Sachs Hedge Fund Strategies
Joe Pescatore, UBS
Martin Phipps, Gartmore Investments

Award Categories: Hedge Fund Leader of the Year, Fund of Funds Leader of the Year, Institutional Manager of the Year, Emerging Manager of the Year, Institutional Investor of the Year

To find out who is nominated and to register for the event contact: Nazneen Kanga nkanga@iinews.com

With 1200 attendees in 2003, Gaim 2004 is the largest global hedge funds event around. Gaim is also known for its extensive and objectively researched programme to find the very latest and most successful talent in the industry. Over 200 speakers are on the 2004 programme - including Cutting-Edge Academics & Leading Thinkers, The Most Significant & Groundbreaking Institutional Investors, The Most Successful FOF And Multi-Manager Houses, Leading Economic Strategists, and Over 100 Of The World's Top Performing Open, Emerging & Established Hedge Fund Managers, some of which you will never have seen anywhere else! To enhance your learning & networking opportunities there are several new features for 2004 including:

• The live global hedge fund industry electronic survey - see what the industry really thinks
• Institutional investor panel of leading North American institutional investors
• Enhanced GAIM Absolute Winners? Gallery - 2004's emerging top performers
• 6 Streams - moving from four to six streams offers more choice to tailor your individual programme
• Glamorous 10^th Anniversary Gala Dinner at the splendid Porte Des Irises, Chateau de Vullierens
• New venue in Beaulieu, Lausanne in Switzerland - only 35 minutes from Geneva with state-of-the-art facilities
• Asia - Special focus on the Far East - GEMS & Japan
• Longer sessions - More extended sessions = more information and discussion on major issues

Contact ICBI: +44 20 7915 5103, or email info@icbi.co.uk, website: www.icbi-gaim.com

Opalesque Ltd.
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This newsletter is edited by Matthias Knab (MK) for Opalesque Ltd. For more information about me and Opalesque Ltd. please use this link.

Jeff Posner (JP), a Chicago based PR specialist and free lance writer focussing on the financial industry, is a contributing editor of this newsletter. He can be reached at Geoffp7@juno.com.

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Disclaimer: The information contained in this newsletter does not constitute an offer or solicitation to sell any security or fund to or by anyone in any jurisdictions, nor should it be regarded as a contractual document. Under no circumstances should the information provided on this newsletter be considered as investment advice, or as a sufficient basis on which to make investment decisions. The information contained herein has been gathered by Opalesque Ltd. from sources deemed reliable as of the date of publication, but no warranty of accuracy or completeness is given. Opalesque Ltd. is not responsible for and provides no guarantee with respect to any of the information provided herein or through the use of any hypertext link. Past results are no indication of future performance. All information in this newsletter is for educational and informational purposes and does not constitute investment, legal, tax or accounting advice.