Tuesday, September 27, 2011

The best bond fund manager Jeffrey Gundlach's story

TCW Group Inc. decided to oust Jeffrey Gundlach despite being warned that firing the fund manager could trigger redemptions of as much as 70 percent, according to testimony during the six-week trial of the bond- fund manager and his former employer.
Gundlach, who started his own firm within weeks of being ousted and has since attracted $16 billion in assets, yesterday won a $66.7 million jury award against his former employer for unpaid wages, which he has to share with three of his colleagues. He was also found to have breached his fiduciary duty to TCW and misappropriated its trade secrets. The Los Angeles jury awarded the company no damages on the breach claim. A judge will determine damages on the trade-secret claim.
“This trial brought home all of the ugliness and the dirty laundry in the business,” Geoff Bobroff, an independent fund consultant in East GreenwichRhode Island, said in an interview. “This would be the most bitter case I’ve seen brought to trial.”
The trial shed light on a decade of tensions between TCW and Gundlach, a former trader who became the company’s star performer over an almost 25-year career there, eventually managing two-thirds of the company’s money. TCW painted him as an arrogant man interested in enriching himself, and a former executive at the firm described him as a “cancer.” Gundlach and his attorneys claimed TCW cheated him out of hundreds of millions of dollars and reneged on a promise not to dilute his stake in the company.
Founder Robert Day at one point contemplated getting rid of Gundlach, 51, then selling the firm to BlackRock Inc. (BLK), according to evidence presented during the trial. His ouster in December 2009 cost the firm $566 million in damages, TCW said in court documents.

TCW, the Los Angeles-based unit of Societe Generale SA, sued Gundlach in January 2010 after more than 40 of its fixed- income professionals joined DoubleLine Capital LP, the asset- management firm Gundlach started after TCW fired him.
The jury found that Gundlach, who countersued, and DoubleLine didn’t act willfully and maliciously in misappropriating trade secrets. Susan Estrich, a lawyer for TCW, said the company will ask the judge to award it $89 million on the trade-secret claim.
“We are very pleased and gratified with the verdict,” Estrich said outside the courtroom. “This was about liability, about standing up for what is right.”
Gundlach said the verdict was “a major win” for DoubleLine.
“In a society governed by lies, truth is considered a cancer,” Gundlach said in a telephone interview.
Gundlach joined TCW in 1985 on a 90-day probation, for about $30,000 a year. TCW needed someone with a “quant” background, which Gundlach had as a Ph.D. candidate in mathematics at Yale University. He didn’t complete his doctoral thesis on the “non-existence of infinity,” which was then considered an unpopular line of thinking among mathematicians, Gundlach said in a 2009 interview.
Gundlach started the TCW Total Return Fund in 1993 and the fund grew as Gundlach’s acumen in picking mortgage-backed securities helped the fund beat peers. By 2001, when Societe Generale acquired TCW, Gundlach had become a substantial shareholder in TCW, with a 4 percent stake.
A consultant who was hired by TCW to advise on options told chief executive officer Marc Sternthat Gundlach’s departure would trigger client redemptions of 60 percent to 70 percent over three years, while keeping 40 percent of clients assets would be a “huge success,” according to court records. The consultant, Woody Bradford, testified that he advised Stern in October 2009 that the best option would be to work out an “arrangement” with Gundlach.
“The case demonstrates the difficulty of running a business when one individual or a group of individuals rise to prominence,” said Bobroff. “That’s a reason why most firms are moving to team management rather than have one or two star managers.”
Public spats are rare in the asset-management industry, where companies typically resolve disputes behind closed doors. In one example that shocked fund managers nearly four decades ago, John Bogle was fired by Boston-based Wellington Management Co. after clashing with the company’s board of directors. He went on to form Vanguard Group Inc. in 1975, which has since become the biggest U.S. mutual fund company.
The relationship between Gundlach and TCW started to sour in 2001, when Societe Generale (GLE) acquired the firm. Gundlach said his stake in TCW fell from 4 percent to the “high 2s,” despite an earlier promise made by Stern that he would “never have the stock taken away” from him, according to court transcripts.
Tensions abated in 2005 after Stern stepped down from active management and the firm created a new leadership team, with Robert Beyer as chief executive officer, William Sonneborn as president and Gundlach as chief investment officer.
“I was really happy” after the change, Gundlach said in his testimony. “I thought it was the greatest thing.”
The new leadership team didn’t last long. A month after unauthorized transactions by traderJerome Kerviel spurred losses at the Paris-based Societe Generale in early 2008, Beyer and Sonneborn tried to engineer a management buyout of TCW from the parent, Gundlach testified. The move angered the French bank because of its “timing,” according to Gundlach.
Sonneborn, who described Gundlach as a “cancer” to the company in conversations with Stern, according to court transcripts, left TCW for private-equity firm KKR & Co. in 2008. Beyer retired in 2009, and Stern returned to lead TCW in June 2009 after Beyer’s departure.
DoubleLine’s attorneys said executives at TCW and its parent had already decided at that time to fire Gundlach. He and other senior managers at TCW had opposed Stern’s return out of retirement and wanted the firm to be run by a management committee instead. TCW said Gundlach’s demands to restructure the leadership and compensation intensified in 2009.
TCW, which said that Gundlach made the equivalent of $20,000 an hour, at one point in the trial compared him to Gordon Gekko, the fictional character who gave the “Greed is Good” speech in Oliver Stone’s 1987 film “Wall Street.” TCW also said Gundlach openly disparaged TCW executives, referring to Day and Stern as “Dumb and Dumber.”
Stern testified that he became suspicious of Gundlach after a series of meetings in September 2009 and instructed TCW’s in- house lawyer to start monitoring the e-mail of Gundlach and others in his group. The investigation showed Gundlach’s people were downloading TCW’s proprietary information and looking for office space, Stern said.
While Gundlach was in talks to join rivals such as Western Asset Management Co. and Pacific Investment Management Co., Day contemplated forcing Gundlach out and selling the firm to BlackRock, according to evidence shown at the trial. Executives at Societe Generale thought the idea of selling TCW to BlackRock “is not really feasible at a good price,” according to an e- mail that was made public.
When those plans fizzled, TCW dismissed Gundlach and acquired MetWest, court documents show.
Gundlach went on to form DoubleLine in December 2009. More than 40 people, including Gundlach’s co-manager on the TCW Total Return fund, Philip Barach, joined him at DoubleLine.
Gundlach’s DoubleLine Total Return Bond fund has surged to $11 billion in assets since it was started in April 2010, a record for the fastest growth among startup mutual funds. TCW’s Total Return Fund has dropped to $5.3 billion from a peak of almost $12 billion before Gundlach was ousted. The DoubleLine fund is up 12 percent in the past year, twice the return of the TCW fund and beating 99 percent of rivals, according to data compiled by Bloomberg.
Brad Brian, DoubleLine’s lawyer, said in his closing statements that handwritten notes from an August 2009 meeting of TCW’s senior executives show they had already decided to fire Gundlach before there was evidence of his people copying TCW data or registering a company in Delaware.
It was “telling,” Brian told the jurors, that none of the executives, including Stern, could recall during their trial testimony what was said during that meeting. Brian said TCW executives don’t want to admit they had made up their minds about firing Gundlach months before they did because it would undermine their damage claims in the case.
Gundlach had negotiated for him and his group to receive 60 percent of the performance fees for the distressed-asset funds he set up in 2007 and 2008. The funds invested in mortgage- backed securities that were downgraded and dropped in value with the collapse of the U.S. housing market. When the funds performed better than expected, Societe Generale and TCW wanted to replace Gundlach with a less expensive asset manager, DoubleLine’s lawyers said.
TCW argued that Gundlach wasn’t entitled to management and performance fees from the funds after his firing.
The case is Trust Co. of the West v. Gundlach, BC429385, California Superior Court, Los Angeles County (Los Angeles).
(Source: Bloomberg, September 16, 2011)

Monday, September 26, 2011

Trader's traits rediscovered

The University in St. Gallen, Switzerland has come out with a study that compares traders with psychopaths. The surprising result was that not only do traders act like psychos, they’re worse. The “normal people” were 27 traders. Stock guys, FX/commodities traders and derivative types. Even the experts were surprised by the result. The performance of the 27 dealers is even worse than the psychopaths. It’s worth looking at what a textbook definition of a psycho actually is.

1. Considerable superficial charm, verbal facility and average or above average intelligence.
2. Unreliability, disregard for obligations, no sense of responsibility.
3. Untruthfulness and insincerity.
4. Inexplicable impulsiveness.
5. Antisocial behavior.
6. Poor judgment and failure to learn from experience.
7. Total self-centeredness.
8. General poverty of deep and lasting emotions.
9. Lack of any true insight, inability to see oneself as others do.
10. Fantastic and objectionable behavior, after drinking and sometimes even when not drinking--vulgarity, rudeness, quick mood shifts, pranks.
11. An impersonal, trivial, and poorly integrated sex life.

(Source: http://brucekrasting.blogspot.com/ September 26, 2011)

Friday, September 16, 2011

Goldman Sachs Closing Global Alpha Quant Fund

Goldman Sachs is shuttering a well-known hedge fund that relies on computer-driven trading strategies after the portfolio rang up a hefty loss this year.- Goldman's Global Alpha fund down 13 pct year-to-date, while many other quant funds performing well.

Goldman Sachs is shuttering a well-known hedge fund that relies on computer-driven trading strategies after the portfolio rang up a hefty loss this year. Goldman told investors in the roughly $1.6 billion Global Alpha fund the news Thursday, one day after it announced a management shake-up at the fund that had been the crown jewel of its quantitative trading business. The fund will be closed in the next few weeks.

Global Alpha had tumbled 13 percent by early September, delivering a far worse performance than other hedge funds that rely on computer programs to quickly take advantage of opportunities in the market, people familiar with the number said. These types of funds are supposed to move quickly in and out of stocks, bonds, currencies and other assets and exit positions before losses accrue.

This is the second time in four years the Global Alpha fund -- once one of Goldman's biggest with $12 billion in assets -- has suffered big losses and its performance raises questions about the ability of Goldman Sachs to manage quantitative strategies for its wealthy clients. In fact, people familiar with Goldman Sachs have said the company's decision to liquidate Global Alpha signals its decision to exit quantitative hedge fund strategies altogether. The firm still manages billions in quantitative mutual funds.

Even though Goldman's Global Alpha fund is in the red, most other other quantitative hedge funds are up or are flat for the year. The average quant fund is down less than 1 percent over that period, according to performance tracking service Hedge Fund Research Inc. Mark Carhart, the man who managed the Global Alpha fund with Raymond Iwanowski for more than a decade until 2009, has gained 7 percent net of fees this year at his new hedge fund Kepos Capital, a person familiar with his numbers said.

The new turmoil at Global Alpha comes almost four years to the day after the fund lost 22.5 percent in August 2007, during the early days of the financial crisis. Those losses prompted investors to pull money out.

Even though the fund's performance steadied with a 4 percent gain in 2008 and raced ahead with a 30 percent increase in 2009, assets never recovered. By the time Carhart and Iwanowski left in 2009, the fund had shrunk to $4 billion from its $12 billion peak. Soon after the pair retired, assets shriveled further to about $2 billion. The fund neither gained nor lost money last year, delivering a zero return.

The quantitative group has been beset by departures for some time. More than two dozen left this year alone, people familiar with the numbers said. On Wednesday, Goldman Sachs Asset Management sent a letter to Global Alpha investors notifying them that Katinka Domotorffy, the head of the group's quantitative investment strategies, would retire at year's end. The letter, a copy of which was obtained by Reuters, did not discuss the poor performance of the Global Alpha fund.

What may have hit the Goldman fund especially hard were the unexpected stock market sell offs in early August and recent currency market fluctuations in the wake of the Swiss National Bank's decision to halt the rise of the Swiss franc, people familiar with the fund's models said. Andrew Schneider, president and CEO of Global Hedge Fund Advisors, said the first half of September has been brutal for some large hedge funds, due to unpredictable moves in market direction.

"The volatility has been so high; if you're wrong, especially if you're using margin or leverage, your returns are going to be extremely poor," said Schneider.

Other quantitative hedge funds, however, fared better. James Simons' Renaissance Technologies' Renaissance Institutional Equities fund has gained more than 25 percent this year, said a person familiar with the fund. Another quant fund, QuantZ Capital Management, for instance, is up 12.8 percent through Sept. 6, according to a letter sent to investors.

Wednesday, September 14, 2011

Alternative innovative investment strategies: QuantShares ETFs

The quant shop Boston investment manager FFCM LLC chose JP Morgan Securities Services for prime custody of its market-neutral equity ETFs.

The QuantShares ETFs will be "market neutral," holding both long and short positions in approximately equal dollar amounts. They are among the first ETFs that will engage in shorting physical securities. FFCM has also chosen J.P. Morgan Clearing Corp. as prime broker for four of its seven new funds.
The new QuantShares ETFs have been created to provide institutional and individual investors with access to several alternative innovative investment strategies, according to FFCM. Claing to offer diversification and risk management, the funds are designed to produce returns with low correlations to the overall equity market. These returns are driven by exposure to well-known factors such as beta, momentum, quality, value, and market cap.

Tuesday, September 13, 2011

Have you seen Euro banks leverage?

Jefferies published the comparison of the assets, market cap, leverage and capital ratio for European and US banks. It looks like this.

Wednesday, September 7, 2011

Andy Xie: This is a consequence of globalization and China's cultural characteristics

I've never thought Andy Xie with his critical mind would praise China and put down European countries so bluntly. If you had followed Andy Xie, you would think he is a brilliant dissident. There is something wrong with this sudden turn... Judge for yourself:

The United States didn't plot to supplant Britain as the international financial center. It happened because the United States replaced Britain first as the biggest industrial power and trading nation. Wall Street's importance is a consequence of American industrial success.
The most important economic development in the 21st century will be China's rise as the largest industrial nation. I have anticipated this for a long time. This is a consequence of globalization and China's cultural characteristics. The government has adopted supportive policies, i.e., not standing in the way. And no other country is on the horizon to challenge China's industrialization.
Some may argue that things have changed since Pingyao's glory days. The IT revolution has made the physical place for asset trading irrelevant. But Germany's plight is a reminder that when profit sources and financial centers are disconnected, bad things happen.
Germany amassed the world's biggest trade surplus over the past decade, but its financial system has been woefully underdeveloped. So it has had to rely on London bankers to recycle money into other countries. Naturally, London bankers can screw Germany; they're even paid to do so.
A decade or two from now, as a result of this mismatch, Germany may become a poor country. People may look back and pin Germany's downfall to the country's hyper-competitive manufacturing combined with an inadequate financial sector.

Tuesday, September 6, 2011

GS on the state of the markets

GS_StateOf the Markets

Thursday, September 1, 2011

Eurozone's confidence dive worst since 2008

The latest storms in Europe's sovereign debt crisis and stock-market chaos have triggered the deepest collapse in economic confidence in the eurozone since 2008's financial meltdown, gloomy new figures revealed today.
The European Commission's latest snapshot of sentiment across the 17 euro countries revealed plunging confidence among businesses of all types and adds to the welter of dire economic news from the region in recent days.
The closely watched monthly survey showed sentiment falling at the fastest pace since December 2008 in the wake of the Lehman Brothers collapse and will fuel fears of a double-dip recession.
It comes after a month of turbulence which saw the US stripped of its gold-plated AAA credit rating and speculative attacks on Spain and Italy, which forced the European Central Bank to intervene to buy up the bonds of the debt-laden nations.
The eurozone managed growth of just 0.2 percent in the second quarter of 2011 as powerhouse economies like France and Germany stagnated. The commission expects growth to slow down further due to high oil prices in the first half of the year and the recent turmoil in markets. Commerzbank economist Christoph Weil said: "Concerns about euro-area fiscal deficits and the global slowdown are aggravating economic confidence."
The commission's survey is seen as a robust indicator of future activity, but the indicator fell to 98.3 in August from a revised 103 in July with optimism declining in all sectors.
Financial information firm Markit added to Europe's worries after its latest survey found the region's crisis closing consumer wallets. Sales fell for the fourth month in a row as retailers "continued to endure challenging conditions", Markit said.
The euro dropped more than a cent against the dollar and also fell against the pound as markets reacted to the poor data. The worries over confidence and growth will increase the pressure on ECB president Jean-Claude Trichet to reverse its previous hard line on inflation after two interest rate hikes earlier this year.
Bank of England Governor Sir Mervyn King has also flagged up the eurozone's woes as the biggest risk to the UK's fragile recovery, as the region accounts for almost half of the nation's exports. The latest business barometer from Lloyds Bank Corporate Markets showed confidence among UK firms slumping at the fastest rate since March 2009.

Reflection Series: Steve Job's family

The biological father of Steve Jobs has begged him to get in touch 'before it is too late' - 56 years after he gave him up for adoption.
Abdulfattah John Jandali said that he was desperate to speak to his son for the first time before cancer claimed his life, but insists he is not after his son's money.
The 80-year-old said he was overcome with guilt for abandoning the boy but admitted that after all this time he was too proud to make the first move.
Biological father: Abdulfattah John Jandali has expressed regret over giving up his son Steve Jobs for adoption and wants to meet him

Instead he implored the Apple founder to call and arrange a reconciliation.
Frail: Steve Jobs was seen on Friday being helped by a friend in Palo Alto
Mr Jandali's intervention came just days after Mr Jobs stepped down as chief executive of the computing and electronics giant.
Photographs taken since then show him looking more gaunt than ever and have raised renewed fears his long lasting battle with cancer may finally be coming to an end.
Mr Jandali, a Syrian immigrant to the U.S. who now works as vice president of a casino in Reno, Nevada, said he only recently learned that his son went on to found Apple, the second largest company in the world behind Exxon with a net worth £221billion.
He said he has emailed Mr Jobs a few times but has not called for fear he would wrongly think he was after his money.
'This might sound strange, though, but I am not prepared, even if either of us was on our deathbeds, to pick up the phone to call him,' Mr Jandali said.
'Steve will have to do that, as the Syrian pride in me does not want him ever to think I am after his fortune.
'Now I just live in hope that, before it is too late, he will reach out to me, because even to have just one coffee with him just once would make me a very happy man'.
Mr Jandali said that it was 56 years ago that his girlfriend Joanne Simpson fell pregnant and he was forbidden from marrying her.
Without telling him she left their home in Wisconsin and went to San Francisco where she had the baby and gave it up for adoption, he told the New York Post.

The only contact over the years has been the occasional email he has sent marking his son's birthday, but that has been all out of respect for his adopted parents.
Like Mr Jobs his father is a workaholic who has no plans to retire, even though he is 80 years of age.
'Because I really am not his dad,' he said.
'Mr and Mrs Jobs are, as they raised him. And I don't want to take their place. I just would like to get to know this amazing man I helped in a very small way to produce.'
He added that even though he thought of himself as a 'computer dunce' he owns a Mac computer, iPhone and and iPad.
He said: 'I honestly look at these things and cannot believe Steve created them'.

Jobs, who has endured a much-publicised battle with cancer since 2004, has always been fiercely protective of his private life and little is known about the powerhouse behind the Apple brand.
The stereotype of a cool New York sophisticate, he famously wears only black and has a minimalist philosophy so severe that friends recall visiting his mansion to find it virtually empty but for a picture of Einstein, a Tiffany lamp, a chair and a bed.
In the Apple HQ, so great is the culture of secrecy that executives are said to deliberately pass misinformation to colleagues to see who spreads it.
Steve Jobs Bio Dad 2.jpg
Apple Inc. CEO Steve Jobs introduces the iPad 2

Engineers working on sensitive projects are watched constantly by cameras and have to cover up prototypes with black sheets so no one can see them.
For decades, Jobs, thought to be worth more than $5 billion, has tried to put a metaphorical black sheet over his private life, too, stalking out of interviews and blacklisting publications that did not tell his life story as he presented it.
A biographer has described him as the ‘Jackie Kennedy Onassis of business and technology — a figure who is ubiquitous as a symbol of his times, but little known as a human being’.
Women have been a complicated issue with the man who has been described as the 'God of our consumer age'.
Turn back time: A young Steve Jobs in 1994 with one of the first apple computers. he resigned from the company last week
Turn back time: A young Steve Jobs in 1994 with one of the first apple computers. 
Grandfather; Mr Jandali tried to contact Jobs' daughter Lisa through Facebook as he is trying to reconcile with his biological son before it is too late

Friends who knew about his own adoption were horrified when Jobs' first serious girlfriend, a painter named Chris-Ann Brennan, became pregnant in 1977 and he refused to believe he was the father.
The mother initially raised their daughter on benefits. Jobs accepted his responsibilities after a court-ordered blood test proved he was the father.
It wasn’t until he was in his thirties that Jobs discovered his sister Mona and the two became friends.
Although he has been married since 1991 — happily, insist Silicon Valley insiders — to blonde beauty Laurene Powell (they have three children), Jobs previously had a string of well-connected girlfriends.
Deciding the 'young, superintelligent, artistic women' he liked were not to be found in California, in the Eighties he bought a multi-million-dollar apartment at the top of New York’s famous San Remo building on Central Park.
It became his base for periodic visits to the Big Apple where he would take out famous actresses, including Diane Keaton, artists  and writers. None of his romances lasted long.
He once dated the folk singer Joan Baez. A college friend believes he became her lover 'because Baez had been the lover of Bob Dylan', with whom he had long been fixated.
His adoptive parents, working-class couple Paul and Clara Jobs, raised him in Mountainview California, were only allowed to sign the adoption papers if they promised to send Jobs to university.
He lasted only a few months at a university in Oregon and then survived on free meals from a local hare Krishna temple before going to India to become a Buddhist.

(DailyMail, August 30, 2011)