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Sunday August 07 2022
Magnum Global Says MOF Study Group Not Deterrent

Bridge News March 3, 1999

by Jamie LaReau


      Chicago--Mar 3--International fund management firm Magnum Global Investments partners said the informal study group launched by Japan's Ministry of Finance was not a deterrent for their plan to target Japan as the next market to draw investors. In fact, one of the firm's general partners said the study group, formed to discuss ways to cope with problems associated with hedge funds and other highly leveraged institutions, would find that regulation was unnecessary and next to impossible to enforce.


      Last week Magnum Global Investments announced the Japanese market would be the next place it sought for new investors. Magnum also wanted to develop hedge funds marketed internationally and run by talented Japanese investment professionals that would capitalize on the potential of the Japanese market.


      But its aggressive marketing blitz on Japan could be dashed because the MOF just launched an informal study group of director-level officials to meet once a month to dwell on steps to mitigate perceived risks involved with highly leveraged institutions, according to Kyodo News.




      The study group was born out of the debacle that rocked the financial world in September: the rescue of giant macro hedge fund Long-Term Capital Management. Many said that incident shed light on the hidden dangers of hedge funds using massive, unchecked, "hot" short-term money flows.


      But those in the hedge fund industry dispute the idea that all hedge funds use high leverage to reap huge rewards. Many said most hedge funds used no leverage at all, some used 2-to-1 and very few were leveraged above 5-to-1.


      Even more disturbing to those in the hedge fund world was the wide belief that the Asian economic crisis, which erupted in the summer of 1997, came as hedge funds abruptly withdrew large amounts of money they invested in the then rapidly growing region. Hedge funds have also been blamed for the upheaval that occurred in Russia and Brazil last year.


      Magnum Fund General Partner David Friedland said hedge funds were an easy scapegoat, but when the MOF study group really stepped back and looked at the facts, it would be obvious hedge funds were not responsible for the wild market swings.


      Friedland said there were about 2,000 hedge funds in the world that controlled an estimated total of $300 to $400 billion.


      "You look at how much capital is actually flying around the global market; I guess it's somewhere between $30 to $35 trillion," he said. "How possibly could hedge funds be responsible for all this?"




      But because of the publicity surrounding LTCM, a group studying regulation was a political necessity, and Friedland's not worried that any study will ruin Magnum's opportunities to use Japan as the next market to draw investors from.


      "Obviously this is the sort of talk that's going on in every jurisdiction in the world right now," he said.


      Jack Gaine, president of the Managed Funds Association, agreed, saying potential investors shouldn't be turned off because of governmental review and examination of some practices. He said it was always a good idea to reconstruct what happened and look for solutions.


      But Gaine said the answer was in improved lending practices and counterparty practices of investment banks and commercial banks.


      "Self-regulation and market discipline have caused this to happen and are causing this to happen to improve the practices," he said. "I think the solution to the problem lies there, not in more regulation either on a national or a global basis."


      "What they're going to find out by looking at that is that it's not practical, it's not possible to regulate hedge funds," Friedland said. "We have to look at the counterparties that hedge funds transact business with and those include the prime brokers and the banks. When they look at that they'll realize that those prime brokers and banks are already regulated."


      He said he wouldn't be surprised if many of the proprietary trading desks of banks or investment banks that had money invested in LTCM had similar trades to what LTCM had positions on.


      "Certainly some of the larger global macro funds are controlling big stakes of capital," he said. "But if you look at the highly leveraged proprietary trading desks, certainly you could look at all of them.... They're the ones making those same trades. In effect, what those proprietary trading desks are are very large hedge funds; they're just not termed that way. They're not seen in the same light, but they're certainly subject to certain regulations."


      Friedland added that the only solution the group would find was to better police the policies already in place that regulate prime brokers and banks so that they don't allow a hedge fund to get overleveraged.


      "A bank certainly regulates how much leverage it can give out," he said.


      He said certain regulations in the US didn't allow a long/short equity fund to leverage more than 2 times the capital. He said there were also broker/dealer rules that require prime brokers to have a certain amount of capital if they want to leverage their hedge funds more than 2 times.




      Friedland said excess regulation would force hedge funds off shore.


      "That's really the last thing that the US or the UK or anyone wants to do because by moving a hedge fund off shore, you're losing business, you're losing jobs that otherwise would be available to people in the local jurisdiction and you're losing tax revenues," he said.


      But ultimately he thought the issue of regulation would come to pass as banks and brokerage houses opened their eyes and watched the amount of leverage they give to the hedge funds they do business with.


      "Certainly we've seen some senior officials at banks get dismissed because of the LTCM debacle and if that's not sort of a warning to future banks, I don't know what is," he said. "I've certainly seen in the hedge fund industry, banks have been reluctant to increase their hedge fund lending business as a result of what's gone on at LTCM."


      Magnum specializes in developing and identifying leading hedge funds and creating fund of funds combinations of hedge funds that seek more stablelong-term returns than individual funds.


      Magnum presently has 18 fund of funds and 12 single strategy hedge funds. Friedland hoped by actively recruiting Japanese investors, the assets in those funds would increase significantly.


      He remained confident Japanese investors wouldn't be scared off by the MOF study group and its examination.


      Bridge News, Tel: (312) 454-3470


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      Source: [B] - BridgeNews Global Markets

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