Showing posts with label Hedge Funds. Show all posts
Showing posts with label Hedge Funds. Show all posts

Monday, 1 April 2013

Asteri Capital and the London Whale: A secret history of Glencore's hedge fund


The global commodity trading giant Glencore once had an internal hedge fund that made proprietary bets on global markets. It was called Asteri Capital. What do you think it bet on? Most people would probably make an educated guess and say commodities, but they'd be wrong. It bet on global credit markets, bonds, structured credit products and credit derivatives that have nothing to do with commodities.

Weirdness level 1: Why did Glencore have a credit hedge fund?
Ok, that's pretty weird. Why would a commodity company like Glencore have a bond-trading hedge fund? Asteri Capital actually started life as something called Glencore Finance AG, and was, for all intents and purposes, just a proprietary trading desk within Glencore, based out of its 50 Berkeley Street office in London. It furthermore appears that it was originally just part of Glencore's treasury, the part of the firm that deals with things like borrowing money for the day-to-day operations of Glencore and managing its cash flow. Here it is from the horses mouth (I've added in comments in square brackets):
"Glencore International AG [the Glencore parent company] funded the investment activities of Glencore Finance AG [The prop trading desk] on a trade-by-basis [Translation: Whenever it felt like it]... Proceeds from the sale of investments (including capital gains) were returned to Glencore's treasury [Translation: Glencore's treasury was the hedge fund]. Unlike an investment fund, realized profits did not serve to increase Glencore Finance AG's funds under management [Translation: Profits went to Glencore's treasury instead]... Glencore Finance AG was historically engaged in certain investment strategies which Asteri Capital Ltd (the Fund) will not pursue in the future [Translation: Asteri is a more limited successor operation to whatever we were doing before]."
This Glencore proprietary trading operation was started by a guy called Evan Kalimtgis, who left Dresdner bank in April 2005 - along with several other Dresdner traders like Athanasios Stavrou, Phil Burford and Matt Johnson - to take up residence at Glencore Finance AG. Initially it was just a group of guys who got thrown money whenever the Glencore treasury felt they had a worthwhile trade to put on, and any cash they made got returned to the treasury. After a while though, they gained some nominal independence, and in December 2006 they started accepting outside investment, becoming Asteri Capital Ltd, an FSA authorised investment firm.

In his LinkedIn profile, Athanasios Stavrou describes himself as: "instrumental in setting up Asteri Capital (a multi-strategy credit hedge fund with $450mil in assets under management) and creating the initial track record that led to raising external funds in 2006. Managed the long/short structured credit strategy ($100mil) and co-managed the High Yield Fundamental Credit Portfolio Strategy ($125mil). Both involved directional, relative value, macro and fundamental credit investments through bonds, loans, credit indices and credit derivative products." 

Other LinkedIn info come from Matt Johnson (now at hedge fund Makuria) who describes Asteri as a "multi-strategy credit hedge fund of Glencore" doing "correlation, vanilla and bespoke portfolios... relative value credit trading... convertibles strategy, credit volatility... and prime lending".

Weirdness level 2: Whale ahoy!
So, Glencore's treasury was harbouring a kind-of-secret credit hedge fund. Does this sound familiar? If you've been following the J.P. Morgan London Whale saga it probably does: J.P. Morgan basically set up a hedge fund in its Chief Investment Office, a part of the firm that is supposed to do risk management alongside the treasury, not proprietary trading. A trader called Bruno Iskil was placing massive bets on credit derivatives, which ended up losing J.P. Morgan some $6 billion.

Which brings us to the second weird part of the story. In October 2008 the Asteri Capital team breaks up. Lehman had just gone bust and it was a pretty bad time for global credit markets. Maybe Glencore was cashing out (or cutting their losses), but the team splits and drifts off to various hedge funds and banks. The leader, Evan Kalimpgis, ends up at none other than J.P. Morgan, where he is hired as co-head of risk management in the Chief Investment Office, alongside Achilles Macris, who he used to work with at Dresdner. They find themselves presiding over a guy called Bruno Iskil, aka 'the London Whale'. So, yes, the guy that was responsible for running Glencore's internal treasury hedge fund was the same guy that was later Bruno Iskil's boss at JP Morgan. The moral of the story thus, is that Evan specialises in working in treasuries that ain't really treasuries.

Weirdness level 3: Some political skeletons in the closet
Let's add one final layer of weirdness for good measure. Back when Evan Kalimtgis was running Asteri, he worked alongside a guy called David P. Goldman, a credit strategist. Goldman also happened to have worked with Evan's father, Kostandinos Kalimtgis, on a late-70s book called Dope Inc, sponsored by a guy called Lyndon LaRouche, which argued that the financial elite in the City of London controlled the global drugs trade. Goldman says he was under the "gnostic cult of Lyndon LaRouche" before breaking away and going all neocon and Wall Street. It seems he and Evan's dad turned on Lyndon: Check out the July 15th 2008 comments by a guy called Roger Moore under this post here. Goldman was, until 2009, writing political commentary under the pseudonym 'Spengler', which he admits here.

Calling all investigators! 3 questions that need answering
Glencore, Lyndon LaRouche, global credit trading, London Whale, secret hedge funds? I mean, WTF? This may be a conspiracy theorist's dream, but I don't have the time to investigate. If anyone else has the inclination to go after this though, I'm interested in three questions:
  1. Why was Glencore hosting Asteri in the first place? Did the Glencore management know the guys originally? Were they doing them a favour? Was it part of Glencore's overall strategy, or just an ad hoc add-on to their commodity trading business?
  2. What was Evan Kalimpgis doing at J.P. Morgan after leaving Asteri Capital, and why did he leave before the London Whale scandal broke? Is there any connection between the activities in the two firms he was part of? Is their a crew of traders who hop through corporate treasuries doing proprietary trading instead of risk management?
  3. What is all this stuff about Lyndon LaRouche? How does Goldman go from writing about City of London conspiracy theories to analysing credit derivatives, and why does he end up hanging out with the son of his former writing buddy at a hedge fund in Glencore?
Maybe there are really boring answers to all these questions, or maybe it's a Hollywood film in the making, but please do send links, comments or suggestions if you find anything out.

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Thursday, 5 July 2012

Watchdog Capital: Setting a hedge fund bloodhound on the trail of financial crime

The ease with which the Libor scandal has brought down the towering figure of Bob Diamond, master of the universe and investment banker extraordinaire, is truly momentous. It reveals how small cracks in corporate structures can turn into gaping chasms that engulf whole management teams. For those that haven’t been following the scandal, the gist of it is that traders have been caught submitting inaccurate figures to manipulate the Libor rate – an index which tries to reflect the average rate that banks can borrow on the 'interbank market' (aka. from each other) – for various dubious schemes.

Libor relies on banks submitting honest figures to the British Bankers Association (BBA), the organisation that calculates the index. Interestingly enough, I was at a debate a few weeks ago on the topic of financial sector corruption, which pitted investigative journalists Ian Fraser and Nick Kochan against a representative of the British Bankers Association. Kochan and Fraser argued that London was a hotbed for corruption and dirty money. The BBA representative didn't agree, arguing that greed and corruption ends in the City, rather than starting in it. Needless to say, the conversation probably would have been somewhat awkward for him if it had been scheduled for this week instead.

Ian Fraser’s analysis at the debate was hard-hitting. He argued that the concept of genuine stewardship in finance had completely broken down, with people entering it as a glorified get-rich-quick scheme. He argued that big intermediaries (banks) are riddled with conflicts of interest, that they often act at the expense of their clients, and that the ‘Big Four’ accountants are complicit in this process. The regulators are under pressure to prioritise City competitiveness over public interest, and prefer to make scapegoats out of juniors than target senior executives. Even financial journalists are ambivalent about exposing scandals, in fear of losing favour in the courts of precious financial information. Fraser labeled it a ‘dictatorship of finance’, and suggested an independent enquiry was needed in order to regain trust.

Time for a true activist hedge fund
In the wake of the Libor scandal it appears the government might indeed hold some type of enquiry, but I’m skeptical of how deep it will go. If regulators, auditors and even journalists have limited will to uncover fraud, perhaps we need some new approaches. I noticed the other day that Barclay’s share price plummeted over 15% on the news of the Libor scandal. That’s a pretty big drop. If someone had shorted (bet against) Barclays shares, they would have done well. It’s naturally occurred to me then, that perhaps one solution is to set up a hedge fund, trained to sniff out financial fraud, expose it, profit from the resultant scandal, and then steer the money back into further financial activism.

The Investment thesis Part 1: The public scandals are just the tip of the iceberg
The Libor scandal offers fresh insights into financial skulduggery, but it’s always hard to tell whether these instances of financial crime, market manipulation and corruption are once-off anomalies or endemic, widespread problems. For one thing, financial crime is often incredibly difficult to detect, and very hard to prove. The occasional scandals tend to be the most sensational cases, but most corruption probably isn’t overt and outrageous. It could be subtle and even subconscious. Earlier this week The Telegraph published the statement of an insider who claims to have known about the Libor rigging. It echoes some of the points I made in a previous post about the problems whistleblowers face: In an environment where dubious behaviour gets normalised by an overall culture of acquiescence, it’s easy to go along with it. Collective inaction can be as strong a form of corruption as the individual actions they quietly ignore.

I personally tend to think that the cases of corruption we see are just the tip of the iceberg. My basic theory comes partly from an academic paper I wrote back in 2007, entitled Free market crimogenesis, corporate governance and international development. In it, I suggested that free market systems tend to encourage short-termism, and that encouraged structures and value sets which are ‘criminogenic’, a fancy way of saying ‘crime-promoting’ or ‘crime-facilitating’.

The first part of my argument is that there are criminogenic structures within financial organisations. I’m not in the camp that says that rampant greed is the only underlying value in finance, and I strongly believe that people within the sector are motivated by a wide range of factors (as will be discussed in a later post). I would argue though, that financial professionals are often working within structures which can amplify those parts of human behaviour we call ‘greed’. Bonuses are often cited for the damaging incentive effects they can have, promoting ‘get-rich-quick’ expectations, but there are many structures within finance that have criminogenic potential. For example, take job promotion systems in which upward mobility is based on the ability to hit short-term targets. This, over time at least, could (statistically) favour those who are prepared to be 'morally flexible', those who are most prepared (and skilled enough) to bend the rules to meet targets, and those who are prepared to cover up misdemeanors of juniors under them. If middle and higher management gets populated by individuals who view such ‘flexible’ and ‘creative’ behaviour as comparatively normal, the implications for corporate culture lower down the ranks are severe.

The second part of the argument though, is that there is a lack of policing mechanisms to counteract or de-emphasise the short-term greed-enhancing factors in the system. Many systems in the world have crimogenic potential, but that is often dampened and contained through formal policing (e.g. official regulation and legal systems), and informal policing via systems of social disapproval and shunning for bad behaviour. Both of these appear to be somewhat deficient in the financial sector though. Regulators appear muzzled by a serious lack of political will to prosecute financial crime, which means fear of prosecution is limited. As for informal policing, many argue that the culture of finance actively encourages dubious ‘Gordon Gekko’ style behavior. Even if you (like myself) disagree with that stereotype, it’s hard to argue that the internal culture of banks would excel at preventing bad behaviour.

Investment thesis 2: The rest of the iceberg can be successfully uncovered, and exploited
I strongly suspect there is a treasure trove of financial frauds waiting to be discovered. Sniffing out when and where they will be exposed, quickening that process, and then betting on the downfall of exposed companies could be a great investment philosophy, not to mention societally useful. The term ‘activist hedge fund’ is used to describe any fund that challenges company management, but this would be a truly activist hedge fund, steering the profits made in exposing negative behaviour back into financial campaigns.

It wouldn’t be easy though. We’d need a unique combination of skills, a motley crack team of radical crime-fighters. For example, we’d have to hire:
  • Ex-FSA & SEC employees, skilled at the ins and outs of regulation and the loopholes 
  • Ex-traders (and especially rogue traders), skilled at understanding the operations of various financial professionals
  • Criminologists, with deep understanding of criminal structures and how they work
  • Ex-bank IT staff and back office staff, who know the nuances of bank IT systems
  • Activists/Campaigners, passionate about mobilising networks of people and raising awareness
  • Hackers, for occasional… um… unorthodox information retrieval.
  • Ex-FBI agents and Mi6 operatives with advanced analysis and infiltration skills
  • Forensic audit experts, and big data experts, to spot anomalies among numbers
  • DJs: To provide atmospheric background tracks in the office

Days will be spent doing elaborate research of bank structures and strategies. Nights will be spent trawling City bars in search of leads. We’ll have offices on the edge of the financial district (London & New York initially) with big screens mounted to the walls and satellite surveillance equipment. Of course, there will be beanbags in the office, and hammocks.

Now that I come to think of it, such a fund would have obvious crossover with my Financial Wikileaks concept – perhaps the professionals at the fund could be the ones processing leaks that get steered to the site…

Watchdog Capital: Bloodhound Fund No.1
All the details can get straightened out later. Most importantly though, the hedge fund would need a punchy name. Any ideas? There are certain conventions to naming hedge funds and even a hedge-fund name generator. I’m thinking of Watchdog Capital, hunting down financial scandals since 2012. Our first fund could be called The Bloodhound Fund 1, and it will raise money from a variety of angel investors and charitable foundations. If you’re interested in joining the team, send your CVs.

Tuesday, 20 December 2011

Protectors of Treasure Island: Border Dragons of the Offshore Financial System

Several hundred years back, the City of London was protected by a great stone wall, and access was controlled via several key gates. Aldersgate was in the north, Ludgate was to the west, Aldgate was in the east, and on the south end of London Bridge there was Bridge Gate. Later, others were added, like Bishopsgate, Moorgate, Cripplegate, and Newgate. Nowadays, the physical wall and gates have slipped out of popular memory. To many modern commuters into the City, the Moorgate is nothing but a station on the Northern Line of the London Underground.

Recently, a wing of the Occupy movement set up camp just up the road from Moorgate, in Finsbury Square. Another wing set up in an old building in Sun Street. Like the original St. Paul’s Camp, the new camps seem  like incongruous outposts amidst the black sheet glass and metal frames of buildings housing financial giants. The protesters have managed to take temporary control of small areas of physical space, and yet, do they really have true access to the City?

It seems to me that the walls of the City are still there, only nowadays you can’t see them. They exist in codes and institutions, cultures and hidden political forces, architectural styles and subtle symbols whispering you don't belong here. Finding ways of passing these hidden gates is a great and worthwhile challenge. Before that can be done though, it's good to get a sense of the ancient boundaries of the City. That's why I've been recently visiting the border dragons.

The City border dragons are sentinels on plinths, totem-like creatures lurking at the ancient entrances to the City, originally to warn travelers and act as toll-booths. They’re sometimes called griffins, but they’re actually dragons, dog-like dragons with wings and a forked tongue. Maybe they’re like small versions of Cerberus, Hade’s three-headed hound of darkness that guards the underworld across the river Styx. Indeed, you do find three of them as you cross over the river Thames – two on the south side of London Bridge, and one in the middle of the road on the south side of Blackfriars Bridge.

So where are the others found? The largest border dragon is found at the Temple Bar on Fleet Street, perched by the Royal Courts of Justice like a nazgul from the Lord of the Rings. There are two smaller ones keeping watch in the street next to Chancery Lane tube station on High Holborn. See if you can find the others. There’s one lurking somewhere on Goswell Road in the north, and one next to the Broadgate complex. There's one around Moorgate, and another guarding the area before the Tower of London, somewhere on Byward street.

My favourite border dragons though, are on the Victoria Embankment by Temple Place. They’re slightly larger than most of the dragons, and strangely enough, they used to reside above the entrance to the London Coal Exchange which was demolished in 1963. Word on the street is that they took off and flew into the night, landing on Victoria Embankment two years later.

Some have suggested that the dragons are creatures from mystical treasure islands known as offshore tax havens. Indeed, the City is at the centre of a giant web of such havens, a beating financial heart drawing in money from the opaque offshore jurisdictions and pumping it back out to them again, keeping a global system of secrecy alive. The vast majority of hedge funds and SPVs for example, are incorporated in places like the Cayman Islands, even though they’re managed from offices within London and the US. It poses something of a headache for tax authorities, and also places something of a burden on the broader society which does not have access to the offshore realms. Indeed, it's an open question as to how much of the City of London is even in London, and how much is situated within excel spreadsheets on computers in Bermuda and the British Virgin Islands.

Certainly the City incorporates a lot more physical space than meets the eye. It’s like that scene in The Lion, the Witch, and the Wardrobe where the door to Narnia is found. Hidden doors abound in the City, and they lead to parallel universes on Caribbean Shores and Swiss Cantons

So where does this leave access? I'm not sure. The border dragons mark the ostensible borders of the City, but the true borders are scattered and fragmented by a world of shell companies and registered addresses. And we haven't even got into the cultural and political boundaries yet. I guess we’ll have to work on this access issue a bit more in due course. I’ve had controversial views on it before, and they need to be refined.

In the mean time, take some photos of dragons. Put a funny hat on its head, or give it some bling accessories. Please do send the photos on me. I’ll be sure to put them up.

Friday, 25 November 2011

Heresy in the shadow of the City: Max Keiser sacrifices the sacred cows of finance

London banks were on high alert last week as Max Keiser – the dark lord of financial hellraising – arrived in London to do what he does best: Sacrifice the sacred cows of finance orthodoxy. It’s fitting that he chose to do so in a pub down an alley in London Bridge – The south bank has long been a place of covert speakeasies where villains, pirates and heretics might slag off the king and preach rebellion among the drunken rabble. The event was a fundraiser in aid of Resonance FM, London's alternative arts radio station. Needless to say, it was awesome, and yes, I was drunken rabble.

Max Keiser is in intriguing guy. I don’t claim to know his background in any depth, but the quoted back story says he was 1) initially a stockbroker, 2) then an entrepreneur that started the Hollywood Stock Exchange, (a platform for buying and selling film rights, later sold to the huge brokerage Cantor Fitzgerald) and 3) an entertainer that carved out a media career in fiery financial commentary. For those who haven't seen Max in action, he's one of the most outspoken critics of banking practice. He cuts a compelling figure, using a background in the financial industry as a platform from which to advance ideas that are serious no-go areas in mainstream finance chat… stuff like questioning the entire basis of modern monetary systems and advocating that senior bankers should be burnt at the stake. 

If this stuff was coming from the standard academic commentator, it would probably sound crap, but Max has made an artform out of passionate advocacy of deeply heretical points of view. Where some people would sound preachy and self-righteous, Max just sounds indignant, pissed off, and funny to boot. He has what many critical academics lack – an opportunistic flair and a talent for entertainment. It’s very seldom that someone can make stand-up comedy out of financial commentary, whilst simultaneously making you deeply question things. He’s both a joker with a mischievous flame and an underdog hyena who cares about injustice. He doesn't claim to be pure, and the fact that he’s been out and tried the system gives him clout.

Financial terrorists
Max is certainly controversial. In fact, he's pure leveraged controversy. He likes to refer to senior bankers as 'financial terrorists'. He shoots political correctness in the head with disturbing stories of financial rape and epic incompetence. He told us about 'the suicide trader', a concept he's been dreaming up as the basis for a potential upcoming production: The story goes that there's this trader in the World Trade Centre, watching the planes coming and deciding to stay in his chair betting against aeroplane stocks instead of trying to escape. Methinks that could cause a stir...

I met a hedge fund manager a few months ago who knows and loves Max. This probably supports my point, made in a recent Guardian article, that some of the best hedge fund managers are those that do not give a flying f**k about what they’re supposed to think. Max himself has dabbled in some interesting hedge fund ideas. Back in the early 2000s he started Karmabanque. Although it’s suggested that Karmabanque was a  hedge-fund in and of itself, Max has characterised it as a ‘broker of dissent’ – a middleman between hedge funds looking to bet against companies, and activists looking to target companies with campaigns. I haven't been able to drill down into the exact structure of Karmabanque and how effective it was, but it's a thought-provoking idea: Betting against companies with poor social and environmental records and then making them targets of activism to drive down their share prices. Some would call that idea 'market-manipulation'. Others would call it sweet justice, a scheme in the spirit of Robin Hood and other underdog rogues (see Greenpeace article). Theoretically speaking, money made in the process could be steered back into doing something positive, like investing in renewable energy, but in the end it seems Karmabanque was shelved. It now provides an interesting model to consider when designing any future activist hedge funds.

Calling the emperor's new clothes: Buy silver, crash JP Morgan
More recently Max has become known for his 'Buy silver, crash JP Morgan' campaign. Max believes that JP Morgan is deeply exposed to a huge naked short position in silver. If it is true, it means JP Morgan is seriously vulnerable to the price of silver going up too much. He reckons that if enough people try buy silver to force the price up, JP Morgan would be forced to try cover its short position (i.e. reverse it's bet against silver), leading to a runaway 'short-squeeze' (in which they scramble to buy silver to get out of their trading position and in so doing cause the price to skyrocket even more) causing JP Morgan to go bankrupt. Here is the dramatised version:

It’s an interesting theory, and not one that I know enough about to have any particular view on it. Max seems pretty sure of himself though, and the campaign goes on. In any case, he advocates the possession of precious metals as a much better alternative to fiat currencies, which he thinks are all going to shit. 

Time will tell if Max is right or wrong, but regardless of what you think of his ideas, it’s great to a have an original voice of dissent challenging orthodoxy. I'm always a supporter of muckrakers that keep the system on its toes, and after an hour or so of standing there listening to him I was cheering like a maniac and thinking ‘ah shit Max, you’re cool, can I come talk to you?’ Then he was swamped with fans and I decided against doing that. Maybe I'll meet him one day and we can compare notes.

Wednesday, 27 April 2011

Financial Zones of London: How to get good coffee in Berkeley Square, Mayfair

There’s a troubling question in my mind whenever I’m in Berkeley Square: It’s the mystery of why I can’t find any good coffee here. It’s mysterious precisely because this square is the centre of the world’s largest concentration of hedge funds, and that kind of means the average person walking here commands a salary larger than…well, everyone else in the whole world. So where’s the good coffee?


Have you ever wondered what a hedge fund is? I mean, I can tell you that a hedge fund is a company registered in the Cayman Islands, and that people around the world put money into it, and then it uses that money as collateral to borrow a bunch more money, and uses that to bet on various things like company shares, commodities, bonds, and derivatives…

But does that really tell you what a hedge fund is? To know what a hedge fund is, you should try run your hand over the golden plaques on the doors around Berkeley Square. The names seem unfamiliar, but this is a ring of fire, and these companies are sorcerers channeling enormous circuits of cash. The old facades hide computer networks sending orders to transact in every market on the globe. In fact, I’d give you 2:1 odds that there’s someone in that inconspicuous building over there that’s about to execute a trade that will affect the value of Russian mining companies in Siberia.

But where’s my good coffee? I know where it is. Lansdowne House, 57 Berkeley Square, houses one of the world’s largest private equity companies – The Carlyle Group on floor 3. Those guys must have good coffee. Have you ever wondered what a private equity company is? I mean, I can tell you that a private equity company runs private equity funds, registered in the Cayman Islands, and that people around the world put money into those funds, and then those funds use that money as collateral to borrow a bunch more money, and use that to buy and sell companies.

But would that really tell you what a private equity company is? To know what a private equity company is, put on a heavy Russian accent, walk in and tell the Carlyle Group that you’ve got an ailing Siberian mining business that needs restructuring – they’ll take you to their meeting room and give you good coffee.


Then you can head back to Green Park tube via Berkeley Street. You’ll pass Glencore. It’s Swiss, and it’s one of the world’s largest privately owned companies. The UK office is by the Sainsbury’s on the corner. They’re huge in the global commodity scene, and they’re only about to get bigger, with a gargantuan IPO* planned. They’ve historically not been too transparent, and, word on the street is that commodities can be a dirty business at times, with all that Siberian mining. This area looks posh, but it’s not – it’s all cowboys, assassins, and oligarchs.

*(refers to initial public offering: selling shares of ownership to raise money)