Hedge Crunch Financial

Ballooning losses from the US mortgage market could force the global financial industry to scale back lending by $2 trillion and trigger a substantial recession, according to a bearish analysis.

The startling figure was suggested yesterday by the chief US economist at Goldman Sachs, Jan Hatzius, who said that an estimated $400bn (£290bn) in losses on mortgages would be magnified as lenders reacted to stay within their solvency requirements.

“Even a $400bn loss does not look all that large compared to the vast size of the US financial markets, and one sometimes hears that it is just equivalent to one bad day in the stock market,” Mr Hatzius told clients. “But this analogy is wrong. There is a big difference between stock market losses, which are mostly borne by long-only investors, and mortgage credit losses, which are mostly borne by leveraged investors such as banks, broker-dealers, hedge funds, and government-sponsored enterprises.”

Even though three of the top ten largest hedge funds in the US lost an estimated $24 billion in assets last year, the overall assets of the top US hedge funds actually rose in 2007 by more than 33%.

JP Morgan topped the list with total assets under management of $44.7 billion dollars. JP Morgan has a number of hedge funds under its management, including JP Morgan Asset Management and Highbridge Capital Management. JP Morgan topped the list even though they suffered from a loss of $8.5 billion in assets, mainly due to redemptions and some losses in their statistical arbitrage fund.

Bridgewater Associates was second on the list with total assets under management of $36 billion dollars. They were almost tied with Farallon Capital Management, who boasted a similar figure in total assets.

Renaissance Technologies came in fourth place with $34 billion dollars, and Och-Ziff Capital Management, the publicly traded hedge fund firm, was in fifth place with $33.2 billion in assets. DE Shaw and Goldman Sachs Asset Management both fell in 2007 due to their exposure to quant funds, and finished up in sixth and seventh place respectively.

Paulson and Company also soared into the top ten due to their aggressive bets against the subprime mortgage market.

Many companies that had significant exposure to quant funds managed to recover in the latter part of 2007. The recover continues in 2008, and it will be interesting to see if firms such as Goldman Sachs can start scaling their way back up the list.

Laurus-Valens, a New York-based firm specializing in hedge funds that make private investments in publicly traded small and microcap stocks has hired a managing director from A.G. Edwards.
These private transactions typically give the Laurus funds warrants for the right to purchase stock at a discount to market prices. The funds seek double digit returns with lower volatility than the broader markets.
Dennis Pollack, senior managing director of Laurus-Valens, said Thursday that veteran investment banker Kendall Raine has joined the firm as a partner and senior managing director.
“Kendall’s background will offer Laurus-Valens new insight and opportunities during this volatile time in the market,” said Pollack.
Raine, who will oversee a variety of strategic and capital markets initiatives, joins from A. G. Edwards, where he was managing director in the investment banking department. At A.G. Edwards, he was responsible for more than 100 advisory and capital markets transactions for business development, mortgage, and consumer finance companies, private equity firms and other specialty finance companies.
Prior to Edwards, Raine worked for Bear Stearns as associate director responsible for investment banking relationships with Midwest depository institutions. Before that, he was chief executive officer of Los Angeles-based United Pacific Bank and senior executive to the banks’ parent company. Raine began his banking career as a calling officer in the Asia division of Chemical Bank.
Laurus-Valens, one of the nation’s largest investors in penny stocks, has approximately $1.7 billion in assets under management. Laurus invests in private investment in public equity, or Pipes, a financing vehicle for small, cash-strapped companies. Hedge funds use Pipes to buy shares at a discounted price and can quickly resell them.
Last March, Laurus Capital Management LLC launched Valens Fund to invest in publicly traded small and micro-cap companies seeking cost effective growth capital.

By Natasha Gural, Editor

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• ESL Investments, Edward Lampert
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• Icahn Partners, Carl Icahn
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• NIR Group, Corey Ribotsky
• Omega Advisors, Leon Cooperman
• Ospraie Management, Dwight Anderson
• Paulson & Co., John Paulson
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• PSAM, Peter Schoenfeld
• Renaissance Technologies, James Simmons
• SAC Capital, Steven Cohen
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