This content is from: Portfolio

Morning Brief: SEC Probes Banks, Brokers Over Fake Bond Prices

The regulator is investigating whether banks used inflated bond valuations to attract hedge fund clients by boosting their returns.

The U.S. Securities and Exchange Commission is investigating whether a dozen banks and brokers fudged the prices of bonds sold to hedge funds in order to secure their business, according to Bloomberg.

The SEC is questioning whether the banks and broker provided inflated prices on debt securities, enabling the hedge funds to show higher returns to investors, Bloomberg said, citing unnamed sources.

JPMorgan Chase & Co. and Citigroup are two of the banks named in the probe, which focuses on valuations of mortgage securities and other thinly traded bonds where swings of just a few cents can have a big impact on returns, according to the report.

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London-based Winton Group claimed hedge funds don’t run nearly as much money as is widely reported – but the real takeaway could just be that fewer hedge funds are charging 2-and-20 fees.

The new study argues that what Winton defines as “true” hedge funds run only $850 billion, not the $3.6 trillion that the SEC reported as of March 31, 2017, and less than a third of the assets measured by leading data providers, including Hedge Fund Research Inc. and Preqin.

Winton said the discrepancy stems from the various definitions of what constitutes a hedge fund, which the report acknowledged is “somewhat ambiguous.”

“A ‘hedge fund industry’ managing $3 trillion - one that is lightly regulated and characterized by a 2-and-20 fee model, low transparency, illiquidity, and extensive use of leverage and shorting – does not exist,” said Jonathan Levy, head of product research at Winton.

Firms that meet all of Winton’s criteria, including charging, at minimum, a 2 percent management fee and 20 percent performance fee, manage an estimated $848 billion, Winton said.

When firms that charge fees greater than “1-and-10” are included, the the figure grows to approximately $2.5 trillion, according to Winton.

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Former Fortress hedge fund manager Michael Novogratz, who plans to launch one of the biggest cryptocurrency hedge funds, thinks more women need to get involved in the craze that has sent Bitcoin prices through the roof, reaching $11,800 yesterday.

“It feels to me that 85% of the crypto community is male,” he tweeted Tuesday. “For the revolution to thrive we need more women on the team. i [sic] know its a complex issue but change starts with awareness."

Novogratz plans to launch a $500 million cryptocurrency fund through his new firm, Galaxy Investment Partners. His strategy could include shorting Bitcoin: At a Coindesk conference last week, he said the digital currency is “going to be the biggest bubble of our lifetimes by a longshot.”

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Boaz Weinstein’s Saba Capital Management is continuing to pare down its stake in funds run by Clough Capital Partners. It sold 600,530 shares of the Clough Global Opportunities Fund last week, leaving it with 6.56 percent of the company.

Saba held a more than 8 percent stake earlier in November after beginning to reduce its holding.

In July, Saba settled with Clough, which agreed to make changes to narrow the net-asset-value discounts of their funds in order to avoid a proxy fight with Saba.

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