Paulson & Co. Short Financial Sector, Long Individual Names

Paulson & Co. the hedge fund founded by John Paulson has received plenty of attention in recent quarters as his massive short bet on subprime mortgages payed off handily. Since then, many of Paulson's funds have continued to outperform.

During Q4 2008, Paulson made a short bet on financials through SKF, a leveraged short financial ETF. However, he also increased stakes in financial firms including Merril Lynch (deal with B of A now closed), Wells Fargo, Wachovia and others.

Below are Paulson & Co.'s top holdings for Q4:

Top 20 Holdings (by % of portfolio):

1. Rohm & Haas (ROH): 18.36% of portfolio
2. Boston Scientific (BSX): 12.64% of portfolio
3. UST (UST): 11.31% of portfolio
4. Kinross Gold (KGC): 8.66% of portfolio
5. BCE (BCE): 7.7% of portfolio
6. Wachovia (WB): 7.62% of portfolio
7. Philip Morris International (PM): 6.45% of portfolio
8. Mirant (MIR): 5.72% of portfolio
9. Genentech (DNA): 4.68% of portfolio
10. Merrill Lynch (MER): 2.68% of portfolio
11. National City (NCC): 2.54% of portfolio
12. NRG Energy (NRG): 2.02% of portfolio
13. At&t (T): 1.41% of portfolio
14. Ultrashort Financials (SKF): 1.36% of portfolio
15. Embarq (EQ): 1.18% of portfolio
16. Northern Trust (NTRS): 0.79% of portfolio
17. Peoples United Financial (PBCT): 0.72% of portfolio
18. Liberty Media (LMDIA): 0.68% of portfolio
19. Centennial Communications (CYCL): 0.66% of portfolio
20. St. Jude (STJ): 0.54% of portfolio

Virgin America, Owned by Pair of Hedge Funds, Faces Puts

19 month old Virgin America is owned by a pair of hedge funds/ private equity firms, Black Canyon Capital and Cyrus Capital Partners.

These funds seem to have negotiated some interesting "put" options when taking ownership of Virgin America. Virgin has had losses mount as the economy, and airline industry specifically, slow to decade old rates. Under the agreement, Virgin Group, Virgin America's European parent, would be forced to buy back the shares. However, under US law, domestic airlines must be majority owned by American companies. It remains to be whether either firm intends to exercise such options.

Black Canyon Capital is a Los Angeles based private capital firm focused on investing in control and non-control equity and structured debt securities. Cyrus Capital Partners is a New York based firm that "invests across the capital structure of leveraged companies throughout their life cycles, including those in financial distress, and seeks to generate attractive absolute returns that are not correlated to or dependent upon the general equity and fixed income markets."

EU Official Seeks Greater Hedge Fund Transparency

The top EU financial official, Charlie McCreevey, is seeking greater transparency from European hedge funds, amid pressure from politicians and citizens. This comes amid increased calls for hedge fund transparency in the US. McCreevey said noted "undesirable levels of leverage in hedge funds, or excessive lending to private equity managed companies."

He also acknowledged the role of leverage in today's markets with redemptions forcing many funds to sell positions, "Much of the present difficulty encountered by hedge funds and private equity portfolio companies stems from the sudden tightening in cash and securities lending,"

"Those who do not like activist investors should not have a fixation with hedge funds," McCreevy said. "Any policy responses that seek to tackle wider problems by targeting hedge funds and private equity will fail."

European nations will likely discuss this with the U.S., China, India and Brazil when the G-20 group of nations meet in April to chart out ways to fix the financial system.

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Paul Volcker Urges Congress to Restrict Hedge Funds

Former Federal Reserve Chairman and current Obama economic advisor, Paul Volker, urged Congress today to place "strong restrictions" on hedge funds and private equity firms to ensure market stability.

Below are some quotes from Volker's testimony:

“We must not again leave the markets so vulnerable that a breakdown will again threaten the national and world economies"
Volker and Obama, July 28, 2008

We need "strong restrictions on risk-prone capital market activities -- hedge funds, equity funds, proprietary trading and the like"

"We are living in a difficult time for the economy, with unprecedented complexities, complications and risks for financial markets and financial institutions."

"There are problems with the present international monetary system that have not received sufficient attention,"

It remains to be seen, what, if any, restrictions or registration requirements Congress will impose on hedge funds, but there current economic and political climate will certainly make it tough for private capital to remain as opaque as it once was.

Will Hedge Fund Frauds Help Mutual Funds?

With a number of high profile hedge fund frauds, most notably the downfall of Bernard Madoff's fund, will investor's begin to shift assets from lightly regulated hedge funds to the more regulated mutual fund industry?

According to Stephan Kunze of Deutsche Bank, "there'll be a drive clearly toward more transparency and stricter supervision. That could be good for mutual funds."

Over the last several years, a class of mutual funds have developed that in many ways mimic hedge funds. Will niche and high turnonver mutual funds attract assets from the hedge fund industry? Maybe so, particularly until the hedge fund industry can regain the trust of their potential clients.

Most Asian Hedge Funds will Not Receive Performance Fees in 2008

Bloomberg's report today that more than 80% of Asian hedge funds will not receive performance fees in 2008, does not come as a huge surprise given most funds' dismal performance. About 30% of funds actually had positive returns in 2008, but presumably high water marks and benchmarks account for why only 2/3 of the hedge funds with positive performance in 2008 will receive performance fees.

More astounding is that the report found that 86% of asian hedge funds are below their high water mark.

APAC Capital Advisors closed its Greater China Fund in September after assets declined by 80% to just $10 million.

Sam Israel's Girlfriend Pleads Guilty to Aiding and Abetting

Debra Ryan, girlfriend of former hedge fund manager Sam Israel, plead guilty to "aiding and abetting Samuel Israel III's failure to surrender to serve his sentence on June 8, 2008", according to the US Attorney's office.

Israel was supposed to serve 20 years in prison, beginning in June of 2008, for his role in defrauding investors in the Bayou Management funds. Rather than turn himself in, Israel allegedly faked his own suicide, and then fled to avoid incarceration.

Background

$440 million The alleged money under management for Bayou.

$101 million Money frozen by State of Arizona believed to be remaining assets of Bayou Management LLC.

The action also states that in the spring of 2004 Bayou began a series of transactions which involved transferring large sums of money to numerous banks. The private placement programs promised above average rates of return, as much as 100% per week. These transactions are what initiated the Arizona investigation.

The CFTC filed fraud charges against Bayou, its principals and Richmond-Fairfield, citing much of the same evidence as the Federal court in charging Bayou. In addition the CFTC points out that Marino, CFO for Bayou, was listed as the registered agent of Richmond Fairfield from Oct. 10, 2000 to April 29, 2003 and is identified as the member/manager of Richmond-Fairfield in New York State records on those with professional licenses. It also notes that Israel was listed as the registrant of the Richmond-Fairfield Web site and the e-mail address provided to the Web sites domain registry was bayoufund@aol.com

SEC Commissioner Supporting Hedge Fund Regulation

SEC Commissioner Elisse Walt, is supporting greater regulation of US hedge funds, an issue supported by democrats in Congress, particularly after the recent Ponzi scheme involving Bernard Madoff.

"I generally do support that notion (of hedge fund registration)," Walter told Reuters in an interview. "But the devil is in the details. Registration has to be meaningful."

Treasury Secretary Timothy Geithner and SEC Chairman Mary Schapiro also have recently expressed their support for legislation regulating hedge funds and other private pools of capital.

However, given that Madoff's firm was in fact an SEC regulated fund, it is not clear who should have regulating authority nor whether it will be effective.

Hedge Fund Pershing Square Capital Management Allowing Redemptions

William Ackman, 42, fund manager of hedge fund Pershing Square Capital Management, is cutting fees and allowing investors to withdraw what is left of their investments. This move could encourage other hedge funds to eliminate some of their restrictions on withdrawals and redemptions.

Of course, not all funds have had as poor performance as Pershing Square's Pershing Square IV Fund, which is down 90% on the year and is left with only $25 million in assets.

Pershing Square Capital Management, based in New york, is waiving performance fees until the fund reaches its high water mark, though given the losses that could be decades.