Killing it like a hooker in Hong Kong

Citadel, Bloomberg and the perils of stale news…

Bloomberg today morning kicked off with a puff piece on Citadel, which will no doubt appear in Bloomberg magazine later in the month…

Oct. 29 (Bloomberg) — Rohit D’Souza was on vacation with his family in India in May 2008 when he got a call from Ken Griffin, founder and chief executive officer of Citadel Investment Group LLC. Griffin wanted the banker, who had just quit his job as head of equity trading and sales at Merrill Lynch & Co., to help him do something no other hedge fund had ever tried.

Less than two months earlier, Bear Stearns Cos. had disappeared, swallowed by JPMorgan Chase & Co. after losing billions on subprime mortgages. Griffin asked D’Souza, a 45- year-old native of Mumbai, if he would be interested in running a full-service investment bank.

6 hours later, WSJ reported the following

The Chicago firm also confirmed that a banker it hired last year to build an investment bank, Rohit D’Souza, was leaving.

The developments showcase the challenges facing the firm that manages $14 billion in assets as it tries to recover from a grim 2008 for its hedge funds while diversifying into other businesses.

Upon which, Bloomberg had to Update the article and add the following

Oct. 29 (Bloomberg) — Rohit D’Souza was on vacation with his family in India in May 2008 when he got a call from Ken Griffin, founder and chief executive officer of Citadel Investment Group LLC. Griffin wanted the banker, who had just quit his job as head of equity trading and sales at Merrill Lynch & Co., to help him do something no other hedge fund had ever tried.

Less than two months earlier, Bear Stearns Cos. had disappeared, swallowed by JPMorgan Chase & Co. after losing billions on subprime mortgages. Griffin asked D’Souza, a 45- year-old native of Mumbai, if he would be interested in running a full-service investment bank.

The two men talked through September as Lehman Brothers Holdings Inc. declared bankruptcy and rumors swirled that Chicago-based Citadel, whose gross assets had reached $145 billion earlier that year, would fail. The firm’s biggest funds, Kensington and Wellington, lost 16 percent that month and started exiting unprofitable businesses. In October, as the funds tumbled another 22 percent, D’Souza said yes. D’Souza said yes.

On Oct. 29, 12 months later, Citadel said D’Souza is leaving the firm and will be replaced by Patrik Edsparr, president of Citadel Europe and head of the company’s fixed- income business. The departure suggests that Griffin’s attempt to graft an investment bank onto a hedge fund firm won’t be easy.

Hilarious… at least Bloomberg is lucky the news wasn’t delayed a couple more days, then in would be in hardcopy in the Bloomberg magazine. However, they certainly couldn’t change the thesis of the article… that Citadel was building an investment bank, without deleting the entire piece… so they just ran with it, regardless of how irrelevant the entire story had become:

His latest enterprise may well be his most audacious, at least since starting his own hedge fund. Grafting an investment bank onto a hedge fund firm won’t be easy. Unlike large banks, Citadel doesn’t have a big balance sheet, so it can’t offer loans to clients to purchase companies or make investments.

October 30, 2009 Posted by | Uncategorized | , , , , | 3 Comments

On the Ground in India

I’m on vacation in India this week, covering mostly southern India, namely the states of Kerala, Tamil Nadu and Andhra Pradesh. We’ve been getting in a mix of the cities and the villages, and I’ve had a chance to touch base with some old colleagues who have moved here. I just wanted to fire off some initial impressions from the ground.

The power situation here is abysmal, but that has created some advantages that will serve the economy well in the future. India has about 120 gw of generating capacity, compared to the UK which has about 80 gw. This is ridiculous. The UK is now contemplationg a power shortage in about 5 years, yet it already has about 1.3 gw per million people, India has 0.1 gw per million.

What this means is that power is now unavailable from the market at the regulated official rate. In order to get power you have to pay off officials, and the unofficial rate is as high as 20 US cents per kwh. In comparison a developed market, with all its regulations and carbon taxes normally has tariffs at about 4 to 5 US cents per kwh (France for eg).

The reserve margin, or excess capacity beyond peak demand is at -20%, officially, and unofficially as high as -50%. Beyond the capital city of each state, electricity is rationed with planned power outages of between 2-4 hours each day.

The southern states plus maharashtra are the wealthiest states with a concentration of manufacturing and IT services. But power is so short that any manufacturer has to either build his own power plant or have a generator at hand to support operations. Indians have turned to distributer power generation because they have no choice. Some companies like Suzlon and Vestas have built these enormous wind farms across the barren landscape of the south. A manufacturer can buy a windmill, feed in to the grid, and take out an equivalent amount at his plant.

The nuclear power plan in India has gotten much further along than I expected. While at a diplomatic level, India has just received unanimous approval from the Nuclear Suppliers Group to buy materials, at the local level, land acquisition, design, and the political debates around the issue are well advanced. I passed by the Kudankulam Nuclear Power site, an existing site where the Russians will add 4 more reactors, and the area had ready been cordoned off, with heavy trucks starting to go in.

The electrical grid has imporoved dramatically since I was last here 3 years ago, with all the wind farms connected by high voltage transmission lines, something which is cauisng the US issues with wind development. the local grids have now all been connected and the Power Grid Corporation is working on the final North-South interconnect. This is probably the only area where the Indians are ahead of the Chinese, but the advantage seems to stem from the inherent bicoastal geography and more distributed population than any focused effort.

Power distribution reform is still at its early stages, with some cities having privatised their grids, and some still under state goverment control. Distribution is probably the most controversial area because you actually have to cut off millions of slum dwellers who have illegally tapped power lines. The more expensive but less troublesome way is to bury overhead copper cables rather than actively policing areas with distribution losses.

The road infrastructure has improved dramatically in the last 3 years, with 2,4 and 6 lane highways on many major routes. If there is one sector of the economy which is printing money right now, it is the toll road operators. Unlike transportation infrastructure in many other developing nations which are basically pork barrel-soft loan-slush fund projects for local politicians with overestimated traffic numbers, a unique tax incentive has made road developers here underestimate numbers (but of course the pork barrel element still exists!). Basically the goverment waives value added taxes when developers show low revenue numbers due to the low tolls they are required to charge. The volumes when the road is built is so much higher than the projections that the developers make out like bandits.

All the major cities are builidng metros. The Japanese are providing soft loans and technology for the Chennai metro which is currently being built. The Indian government no longer provides sovereign guarantees to any of these projects, as India is now an investment grade destination. I believe the last project they provided a guarantee to was the ill fated Enron Dhabol project.

Finance and banking
Finance is largely in the 1920s here. Bank loans are obtained by bribing bank officers for small loans, and being friends or family with the head of the bank for larger loans.

There is no concept of limited recourse, and loan applicants typically have to assign all personal and family assets to the bank.

The stock market is purely an insider’s game at the local level. The larger local investors receive tips from the tax offices, accountants, consultants, and other people in the know. In fact, trading on pure analysis without as inside edge is regarded as ludicrous. All the big brokerages are essentially stock pools which exist to manipulate stocks up and down. On a daily basis, brokers from IndiaBulls and Edelweiss and other brokerages send text messages to the millions of small investors under their wings, directing them to sell or buy particular stocks, while leading their clients. It’s really the 1920s out there.

There is no bond market for local issues, and hence there is no concept of bankruptcy. Instead all the bank lenders club together to put the company through a Corporate Debt Restrucuring process, which typically involves paying some upfront fees to lender (and bankers as well presumably), in return for an indefinite maturity extension.

This process has created literally hundreds of companies under perpetual restructuring. No one will sell when distressed, because they can always make a deal with the bank. This process only gets disrupted when there is significant external borrowing from foreign sources, one reason why the Reserve Bank of India is a predatory hawk when it spots this.

If the indian economy has an Achilles heel, it is agriculture. 700 to 800 million people depend on it, but the variabily of the monsoons, groundwater depletion and overfarming are driving desertification of large areas of the country. The south is in severe drought right now, and in the afternoon the temperature hits 40 degrees C. Inter state disputes and local politics have delayed many of the water projects. Lack of power has also been a significant hurdle.

Having said that, the agricultural sector produces an immense amount and variety of products here, This may simply be a by-product of the smallholding system, or it may be that there is enough local variations of climate and conditions to support a wide variety of plants.

Poverty and the Naxalites
India still has the kind of grinding sub-saharan africa kind of poverty that has disappeared from the south east asian ecenomies. Farmers who have taken 5000 rupees or about USD100, end up going into indentured servitude and shipped off to stone quarries and coal mines. All absolutely illegal, and civil society groups try to expose and prevent the worst of the atrocities, and yet it happens.

While a huge number of people live on less than USD5 a day, it is amazing how much you can buy for that amount in India. A college educated non-engineering graduate would probably make USD200 a month. A good meal at a local diner would set you back maybe 50 US cents.

The Naxalites are a more recent development. I think the best way to describe them would probably be a slightly Communist tinged Project Mayhem type organization. There does not seem to be a central leadership, but more than two thirds of Indian districts are supposedly under their control. They pop up randomly, extort small amounts of money or oppose some project by kidnapping someone. Their victims generally know who they are, and in fact live side by side with them in the villages. Most of the Naxalites don’t know who their leaders are, but simply follow the instructions they receive, show up here, pass this package to a person who gives you this signal. It seems like a classic uprising of the lower classes against the stratified and protected elite.

October 24, 2009 Posted by | Uncategorized | , , , , , , , , , , , , | Leave a comment

Fund Info: Matchpoint Asia

Well,  looks like Raaj Shah, he of the first Och Ziff partner to get fired after the IPO fame, has bounced back, somewhat…

Sets up Matchpoint Asia with Sean Debow,  another hedge fund firee. The size of the fund USD50mm, indicates that it’s probably primarily partner’s funds. They probably put in USD20-USD30mm on their own, and got some Chinese entrepreneur to pump in USD20mm in return for a cut of management and performance fees. The problem with new fund raising these days, is that it takes at least 3 years to establish a track record as a new fund and get on the radar screens of the typical institutional investors, all of whom were badly burned in the last 18 months.

I’m still waiting for a Chinese oligarch backed fund, with money from a Chinese family and a cutthroat CIO to show up and start doing big things. I would envision something like Barakett’s Atticus Capital, where a HBS ice hockey cowboy was paired with an European playboy fund raiser. Atticus was such a play on concentration, leverage and sheer luck. No diversification of bets whatsover.

Getting back to Matchpoint, their strategies seem to be to trade whatever equities, bonds, and convertibles they can. There’s a lot of smoke on their strategies, but that’s what it’s going to boil down too.

On another note, neither Raaj nor Sean is Chinese or even North Asian, and yet they focus markets are North Asian. I always wonder why these guys think they can make it out here. Here’s a piece of advice, it you want to be the smart money in Asia, you better damn well have family connections into the oligarchies that run stuff. Or you will get you ass handed to you everytime.

Oct. 7 (Bloomberg) — Raaj Shah, an ex-partner of Och-Ziff Capital Management Group LLC, co-founded a hedge fund last month trading under-researched and mispriced Asian securities affected by events such as mergers, tax changes and forced selling.

The almost $50 million Matchpoint Asia Fund Ltd. targets annual returns of 15 percent to 17 percent without betting on market direction, Sean Debow, chief operating officer and co- founder of its adviser Matchpoint Investment Management Asia Ltd., said in an interview. Hong Kong-based Matchpoint’s nine- person team has the capacity to manage $700 million, he added.

“We see arbitrage opportunities in Australia where there are a lot of takeovers and tender offers,” Debow said yesterday. “We see a substantial number of securities that are mispriced and not as well understood in India, Taiwan and China.”


Shah, Matchpoint’s 34-year-old chief investment officer, spent 12 years with Och-Ziff, the New York-based hedge fund firm led by Daniel Och. He co-managed Och-Ziff’s Asian operations before leaving in December. Debow, 42, was most recently Asia research director and Asia business head of Los Angeles-based Ivory Investment Management LP.

‘Turning Point’

Och-Ziff’s then $16.4 billion OZ Master Fund lost 16 percent last year. The $2.4 billion OZ Asia Master Fund fell 31 percent, according to the annual report.

“We’re at the turning point right now in terms of the availability of talent for the hedge-fund industry in Asia,” said Charles Stucke, Chicago-based global chief investment officer of Guggenheim Investment Advisors LLC, which manages more than $50 billion of assets.

Matchpoint will use a so-called bottom-up approach to select its investments, Debow said. The bulk of its holdings will consist of listed shares of companies. About 10 percent of the assets would be listed securities incorrectly priced because of forced selling by investors, short-term changes in the issuers’ cash flows, or other types of corporate distress events, he said.

It will invest in securities whose prices are expected to be affected by “hard catalysts,” including publicly announced corporate actions such as mergers or events with a number of possible outcomes. Matchpoint will exploit mispricing of those securities before the events are completed, Debow said.

Distressed Prices

Company executives are shifting their focus from “firefighting” during the financial crisis back to growing their businesses through strategic investments amid “the calm after the storm,” Debow said.

Matchpoint will also trade securities with “soft catalysts,” meaning they will be affected by short-term changes in factors such as consumption patterns, taxation rates, regulatory environment, or costs of goods sold, he said.

A third category of investments will be securities trading at distressed prices, hit by forced selling by investors, or events such as material changes in near-term costs and selling prices of their products, Debow said.

The Matchpoint fund will focus on Hong Kong, China, Australia, Japan, Taiwan and South Korea, and to a lesser extent, India, Singapore, Indonesia and Malaysia, he said.

Och-Ziff, Ivory

Och-Ziff invested about 20 percent of the $27 billion assets under management at the end of December in Asia, according to its annual report.

The company in December cut at least 10 jobs in the region as its funds lost money amid falling markets and investor withdrawals, people said then. Shah departed that month to “do something more entrepreneurial,” Debow said.

Debow left Ivory, which decided in December to close down the Asian operations to focus on U.S. securities, he said.

He declined to give his and Shah’s earlier investment performances, saying the track records are owned by their former employers.

October 8, 2009 Posted by | Uncategorized | , , , , | 5 Comments

Infrastructure Investment Of the Year Award!

This would be pitched so:


ELAN INVESTMENTS presents unique investment opportunity in Asian infrastructure. The Company is the owner of the exclusive right to develop a transportation network in a prosperous Middle Eastern democracy. The network will be used for the transportation of all goods to be used by the territory in question, and hence would have a monopoly on transportation of materials into the territory. The economy of the territory in question is estimated at USD12 billion for a population of 2.5 million, for a GDP per capital of USD5,000 per person, which is higher than India and slightly lower than China.

The license obtained by Elan does not limit tolls in any way, and hence the Company will be able to charge whatever the traffic will bear. Cost of construction of each link in the network will cost approximately USD100,000.  The Company has been encouraged by the sponsor government to build as many links as possible. The Company envisions an initial investment of USD100 million in the form of Redeemable Assumed Preferred Exchangeable Receipts  paying a coupon of 120% per annum. The sponsors of the Company will own all equity in the firm, and hope to make a return in excess of the RAPES.

Political risk insurance on this investment in not available.


Elan by the way, in Arabic would translate to Hamas.

Inshallah they get restitution.

Investment opportunities are rare in the Gaza Strip. So when Nabila Ghabin saw one last year, she pawned her car and jewelry and put $12,000 into a network of tunnels that brought in supplies smuggled from Egypt.

She was one of about 4,000 Gazans who gave cash to middlemen and tunnel operators in 2008 as Israel blocked the overland passage of goods. Then Israeli warplanes bombed the tunnels before and during the Dec. 27 to Jan. 18 Gaza offensive and the investments collapsed.

Now investors, who lost as much as $500 million, want their money back from Hamas, which runs Gaza.

The imbroglio over the 800 to 1,000 tunnels has deepened Hamas’s decline in public opinion in Gaza and highlights the Wild West nature of the underground economy that supports this jammed enclave of 1.4 million people.


Digging and operating a tunnel, typically about 50 feet (15 meters) deep and 250 feet long, costs as much as $100,000, according to Shaban.

With Israel restricting the flow of goods into Gaza after Hamas took power in 2007, tunnel owners began seeking funds for more tunnels. They built under license from Hamas: Four operators who declined to be identified said they each paid 11,000 shekels ($2,950) to Hamas for a digging license.

According to investors Ghabin, Mohamed Shurab and Shadi Qishawi, the financing worked this way: In exchange for their money, investors were promised monthly dividends of 10 percent. They were not owners of the tunnels. The returns came from the profits of smuggling as well as new investments, Shaban said.

October 7, 2009 Posted by | Uncategorized | , , , , | Leave a comment