“So much for Objective Journalism. Don’t bother to look for it here–not under any byline of mine; or anyone else I can think of. With the possible exception of things like box scores, race results, and stock market tabulations, there is no such thing as Objective Journalism. The phrase itself is a pompous contradiction in terms.”

- Hunter S. Thompson,“Fear and Loathing on the Campaign Trail ‘72″

Same story, two markedly different takes:

Pensions & Investments: Hedge fund closings surpass debuts for 2nd straight year.

MarketWatch: Liquidations fall, while hedge fund launches rise

Same data, same source, very different takes. I had a journalism professor who maintained there was no objectivity in journalism. As soon as a reporter picks a quote to use or cites one statistic instead of another, subjectivity is introduced. In this case, it’s not even that cut-and-dried. Both stories cite the same statistics, it’s just that one emphasizes the change year-over-year while the other focuses on single-year numbers. Both are equally true and equally accurate.

Shades of gray in a black-and-white world.

I’ve been covering hedge funds for about 10 years, and in that time I’ve seen them shift from investments most people had never heard of to topics of conversation among friends of mine with no connection to finance. I used to say I wrote about hedge funds and get a blank stare. The other night I was at a college alumni function with a bunch of younger people I’d never met and every person I talked nodded knowingly when I said “I cover hedge funds.” Reactions ranged from “Oh, Madoff” to “Oh, Greece.”

Granted, not everyone understood the hedge fund connection to the home of the Gyro, but the perception was that hedge funds are somehow, possibly illegally, making money off the misery of another country.

I tried to tell people there’s nothing “illegal” about it, at least not yet. Speculation is legal, and has been encouraged in financial markets, especially since the passage of the Commodity Futures Modernization Act of 2000, which threw open wide the door to trading the same esoteric over-the-counter derivatives upon which much scorn has been heaped the past couple of years.

I remember those days well. They were among my first covering risk management and derivatives at Pensions & Investments. I knew very little about the industry then (it could be argued that I know only a little more today), and the phrase that stuck in my mind when people talked about the proposed derivatives legislation was “legal certainty.”

At the end of the day, the CFMA eliminated concern a court could rule that swaps and other since-popularized derivative instruments had to be traded on regulated exchanges. That would have killed the business, many argued. The idea behind the eventual treatment of these derivatives by the legislation was that the pre-CFMA 2K uncertainty was constraining innovation and denying investors access to important risk management tools. Everybody, it seemed was on board with this notion.

A Bloomberg story last month noted that Gary Gensler, the chairman of the Commodity Futures Trading Commission, who was a big supporter of the CFMA 2K and fought hard for its passage, has now come to the conclusion that the very over-the-counter instruments exempted from regulation by the CFMA 2K now must trade on-exchange. Gensler is far from the only CFMA 2K supporter to have been converted in this way. Alan Greenspan and Arthur Levitt Jr. have both seen the light, as it were, according to Bloomberg.

“Former Federal Reserve Chairman Alan Greenspan and former Securities and Exchange Commission Chairman Arthur Levitt Jr., both of whom supported the 2000 law, have expressed regret that derivatives were not more tightly controlled.”

What did looser control bring? Well, in the Credit default swap market it brought explosive growth. What was a $180 billion market in 1997 grew to $5 trillion by 2004 and an estimated $62 trillion by the time the bottom fell out of the credit markets in 2008. That’s a ridiculous growth rate, and far more indicative of a frenzied speculative bubble than a rush to embrace a new risk management tool. Of course, it’s easy to say that in hindsight, but when it’s happening it’s exciting, and much of the supposed “watchdog” financial press was caught up in reporting on the superheated growth rate, but decidedly less focused on its implications.

And so here we are, at a point in time where hedge funds and naked credit default swaps are being blamed for exacerbating Greece’s financial woes, and both are facing tighter regulatory scrutiny.

Today’s Wall Street Journal details the expanding criticism of the swaps market by people with the power to shape policy, both in Europe and the United States. The Journal discusses Gensler’s most recent views, while the Washington Post does a deep dive into the European Commission’s moves toward banning credit default swaps in sovereign debt. The Irish Times goes after naked credit default swap trading. And Janet Tavakoli warns on Huffington Post today about naked CDS on U.S. debt

Swaps and other derivatives, and hedge funds’ use of them, is no longer a topic only for finance geeks and traders. That’s probably not good news for the laissez-faire/Chicago School/free market crowd, but good news for the Keynesians. The pendulum is on its way back.

Call me an unintended acceleration skeptic. These days that’s like saying I don’t believe climate change is real or that I think the Earth is 5,000 years old.

I do believe climate change is real, however, and I believe all the science I’ve been taught over the years that the Earth has been around a lot longer than 5,000 years. But I don’t believe people’s cars are just running away out of control, not without some additional factors at play, anyway.

What’s the hedge fund connection? The smart money, in the short term, may be betting against Toyota’s share price. But in the long run I think the company will be a good long bet.

I’m not a scientist or an engineer, and I have never worked as an investigator for the National Highway Traffic Safety Administration. But I am old enough to recall the Audi sudden unintended acceleration cases from the 1980s. Many of those claims were attributed to driver error (hitting the gas instead of the brake), however Audi did take some steps to further separate the brake and gas pedals due to the complaints. There is one consolidated class-action lawsuit left in that case that I know of—Audi owners who claimed the re-sale value of their cars was hurt by the allegations and subsequent Audi recall. After 22 years of legal maneuvering, that case is still active in the courts. Meanwhile Audi has continued to make cars.

Look, it’s not that I don’t believe cars can suddenly and unexpectedly accelerate and that drivers can reasonably report being unable to stop them. In the pre-drive-by-wire electronic engine control days, gas pedals could get stuck to floor mats, or stuff rolling around on the floor could get behind the brake pedal. These days, computers control everything and presumably can go wiggy. Additionally, for reasons related to physics (heat) and mechanics (vacuum pressure), brake systems become less effective when a car’s throttle is wide open.

And yet, Car and Driver magazine tested three cars and in each of the cases the brakes were strong enough to overcome the engine’s acceleration. Even the 540-horsepower Rousch Stage 3 Mustang was eventually dragged to a stop.

“From 70 mph, the Roush’s brakes were still resolutely king even though a pinned throttle added 80 feet to its stopping distance. However, from 100 mph, it wasn’t clear from behind the wheel that the Mustang was going to stop. But after 903 feet—almost three times longer than normal—the 540-hp supercharged Roush finally did succumb, chugging to a stop in a puff of brake smoke.”

Granted, the lack of confidence at 100 miles per hour, even among experienced drivers, means that less experienced drivers would probably panic. But the brakes still eventually overpowered the engine.

I think what’s most likely at work here is a combination of bad ergonomic design (Toyota’s floor mats), an abysmal driver education system, distracted driving and plain opportunism (read: “plaintiffs”).

Toyota is fixing the ergonomic problems. I’m less convinced (and obviously Toyota is, too) that the vehicle ECMs are suddenly opening the throttles, but if we’re both wrong and there’s a severe software problem Toyota will address it for its own survival.

What I’m getting at is that even with all the bad publicity surrounding Toyota of late, these acceleration issues will mostly boil down to a) driver error, b) design flaws, or c) software flaws. There will be lawsuits, but as the Audi example shows they will likely drag on for years. Toyota seems willing to fight any claims that it has been negligent. A billion-dollar-plus settlement seems a remote possibility.

Meanwhile, once this period of hyper-focused bad publicity passes, two realities will emerge: First, Toyota by and large builds good vehicles that are affordable. And second, most of those vehicles are perceived as fuel-efficient. Oil prices are back above $80 a barrel.

There are plenty of holes in my argument, no doubt. But that’s my take on it anyway. Go long Toyota.

The bucket of Relative Value strategies tracked by Hedge Fund Research notched a 0.22 percent gain in February, marking the 14th straight month of positive returns for the investment style, according to Ken Heinz, HFR’s president.

The last time the RV category registered a decline was in December 2008.

Relative value, as many readers probably know, is hedge fund industry catch-all jargon for strategies seeking to exploit pricing dislocation between two related or similiar securities, usually bonds. If Long-Term Capital Management still existed, most likely it would be considered a relative value fund.

Fixed-income arbitrage and convertible arbitrage are among the most common sub-styles of RV.

When the financial meltdown/credit crisis hit in late 2008, liquidity on Wall Street dried up like Scottsdale in summer. RV, which inherently requires leverage to make the discrepancy exploitation game worth playing, got slammed, Heinz explained.

“But as liquidity has come back in to the market, relative value has benefitted and has proven the most consistent performer of any category we track,” Heinz explained.

Among the best performing sub-style within Relative Value is “multi-strategy relative value,” he added.

People love lists and more specifically they love rankings. Journalists know this. Thus, in hedge fund land, we are treated to endless lists of who makes how much, which hedge fund firms are the biggest, which managers deliver the best returns, who took in the most money, who lost the most money. Some of these lists are of a higher quality than others. You readers of these lists know what I mean – some are little more than speculation while other are meticulously researched and documented.

Both kinds get loads of media attention, mostly because, although we deny it, we seem to be fascinated with how much money other people make and how successful (or unsuccessful) they are. We love to see the high brought low and get our indignation on at the eye-popping paychecks some in this industry regularly collect.

All of which is a way of backing into the latest ranking, from Pensions & Investments, of hedge fund assets. In its story accompanying the chart, P&I pointed out that three firms—Goldman Sachs Asset Management, Renaissance Technologies Corp. and Citadel Investment Group—lost enough in assets during 2009 to fall below $20 billion in assets, the cutoff for making the newspaper’s list.

Four other firms—Brevan Howard Asset Management LLP, Baupost Group LLC, Soros Fund Management LLC and Man Group plc—exceeded the $20 billion threshold to make P&I’s list.

J.P. Morgan was the largest hedge fund manager, with $53.5 billion in assets as of Dec. 31. That amount was divided between J.P. Morgan Asset Management and Highbridge Capital Management LLC.

Farallon Capital Management LLC saw 42.5% of its assets disappear, according to P&I. Goldman Sachs’ assets fell 45.2%, dropping the firm from sixth place in 2008 to off the list last year.

P&I also found that institutional assets managed by the top 11 firms fell by 22% to $151 billion. What to make of that? Some institutions probably moved money to smaller firms as they got more comfortable with the space, while others pulled money out of hedge funds as a strategy. But by and large, P&I found, institutions appear to prefer the larger hedge fund managers, which isn’t surprising. What’s that old adage? Nobody ever got fired for buying IBM stock? Same deal here, as P&I pointed out.

Last fall I was on a conference call with several prime brokers. After the introductions were through, the conversation among the assembled prime brokers turned to business. Specifically, how business was.

One of the brokers spoke of business in 2009 in terms of business in 2008. “A year ago it felt like the world was ending,” he said. “This year I sense people are feeling a lot more confident.”

Seems like a simple observation, and it was. The other prime broker representatives on the call all concurred, and offered anecdotal evidence from their own experiences. But that was last year, and as good and relieved as everyone on that call was I found it hard to muster any enthusiasm of my own for 2010.

January seemed to bear out my pessimism. Hedge fund returns were down or essentially flat, depending on which index one consulted. And yet we published a fairly extensive list of hedge fund launches. Not that unusual for the start of the year, I thought. But it seems the optimism I sensed on last fall’s call is carrying over into this year.

Yesterday we ran a story quoting Alex Ehrlich, head of prime brokerage at Morgan Stanley, saying hedge fund launches are up this year over last year.

“Without being specific, Mr. Ehrlich said between 15 and 100 newly launched hedge fund firms will start working with Morgan Stanley this year. The numbers suggest that portfolio managers and traders who are now working at banks or other hedge funds are still very eager to hang out their own shingles even as industry analysts report that it is becoming more difficult to launch these funds.”

Left unsaid in the story is exactly why experts say launching hedge funds is becoming more difficult. Investors, of course, are demanding greater transparency, although some of the air has been let out of that balloon following a year that weeded out a lot of poor-performing hedge funds (2008) and a year that saw performance rebound (2009).

I suppose the prime broker ranks have thinned a bit, which could make starting a fund harder. Additionally, investors were for a time more leery about hedge funds, but I sense that’s changing as well.

We ran a story today about fees, not a new topic but one that periodically gains traction in the media. The new reason fees are expected to fall is that managers trying to win big institutional mandates are bowing to demands to lower fees.

“‘Some hedge fund managers are already being paid 1 and 15 when they manage institutional money and our expectation is that we will see more of this,’ Andreas Utermann, Global Chief Investment Officer at Allianz Global Investors equities arm RCM, said at a separate briefing this week.”

It has long been true that some funds will deal on fees for large clients. Others won’t. The argument for higher fees has been, and will continue to be “do you really want to invest in a fund that’s going to deal on fees?” The implication being, of course, that confident and talented managers will charge higher fees because they’ve earned that right by providing good returns.

Fees aside, February’s hedge fund returns are coming in and it looks like the news is good. Hedge Fund Research reported that its HFRI Fund Weighted Composite index gained 0.52% in February, reversing a January loss and bringing the year-to-date return to negative 0.18%. Hennessee Group’s broad hedge fund index gained 1.2% in February after losing 0.5% in January.

Personally, I’m still expecting a flat or even slightly down year for hedge funds. It’s just a feeling. February’s numbers look good, but that was last month. We’re already into March and aside from a long-awaited thaw here in the Midwest, I still don’t see a whole lot of reason to be optimistic.

Warren Buffett is full of hops. He bashes investment bankers, and yet he has a former Goldman Sachs i-banker as his personal dealmaking consigliere. He once called derivatives “financial weapons of mass destruction” and then engaged in a massive options transaction that lost him billions. He poured money into Goldman Sachs, which is the Lockheed Martin of derivatives. He says newspapers are lousy investments—well, he owns the Buffalo News. He could be a force of changes at Goldman (reining in risk taking that could one day set off another meltdown) but he doesn’t rock the boat. He says “come Monday it’ll be alright,” but everyone knows that Mondays almost always suck.

Wait. Scratch that last one. Never mind.

Speaking of the world’s greatest money managers, two readers correctly guessed the person who was on the cover of Institutional Investor in spring 1981 under the headline “World’s Greatest Money Manager.” It was indeed George Soros. Copies of “Diary of a Hedge Fund Manager” (which I coauthored) are forthcoming.

I have no beef with Soros. Buffett—well he did inject cash into the system during the crisis when cash was sorely needed so I guess I shouldn’t be ragging on him too much. Still, no one seems to challenge anything he says, so I figured I’d give the Oracle a nose tweak.

Buffett released his annual letter to Berkshire Hathaway Inc. shareholders recently. The full letter is available online at www.berkshirehathaway.com

A new hedge fund launched Monday, March 1, focuses on opportunities in Africa and promises to re-invest a share of its profits into African countries “wherever needed most.”

To underscore the seriousness of that vow, it was placed front and center in the lead sentence of GoldVest’s March 4 announcement that The Bullion Fund is open (though not the general public).

According to GoldVest, The Bullion Fund is an opportunistic global macro and long/short equity fund that uses “proprietary statistical trend following models for both new idea generation as well as hedging the overall portfolio.”

“The Bullion Fund helps give citizens of emerging nations the confidence to reinvest in their own economy by helping to open up their markets to free trade and encouraging foreign capital,” said Portfolio Manager and Managing Partner Steven Zoernack, formerly of Bear Stearns.

The fund, he added, “seeks assistance from [a]gencies both in the United States and in Africa in locating worthy goodwill projects to invest in. Some future projects will attempt to help maintain peace, improve global image, build schools, infrastructure, medical facilities, attract tourism, develop a financial center or assist in the cultivation and mining of natural resources.”

This isn’t Zoernack’s first venture in Africa. He is also executive director of the African Peace Fund, Ltd. – a non-U.S. alternative investment and goodwill fund managed by GlobalHedge, Inc. This offshore fund (based in the Cayman Islands), which is not open to U.S. investors, re-invests 25 percent of its profits back into African countries’ economies, “wherever needed most,” according to its website. (More, but dated, information about the African Peace Fund is here.)

Less than four months ago, Reuters’ Emerging Markets Correspondent Carolyn Cohn suggested the time might be right for investment in Africa, thanks to “rock bottom interest rates in the developed world.”

Four and a half minutes … who’d have thunk it could be boiled down to that? I particularly enjoy the stick figures and dramatic drum music. You’ll also notice that this 4:28 video is only part of the story about the economic meltdown. There’s a part two, if you can manage to sit through another 9:13.

The point here isn’t to suggest that this is a good history of the economic collapse, it’s more to show you what happens when you write the history of the world using YouTube.

I’ve looked at clouds from both sides now
From up and down
And still somehow
Its cloud illusions I recall
I really don’t clouds at all

“Both Sides Now”—Joni Mitchell

President Obama, Chris Dodd, Barney Frank and other Democratic policy influencing heavies want, as part of a grab bag of proposals to reform banking/finance/Wall Street post-financial crisis, a Consumer Financial Protection Agency.

If created it would add to the regulatory alphabet soup a brand new entity, the so-called CFPA.

Some say it is already dead. Some say it is definitely coming in some form.

Dodd wanted 1) a standalone agency, 2) with a director appointed by the President, 3) with statutory power to make rules and to enforce them, and 4) separate funding appropriations.

Now there is rumbling that said watchdog agency could be folded into the Federal Reserve, prompting blowback from Barney Frank.

Dodd himself said on cable television months ago (MSNBC’s Chris Matthews called him out yesterday, armed with video) that a Fed-run consumer protection agency would be an abysmal failure. Now for the sake of compromise Dodd says he will acquiesce—if his four basic needs are met.

For Dodd, lame duck that he is, and Obama, cast as lame by the right but not doing all so terribly considering he is new, a CFPA is a must. In fact, inside the Beltway it was already sort of accepted, and it was also seen as fait accompli that Elizabeth Warren, Harvard Law professor and righteous TARP overseer, would head this new entity.

Warren herself wrote a few months ago:

“The big banks are storming Washington, determined to kill the Consumer Financial Protection Agency (CFPA). They understand that a regulator who actually cares about consumers would cause a seismic change in their business model: No more burying the terms of the agreement in the fine print, no more tricks and traps. If the big banks lose the protection of their friendly regulators, the business model that produces hundreds of billions of dollars in revenue—and monopoly-size profits that exist only in non-competitive markets—will be at risk. That’s a big change.”

The consumer protection issue—think of it as the shredded beef (or pork) in the whole financial reform enchilada—has over the past few weeks re-fried to a head but not so much over substance but rather over something very basic—where would the CFPA be housed?

Democrats want to create a beast to regulate bank products, such as adjustable-rate mortgages, controversial and something many people have come to be familiar with over the years.

However, there already are a number of entities regulating banks, collectively known as “prudential regulators” i.e. the FDIC, the OCC and the Federal Reserve. The Democratic leaders wanted bank activities regulated by these entities. Bank interactions with the public—the selling of financial products—would be separately regulated by the new CFPA. This came to be known in lobbying circles as “twin peaks” and for Sen. Richard Shelby from Alabama, ranking Republican on the Senate Banking Committee, mondo supremo shot caller, twin peaks was a non-starter.

Wall Street opposed it vehemently. Why? If you ask me, I’d refer you to what Warren said above. If you ask Wall Street the answer is less sinister and more pragmatic, that is if you separate the regulation from financial products from financial entities then you are setting up a new, complex layer of bureaucrats, and, moreover, by separating the oversight of banks and the oversight of bank products (such as ARMs) the industry is poised for unintended consequences of left hand and right hand not working in tandem.

Here is a hyperbolic example, for illustrative purposes, given to me by a lobbyist who asked to be off the record.

“If the CFPA says banks can no longer issue mortgages higher than 2% banks would fail and so how is that good for the consumer? If we over regulate that serves no one.”

Regardless of whether you buy that, the CFPA being a separate entity—if it is to exist at all—could possibly be some division of the Federal Reserve, it now appears, although that is just an idea on the table.

Shelby pushed back hard on this and got his way. Shelby suggested the CFPA be part of the FDIC, and I think Dodd rejected that. Dodd said it should be part of Treasury and I think Shelby rejected that. Now Dodd’s new dance partner, a Republican, Bob Corker of Tennessee, said okay we’ll put it under the roof of the Federal Reserve. Frank supposedly called the idea a joke; Frank says the Fed failed to watch Wall Street in the first place and you may as well have the fox watch the henhouse.

This Corker-Dodd compromise could have legs and at least set the stage for a bill, at which time the whole watering-down stage takes place, but to even get to that stage the main actors (Obama, Shelby, Dodd, Frank, Wall Street honchos) need to agree on where the CFPA will go, and so that is where we are.

Wall Street Lobbyist: “The banks are on board with the concept that consumer protection is a good thing, it’s not like the banks are opposed to protecting consumers. The issue is how best to do that without creating unintended consequences that hurt the consumers in the end which no one wants. Wall Street wants the structure to be right then we can talk about strengthening consumer protections. There is going to be some form of consumer protection—it may not be the CFPA as it was originally envisioned, but there will be an entity set up that oversees things such as mortgage products and credit cards.”

Moshe Silver, veteran compliance officer on Wall Street and currently chief compliance officer for New Haven, Conn.-based research firm Hedgeye, said this about Wall Street’s push back on consumer protection: “The real push-back came from the banks—the ones that originate consumer loans, consumer paper, credit cards, auto loans, and homeowner mortgages. Wall Street has reasons of its own to not want this legislation to pass.”

Anyone who looks at Wall Street regulation clearly—without having their vision clouded by a political agenda—has to admit that, from a sheer quantity perspective, there is more than enough regulation in the financial markets. The regulation that is in place has been mismanaged by having agencies staffed by incompetents—or by tyros who don’t understand how the markets work. Rules are made by commissioners who are caught in the political bind of having to keep their jobs. Congress is the top of the heap of compromise, having long fed from the Wall Street trough.

It is no wonder that regulation does not work.

Now, the administration wants to create a new layer of regulation. From the perspective of Wall Street the actual function of the proposed agency is a side issue. The Consumer Financial Protection Agency will not touch much of what the Street does. What it will impinge on is Wall Street’s customer relationships with retail investors. Probably the biggest headache there is to have the Arbitration Clauses removed from customer account agreements, which would mean customers could take brokers and brokerage firms to court and sue for damages.

More Silver: “The industry does not have a history of paying lots of money to complaining customers. Arbitrations brought for churning, unauthorized trading, unsuitable recommendations often go nowhere, or result in small awards. It is only with outright theft—a broker deposits a customer check in the broker’s personal account—that there is a high likelihood of obtaining a judgment. But even then, customers rarely collect much.”

This part of it may be moot if the SEC’s push to apply a fiduciary standard to stockbrokers plays out the way it should.

Look at what the Consumer Protection Agency is supposed to become. It will either be a new agency—which we clearly don’t need—or it will be a new division within Treasury, or the Fed. In any event, this is multiple jeopardy in an industry that already is subject to double jeopardy. Wall Street is already regulated by both FINRA and the SEC, neither of which has a great track record of oversight. Now the Administration wants to fold in direct oversight from Treasury or the Fed. This means ANOTHER annual audit by ANOTHER agency whose staffers don’t understand your business. Even if you believe Wall Street is full of criminals who need to be brought to account, this looks like an idiotic plan from the Street’s Eye View.