With U.S. markets taking a holiday on Friday, April 2 – Good Friday – New York City-based hedge funds are chipping in to help Habitat for Humanity. The Hedge Funds for Habitat-NYC campaign needs volunteers to help renovate community space in a distressed Big Apple neighborhood. A minimum contribution of $500 is required (all proceeds benefit Habitat-NYC). Space is limited. To reserve slots on the Hedge Funds for Habitat team, or for more information, call James Andrews at (212) 991-4000 Ext. 330, or e-mail him at jandrews@habitatnyc.org.

In these tough economic times, it’s nice to know some people are still making enough to get by. For those of you curious about which hedge fund managers made Forbes magazine’s annual list of billionaires, but not curious enough to comb through the whole list yourself, FINalternatives has done the legwork.

Here’s the list:

35. George Soros, $14 billion
45. John Paulson, $12 billion
59. Carl Icahn, $10.5 billion
80. James Simons, $8.5 billion
113. Steve Cohen, $6.4 billion
171. Stephen Schwarzman, $4.7 billion
212. John Arnold, $4 billion
(tie) Ray Dalio, $4 billion
(tie) Daniel Ziff, $4 billion
(tie) Dirk Ziff, $4 billion
(tie) Robert Ziff, $4 billion
258. Bruce Kovner, $3.5 billion
(tie) David Tepper, $3.5 billion
287. Daniel Och, $3.3 billion
297. Paul Tudor Jones II, $3.2 billion
316. Edward S. Lampert, $3 billion
354. Stanley Druckenmiller, $2.8 billion
374. Leon Black, $2.5 billion
(tie) David Shaw, $2.5 billion
437. Julian Robertson, $2.2 billion
488. Philip Falcone, $2 billion
536. David Bonderman, $1.9 billion
536. Alan Howard, $1.8 billion
556. Wilbur Ross, $1.8 billion
582. Israel Englander, $1.7 billion
655. Louis Bacon, $1.5 billion
(tie) James Dinan, $1.5 billion
(tie) Stephen Mandel, $1.5 billion
721. Marc Lasry, $1.4 billion
773. Glenn Dubin, $1.3 billion
880. Michael Hintze, $1.1 billion
(tie). T. Boone Pickens, $1.1 billion
(tie) Henry Swieca, $1.1 billion

Clearly, the guys at the bottom need to start working harder. And what’s with the family collusion among the Ziffs? If I was Dan Och, I’d be wondering…. Actually, if I was Dan Och I’d be floating on a blow-up raft in a warm cove on my own private island. Dubin & Swieca - SUNY Stonybrook guys make good.

“The issuer-pays model is fraught with conflicts,” said Connecticut Attorney General Richard Blumenthal, appearing on CNBC Wednesday [March 10].

Earlier in the day, Blumenthal, invoking a state unfair practices law, The Unfair Trade Practices Act, filed a civil suit in Hartford Superior Court against the two largest rating agencies, Moody’s Investors Service and Standard & Poor’s. The Connecticut AG’s suit claims that Moody’s and S&P deliberately, misleadingly, slapped favorable ratings on dicey structured products in an effort to maintain favor with bank issuers buttering their bread.

Asked by CNBC’s Erin Burnett about damages being sought, Blumenthal didn’t bite. He declined to throw out any big scary numbers on live television, what with most of the stock market watching him, although he did tell The Hartford Courant that the figures possibly could reach into the hundreds of millions of dollars.

Blumenthal, at least in the CNBC segment, appeared less concerned about recouping dollars from Moody’s and McGraw-Hill, and more intent on shaming the agencies under the auspices of reforming their practices in the spirit of consumer protection. And while fixed-income portfolio managers and trustees of public pension funds deserve the same fundamental rights as guzzlers of scalding hot McDonald’s coffee, it remains to be seen whether public outrage over shady Wall Street practices has enough fervor left to go around later in the year when it comes time to make more hay with faulty ratings given to complex securities backed by various forms of loans and revenue streams. Will the public, or a jury for that matter, have much tolerance for any narrative in which the central character is a AAA-rated ABS CDO vehicle issuing debt and equity, then investing the proceeds in various forms of securities, including but not limited to RMBS Alt-A….

Perhaps Blumenthal is looking to strike a blow on behalf of Connecticut-based hedge funds—among the foremost consumers of the research coming from Nationally Recognized Securities Rating Organizations and which Blumenthal believes to be so odious. I have yet to see any partners of a folded hedge fund seek reparations from raters.

Blumenthal sued the rating agencies separately, last summer, claiming that they were giving out better ratings to Wall Street wares and weaker ones for municipal issues in a sort of two-tiered system.

So for those keeping score, Blumenthal has sued rating agencies because some ratings are too low now, and also because others were too high then.

Congress is in the midst of a massive financial reform steel cage match. When the grab bag of proposals get sorted out, it could be, under one possible legislative scenario, easier for investors to sue rating agencies. This liability question already looms large over the entire industry. Rating agencies, after all, are already getting sued, left, right and center.

One major Lehman-related lawsuit filed by two pension funds against the big rating agencies was dismissed in late January by Southern District New York State Judge Lewis Kaplan who said that under the Securities Act of 1933 the agencies were not liable; they weren’t the issuers. If Consumer Reports or Kelley’s Blue Book ever gave Toyota a good safety shout out in past years, would anyone think to file suit against them?

CalPERS is currently suing the rating agencies—it’s a case involving SIVs. Banks sold CalPERS instruments tied to off-balance sheet financings. CalPERS is blaming the rating agencies now that they have been burned.

(”Sure, I like my coffee hot your honor but I didn’t expect it to burn my lips off!”)

The SEC is in the midst of rewriting rules that require ratings in the first place, but only for some types of securities. After the infamous Penn Central debacle in the early 1970s the SEC required credit issues to be rated, thus giving birth to a humongous industry.

Interestingly, today, money market funds kicked and screamed over the possibility that ratings would no longer be required as part of their investment mandates; they did not want the ratings requirement removed from the rule books likely because when they screwed up and bought something that went sour they could still have someone to blame.

Even as they reconsider rating requirements, the SEC is also, rightfully, going after the practice of ratings shopping.

Among the many fairly standard but no less dubious Wall Street practices, which in hindsight seem particularly unscrupulous, was banks awarding ratings gigs to the agencies who handed out the most favorable ratings to their structured products. On a corporate bond or a muni, rating agencies all have access to the most of the same cash flow and balance sheet info. But for a structured, securitized product, such as an ABS tied to a stream of credit card receivables, well that’s bespoke, private, the issuers have that info and it’s all unique to the deals they are selling.

To prevent ratings shopping from ever happening again, the SEC wants to make all the data points that go into the creation of a rating available to any NRSRO who wants it, so as to have the fixins’ to come out with their own unsolicited rating. In effect the SEC is fostering a “second opinion” market in the credit rating realm.

If this data is centralized, accessible, and second opinions can be issued, perhaps Moody’s or S&P can come out with better, more accurate, must-read assessments of downside risk. Maybe these unsolicited ratings will spawn new spread-bet markets or attract a loyal fan base, even earn the agencies some investor-pay model fees flowing from various money managers and stewards of retirement funds who by the way surely never solely relied on a rating to provide them creditworthiness assurances in much the same way that the parents of a ten-year-old boy wading into rough Montauk surf wouldn’t solely rely on the lifeguard back on the beach to prevent their frolicking lad from getting sucked out to sea.

Some niche rating agencies could in theory take all the second opinion data (which is supposedly to be made digitally available on an issuer-sponsored website) and bust out their own more skeptical ratings of an ABS CDO causing the market to reconsider the issuer-paid ratings, so fraught with conflict, as Blumenthal pointed out.

More likely, the niche agencies won’t bother because they won’t be getting paid for unsolicited ratings.

Maybe there will no longer be rating agencies because the regulatory crackdown, political blowback, legal bills and damage awards will in the end crush them. At that point every money manager and pension fund would be on their own with no one to blame but themselves when, seduced by the charms of higher than treasury yields and some slick team of salespeople, they get their lips burned off.

“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