Daily Archives: February 20, 2009

Say goodnight, Walter

A reader alerts me that Walter Noel’s Fairfield Greenwich Group has taken down its website – or at least its wonderful due diligence page in which it promised to investigate anyone they entrusted money to. Sadly, when I wrote on December 14, 2008 about FGG’s complete failure to conduct due diligence on Bernie Madoff I linked to their site, rather than make a copy of the page and post that. So the link’s now defunct. Oh well, I’m sure it will show up in court pretty soon.

UPDATE: Here it is, thanks to Google’s cache system. Just to make it doesn’t get lost again, Walt, ‘m posting it on my site – fewer accidental erasures, don’t you know.

This is Google’s cache of https://www.fggus.com/guest/due_diligence.html. It is a snapshot of the page as it appeared on Feb 15, 2009 05:10:40 GMT. The current page could have changed in the meantime. Learn more

These search terms are highlighted: fairfield greenwich group  

FGG’s Due Diligence Process

FGG’s due diligence process is deeper and broader than a typical Fund of Funds, resembling that of an asset management company acquiring another asset manager, rather than a passive investor entering a disposable investment.

A number of areas of inquiry are examined by a team of FGG professionals who specialize in evaluating respective areas of risk. Typically, a manager has been investigated and monitored for six to 12 months before that firm can be accepted onto the FGG platform. Long negotiating periods enable FGG to be more confident of its decisions before proceeding with a manager. Areas of examination are centered around the following:

1. Portfolio Evaluation, Investment Performance, and Financial Risks:

A core area for further analysis is to attempt to dissect and further understand investment performance, how a manager generates alpha, and what risks are taken in doing so. As portfolio management and risk management incorporate elements of both art and science, FGG applies both qualitative and quantitative measures. FGG:

  • Examines independent prime broker trading records
  • Conducts detailed interviews to better understand the manager’s methodology for forming a market view, and for selecting and exiting core positions
  • Analyses trading records
  • Conducts a number of qualitative and quantitative tests to determine adherence to risk limits over time
  • Confirms portfolio loss risk controls, diversification and other risk-related control policies, as well as any experience regarding unexpected or extreme market events
  • Reviews the risk and return factors inherent in the strategy
  • Evaluates capacity issues, which may affect alpha, as well as expected opportunities going forward within each candidate’s strategy
  • Analyses the various drivers underlying a particular portfolio’s risk
  • Evaluates credit risk and market risk both at the instrument and portfolio level
  • Assesses the extent to which leverage is used by a manager, as well as how it is used, the funding sources, and the impact on the risk profile of the fund
  • Investigate whether or not private or special registration securities are held, and determine how the daily trading volume and inventory held compares to the float and/or daily trading volume for a given security

FGG also conducts many quantitative reviews of investment performance in light of:

  • Fees and fee structure
  • Historical draw-downs
  • Return volatility
  • Commissions earned
  • Performance return in calm versus volatile markets
  • Current/historical correlation of the fund under consideration with standard industry benchmarks, peer groups, and other FGG or competitor funds used as benchmarks

FGG attempts to understand the return attribution for individual securities in the portfolio, and conducts a full suite of VaR analyses and stress tests to model the loss distribution function under extreme market scenarios. Leverage, concentration limits, and long/short exposures are examined over time to assess whether they have remained within operating guidelines.

Style fidelity is another key area of inquiry; the manager’s trading pattern over time and through various market environments, FGG determines whether the manager is prone to trade outside of their area of expertise.

2. Personal Background Investigation:

FGG examines the abilities and personalities of the individuals involved in managing the fund through extensive interviews, as well as background investigations.
FGG verifies:
Education
Personal credit standing
Litigation and regulatory background
Track record
Other indicators

FGG explores the manager’s experience and qualifications relative to the strategy being managed. Prior professional associations of a manager’s key personnel can be crucial in understanding a person’s experience and character and how they run their investment management business.

3. Structural and Operational Risk:

“Operational risk” refers to the risk of loss resulting from inadequate or failed internal processes, human resources, or systems, or from external events.Operational failures, including misrepresentation of valuations and outright fraud, constitute the vast majority of instances where massive investor losses occur. Other operational risks include staff processing errors, technology failure, and poor data.

Pricing models, as well as the adequacy, independence, and transparency of valuation procedures, contingency plans, and other trading and settlement procedures are all matters for close scrutiny by FGG professionals.

FGG seeks a sound understanding of whether a hedge fund possesses key controls in the areas of portfolio management, conflicts of interest, segregation of duties, and compliance. FGG carefully assesses the controls and procedures that managers have in place and seek to determine actual compliance with those procedures, often suggesting modifications, separations of responsibilities, and remedial staff additions.

4. Legal, Compliance, and Regulatory Risk:

FGG’s legal, compliance, and accounting teams specialize in investment management regulation, securities compliance, corporate operations, and tax issues. Hedge fund managers function within an ever more complex legal and regulatory landscape, and the role of this part of the diligence exam is to determine the seriousness of any deficiencies in this area which may cause risk of sanction, loss, or reputational embarrassment.

Both in-house and retained legal professionals interview the management and staff of the manager, research regulatory filings, and review corporate organizational documents, as well as fund memoranda and related material contracts.

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And he was so polite when he came to dinner!

Sidney Poitier demands that all CEO’s pay be capped at $500,000. That’s what my grandfather John Gilbert earned per year from MGM but he was being paid that sum in the late 1920s. I haven’t kept up with Hollywood lately but it’s my understanding that Mr. Portier earned far more than that for his films. Then again, he isn’t a CEO, so perhaps that explains his call for wage controls in this limited instance.

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California darkly

Yesterday I noted that the NY Times looked at California’s collapse and concluded that it was all the fault of right wing radio hosts. Not surprisingly, this columnist for the Wall Street Journal finds another cause: a wanna-be welfare state that couldn’t afford its largess. With all due respect to Rush Limbaugh and his ilk, I do question his ability to bring the world’s 7th largest economy to ruin. Over spending seems more plausible. To me – not to the Times but perhaps they’ll get religion now that they’ve eliminating paying dividends on their stock. What will Pinch and family live on?

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Can’t find what you want? Build new!

It’s hard to believe, but out of all the new houses sitting vacant and begging on the market, I’m finding it difficult to locate one that meets one of my client’s criteria: good street, great land, not huge, good family living space. Most of the spec houses are built on marginal land purchased when builders thought buyers would settle for anything. They might have once, they won’t now. And many are simply gargantuan – 13,000 sf and bigger, too big for many buyers’ taste today. If you’re in the same boat, may I suggest that you consider building what you want? Builders are much cheaper than they were, far less busy and materials cost less. It’s a great time to build, if you can find the right land.

228 Round Hill Road

228 Round Hill Road

This is probably the prettiest land I’ve come across recently. 4.6 acres next door to Sabine Farm’s fields, beautiful white pines leading up to it and rolling lawn behind. Just great. The house that sits on it now is a perfectly nice Peter Ogden contemporary, circa 1980. I like it a lot but Ogden designs, once hugely popular in town in the 60s and 70s, are being torn down as fast as they’re discovered. I feel for a man whose life’s work is being extinguished like so many birthday candles but sic transit gloria and all that. It would be a very comfortable place to live in while you work up plans for a replacement.

Asking price is $5.1 million, which isn’t crazy for a Round Hill address and this much land in the RA-2 zone, but now’s the time to negotiate land prices, too. There are other parcels out there but none quite so nice, so convenient to town. This could be an excellent buy (and no, it’s not my listing).

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Market activity so far

Nothing particularly encouraging so far, I’m sorry to say. We’ve seen 18 single family houses reported as under contract this year which is roughly 2 1/2 contracts per week compared to 18-20 per week in the good old days of three years ago. Three of those 18 were spec projects, one at $2 million the others asking in the $6s. Nothing above that yet, but the year is young.

Another new spec house joined the crowd today, 17 Wynwood, off of Clapboard, asking $10 million. I’ve seen the house that its builder put up next door and he does nice work. This one will really have to stand out among its competition though, to get much attention – there are 9 other spec houses currently on the market now between $9.25 and $12.5 million (although 20 Langhorne exists on paper only and will probably never be built, as its builder has dropped its imaginary price from $15 million to $11 million and put the land up for sale as is). I wish him the best, naturally.

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Pre-construction premium

Not so long ago builders would offer a pre-construction discount, offering to sell their house to you before it was completed for a discount from the price they intended to charge when it was done. This was usually a line of BS – if the guy was satisfied with one price in July, he’d usually be darn glad to get that same price in December – but sometimes, when the market was really zinging along, such discounts were real.

Today 264 Riverside Avenue, a building lot yet to be started on, cut its price $400,000 from $4.395 million to $3.999 which, in effect, means that a buyer would have paid a premium for the place had he agreed to the first price. Of course no one did, hence the reduction, but I find it interesting to observe – this is not the first spec house planned that has cut its price before the first bulldozer arrives. I suspect the builders know something.

My personal preference, if I were representing a buyer, is to grab a (very large) discount from a builder after he’s completed the house. That way, he’ll have already added in all the extra flourishes that he can no longer charge you for and you get them, in effect, for free. Hey buyers – you were stuck in a seller’s market for years – now’s your chance for payback. Go out and negotiate, hard.

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Heh

Blogger forces Greenwich real estate professionals to seek help at local breadlines.

As proof that my dire words of gloom are infecting the world, I’m sorry to report that there hasn’t been a single sale in New Canaan this year. Not one.

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