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:
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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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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If I were you, Walt, I’d stay in Mustique

Turns out that Bernie Madoff didn’t trade a single security in thirteen years.

  • Madoff’s operation was enormous, taking in 2,350 clients.
  • For at least 13 years, no securities at all were purchased on behalf of those clients. That means that every single transaction recorded, every cent of gain was simply made up out of thin air.

This may be bad news for Ol’ Bernie but it has to be even worse news for Walter and his Fairfield Greenwich Group. It’s arguable, I suppose, that their due diligence couldn’t be expected to uncover the fact that Madoff’s “auditor” was a retired old coot who split his time between a Florida trailer home and a strip mall in upstate New York – hey, how much expertise do you need to track a measly $50 billion? – but no trades in 13 years? You never tried to match a single one of them, did you Walt? Back when I hunted wicked stock brokers I used a very creative guy named Tom Benson to reconstruct trading activity in my clients’ accounts. Tom was wizard (he’s since moved from Naples but in his time he probably ran into Walt and Bernie at Palm Beach) who could usually generate a report, accurate to within a penny, in 3-5 days, max. Now, he was expensive – maybe as much as $5,000, but we were talking big money in those days, as much  as $1 million. Walter only had to worry about $7.5 billion and why would he spend a dime investigating how that was doing when (a) he was dealing with the Bernard Madoff and (b) he was skimming $270 million a year off the top, a tidy little profit that would screech to a halt if trouble were found at Madoff headquarters. No, there was no need to ever look at the accounts.

And you know, Walt’s friends in Greenwich still today insist that he’s just a wonderful, warm-hearted guy. I’m sure he is.


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Words of wisdom from Minnesota Peg

This was sent in as a comment but I thought I’d give it more prominence:

Like you, Chris, I sell residential real estate for a living.  (Well; let’s say I try!)  Bad as it is to see homeowners who have seen a significant drop in the value of their home – it’s even worse to see those who purchased recently and may now face tough times because of it.

Still – almost everything has dropped.  Last time I checked, my stock portfolio is half of what it was 14 months ago – and the carnage seems to continue.  If I want to sell what I’ve got, it ain’t gonna be a 20% or 30% drop – try more like 50% – or worse in some cases.

We all  have to suck it up and acknowledge what it is today.  That is – if we wish to sell.  And – try to remember the silver lining…  for those who thought they may have been shut out of homeownership forever – the door is opening wide.  That is – if sellers will be realistic and let them.

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From InstaPundit comes this link: Get out of the way of the housing market. Keeping poor people in homes they can’t afford, postponing foreclosures, artificially lowering interest rates all merely delay the day of reckoning. We have too many houses priced too high for people to afford them. That’s something the government can’t fix. The marketplace can. I believe I’ve mentioned this before.

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Andrews Farm

36 Andrews Farm Rd

36 Andrews Farm

A reader asked about this house, currently for sale at $9.250 with 4 acres and $12.750 with a second building lot. It’s a beautiful house, built by Fareri with the exact layout one of my clients is looking for. Unfortunately, he’s looking for houses half this expensive, but I know he’d love this one. There are 13,600 sf (a chunk of that underground) and the only flaw that I saw was the back yard – where did those four acres go? Still, heated pool, no noise from the Merritt that I could detect, and fabulous construction (the listing broker says it includes “WONDROUS NUANCES” – I don’t know what that means, but I assume George Bush would be unable to appreciate them too).

Considerations: When I was visiting this house on a snowy day I noticed no tire tracks in any of the street’s driveways. Was everyone in St. Moritz or is this one of those weekend destinations I wrote about this morning? I don’t know but if I were looking to move a family here, I’d want to find out.

[Update – thanks to my colleague Liz, I was alerted to the fact that I erred in pulling prices for this street – blog in haste, repent at leisure. I’m redoing it to reflect a much stronger price history than I initially reported]

There are no recent sales on Andrews Farm on our MLS, other than 35, which was listed with 12 acres and mansion for $16 million in July 2003 and sold for $11.250 in January 2005 (it’s back on today for $11.5, down from an initial price of $12.5 and with just 4 of those original 12 acres still attached). The town tax assessor showed market values of around $8 million for the other houses on the street back in 2005 and valued empty lots at around $2 million. We have certainly seen price depreciation since then, but I wouldn’t call the asking price for this house out of the reasonable range at all. It’s a really, really well built house.

I would note that the builder of 36 Andrews tried unsuccessfully to sell the attached building lot separately for, first, $3.85 million and eventually $2.95 million, so there’s probably some negotiating room in the price of $12.750 for land and building, especially given what the town thinks that land is worth.

So all in all, an excellent house. Your call as to what’s happening with prices on the road.


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California falls into the sea

From Minnesota Peg comes this cheery link: Southern California home prices fall to 2002 levels. Gee, things must be improving out there.

As an aside, I recently got a call from an appraiser who is redoing a 2007 appraisal on land in one of our less popular areas. How much did I think prices had fallen there from 2007? I said, “20%, minimum.” “Oh,” said the appraiser, “I was thinking 45%”. “Go for it,” said I.

My first estimate was me being kind. My affirmation of 45% was me being realistic. Someone’s in for bad news and he can blame me. But I don’t want to hear from LA homeowners – their problems are their own.

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Mad Monkey, here’s your broker!

From a reader:

If this virtually frozen market proves anything it is that Greenwich is a town full of people who don’t need to sell their house.  There are 594 houses on the market.  Some of them, very few, have owners that must sell, the overwhelming majority do not.  The current record-holder for time on the market is a Lake Avenue listing on for 14 years.  Do you think that seller will consider your low offer? He will not.  There are spec houses that are entering their 2nd or even 3rd year on the market. Surely if any group was going to dump property it would be the builders, but even they manage to hang in there.  

Many people would like to live in Greenwich for the usual reasons:  close to NYC,  good schools, low taxes, golf courses, beaches, parks, , etc.  These reasons continue to exist.  So if buyers are waiting for Greenwich to go “on sale”, they will wait a long time.  And that’s just fine with most Greenwich sellers.  They have time, they don’t need the money, and the only ones hurting are us brokers!   
To the contrary, I predict we brokers are going to busy as heck by September and probably sooner. Dow closed at its October, 2002 low yesterday and is set to burrow down further in the next weeks. Where the Dow goes, we will follow.
Or that’s what I think. Obviously, others differ.


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Here’s a mystery: gas price up – demand down. Price down, demand up. How come?

All without a single evil oil company executive in sight! I demand an investigation.

And I wonder: would this mysterious force work on Greenwich real estate?


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Hamptons on sale

Yes, the Hamptons are second homes and we consider Greenwich a primary residence town but (a) the people who used to buy in the Hamptons are similar or identical to Greenwich buyers and (b) Greenwich’s high end market has long been largely a weekenders market. So news that real estate’s down 40% out there in the potato fields is perhaps a harbinger of things to come here.


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I thought they were talking about the state of Connecticut

Police warn about lottery scam.  Turns out, they are referring to those pesky Nigerians. Hartford runs one too, fellas, and it’s right up the road from you.

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