Recent returns highlight risks of "Concentrated" hedge funds; CDS as weopons of mass speculation; Sentiment changing regarding SPACs?; Hedge funds warming up to stuck bank debt

• Lampert, Wood Show Risk of `Concentrated' Hedge Funds
• Credit Default Swaps: Weopons of Mass Speculation
• Shell game
• Hedge funds start to buy bank debt

Lampert, Wood Show Risk of `Concentrated' Hedge Funds - Bloomberg 

When Jon Wood opened his Monaco-based hedge fund, the former UBS AG trader told investors he'd beat the market by buying stakes in no more than 40 companies -- the same way he made $2.4 billion in six years for his old employer.
 
  Instead, holdings such as failed U.K. bank Northern Rock Plc and Calabasas, California-based Countrywide Financial Corp., the largest U.S. mortgage lender, imploded. From its start in late 2006 with $3 billion, Wood's SRM Global Fund lost about 70 percent through March 31, said two investors, who asked not to be identified because the firm doesn't publicly disclose returns.
 
  ``These concentrated funds scare the hell out of me,'' said Brad Alford, head of Alpha Capital Management LLC, an investment consultant based in Atlanta. ``Either the manager knocks it out of the park or he strikes out.''
 
  Other managers who follow the approach of betting big on out-of-favor stocks are also struggling as market volatility hits historic highs. Edward Lampert's ESL Investments Inc. dropped 27 percent last year and an additional 1.3 percent in the first three months of 2008, investors said. The 45-year-old Lampert, who oversees $17.5 billion, has been hurt primarily by a $6.1 billion stake in retailer Sears Holdings Corp. of Hoffman Estates, Illinois, which has fallen 48 percent in the past year. Lampert is chairman of Sears.....

Credit-Default Swaps: Weapons of Mass Speculation - Barron's

Don't know much about derivatives called credit-default swaps, or CDS? There's no reason one should. Even today, CDS, which represent bets on the default risk of various debt issues, remain an obscure corner of the global-finance market, inhabited mostly by big banks and brokerages, hedge funds and other institutions. Denizens of the CDS market strike customized insurance deals covering all manner of debt, from corporate, sovereign and municipal bonds to asset-backed securitization paper. There's no formal clearing house for this over-the-counter market. Nor is there much public reporting of the pricing of the trades.

But don't be fooled by the low profile of the business. In the decade since credit- default swaps were invented, the market has exploded in size, to some $62 trillion of CDS deals outstanding from just $1 trillion in 2000, according to industry estimates. This dwarfs the size of the underlying bond issues.

Beyond concerns about its size, the CDS market seems to have become a weapon of mass speculation that is destabilizing international debt and even equity markets. That looks to be true in the subprime-debt-induced crisis of recent months that still has the credit markets in a deep-freeze. At the height of the crisis, in the first quarter, the price of credit-default insurance for key financial companies zoomed to once-unimaginable heights, signaling rightly or wrongly the imminent default of their debt issues.

Shell game - The Deal 

In the curiously complex world of special purpose acquisition companies, a reverse merger announced last June between publicly traded Freedom Acquisition Holdings Inc. and London hedge fund manager GLG Partners Inc. seemed to represent a coming of age. While a few notable mergers preceded it, the deal, at $3.4 billion, was easily the largest SPAC acquisition to date. It was masterminded by two reputable dealmakers with proven track records -- London financier Nicolas Berggruen and Martin Franklin, chairman and CEO of Jarden Corp., a $2.5 billion, New York Stock Exchange-listed company. The deal was also one of the first SPACs to be lead-managed by a major institution, Citigroup Inc., which lent credibility to a process that, though increasingly popular, has always had its critics. Demand for Freedom shares was brisk, and the deal breezed through the shareholder vote in November.
 
  In contrast, shareholders rejected quite a few other proposed SPAC mergers, forcing many of these shell companies to return money to investors. As a cascade of liquidations came in recent months, SPACs began looking dicey again....

Hedge funds start to buy bank debt - Financial News 

Hedge funds and other investors have started buying leveraged loans and asset-backed securities that have been languishing on banks’ balance sheets since the credit crisis began last summer. This is the latest indication that the credit market may have turned.
 
  A sustained recovery in buyers’ enthusiasm for this debt could free banks’ balance sheets and allow bankers to recommence arranging financing for leveraged buyouts and corporate acquisitions.
 
  Among the investors that have started buying are Centaurus Capital, a UK-based company with $12bn (€7.8bn) of assets under management, and Cerberus Capital Management, a US private equity firm that last year had $26bn of assets.....

At the same time, funds of hedge funds, including GAM, Permal, Thames River Capital and UBP have also started allocating capital to hedge funds that are buying this debt.
 
  Shoaib Khan, a senior portfolio manager at Swiss fund of hedge funds manager UBP, the second largest in the world with $53bn under management, said his firm had started increasing its allocation to distressed debt hedge funds from about 10% to as high as 20% over the next three to six months.....