The below is from fiercefinance.com

The nightmare hedge fund employee

November 10, 2009 — 9:54pm ET | By Jim Kim
This is the mark of a small, amateurish hedge fund: Having the CFO serve also as chief trader. That’s hardly going to inspire big pensions to take a close look at investing in you. So perhaps we should not be surprised that the chief trader and CFO of Boston Provident has been arrested and accused of stealing more than $1.3 million from the hedge fund.

According to Reuters, Ezra Levy wired $726,000 from the fund to his personal Washington Mutual bank account in monthly installments from January to October this year. On other occasions, according to charges, he generated a $600,000 profit for himself by using Boston Provident to buy shares at inflated prices from an account he controlled. He faces many years in jail.

You have to fault firm management for some obvious control deficiencies. This sort of structure will not fly at top hedge funds.

Citigroup is preparing to relaunch its hedge fund business operations, after months of debate on the unit’s future, The Financial Times reported.

The move comes after two years of performance problems and investor unrest at the unit, Citi Alternative Investments. Now, it seems, the only problem facing Citigroup executives is what to name the unit, which has $14 billion of assets under management.

The Financial Times, citing people close to the situation, said the company was looking to change the name to Citi Capital Advisors. Some of the unit’s executives wanted to drop the Citi name, but others feared that dropping it would suggest that Citigroup wanted to get rid of the unit.

Go to Article from The Financial Times »
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City 2.0: IT will make cities more engaging and energy-efficient

Technologies such as WiMax, smart grids and social networks will transform tomorrow’s urban centers.

By John Brandon

Computerworld – Science fiction writers paint grand pictures of glorious cities of the future. But aside from some of the more whimsical elements of those visions — flying cars, say, or downtown atriums protected by invisible walls — City 2.0 isn’t as far off as you might think.

Ubiquitous wireless networks are already available in Baltimore, Minneapolis and other cities; corporations such as Thomson Reuters PLC have sustainable data centers that sell power back to local utilities; the smart energy grid is well on its way; and city-provided social networks are becoming more common. Indeed, the next steps toward the city of tomorrow are all about integrating those services cohesively, making them widely available across the entire metropolis and managing the services more efficiently.

“The reality is that the city of the future will likely have many aspects of a contained and managed ecosystem,” says Rob Enderle, president and principal analyst at Enderle Group.

While some visions of tomorrow’s municipalities are quite grandiose, several recent technology advancements are already paving the way to City 2.0.

The Smart Grid

The smart use of energy is one of the most important goals for urban centers. The smart grid concept centers on the idea of using electricity when it’s available cheaply, rather than at peak times when it’s more expensive, and it calls for wind and solar and other renewable sources to be integrated into the energy grid. This requires two-way communication between utility companies and the businesses and individuals who use their power. We’re nowhere near a comprehensive smart grid yet, but some cities and energy companies are taking steps in that direction.

Today, a few cities, such as Boulder, Colo., and Houston, have pilot programs in which customers can visit a Web site to see their real-time energy usage.

A good example of smart grid technology in action is at the Iowa State Capitol complex in Des Moines. City officials there have set up a smart grid that feeds to a central kiosk that shows the power usage for each building in the complex. To create the smart grid, the buildings were wired with sensors that connect a fiber backbone, feed through a central server and then report usage data in real time to the kiosk.

“Today, departments have no incentive to save power,” says state CIO John Gillispie. “We are working toward billing the individual departments for how much they use.”

Gillispie is planning on adding sensors for monitoring power by floor, and he envisions a day when sensors are deployed across the state — even on roadways and in cars, office buildings, schools and homes.

City-centric Social Networking

We’re all familiar with using social networks to catch up with friends and family or even to find a job, but wouldn’t it be nice if your city had a social network where you could keep abreast of local developments and weigh in on neighborhood issues?

The city of Dublin, Ohio, uses Novell Inc.’s Teaming software to run a portal where government officials can publish blogs, chat via instant messaging and share documents. In the next few months, the city plans to make the private network available to all citizens. In the future, a social network like that could allow residents to submit ideas for city improvements, chat with politicians and blog about their neighborhoods over a secure, city-centric portal.

San Jose, Calif., is already one of the most high-tech cities in the U.S. Over the next few years, it will create a social network on Wikiplanning.org — an online site for civic engagement — that will help citizens learn about the city, chat using instant messaging tools, complete surveys and download city podcasts.

“Frequently, only small groups of residents come to public meetings, and in the case of a multiple-meeting project, it’s largely the same group of citizens who continue to participate,” says Kim Walesh, San Jose’s chief strategist. “Participation by small groups may not offer a good representation of the community as a whole. An advantage of Wikiplanning is that activities can be done day or night at the user’s convenience, allowing for far greater participation.”

WiMax and Citywide Wireless

The concept of readily available wireless service has been around the block a few times, so to speak. Cities such as Philadelphia and Chicago have tried to provide Wi-Fi access, without much success. Minneapolis is one of the few large cities that has deployed Wi-Fi successfully.

In Portland, Ore., a Wi-Fi network didn’t fare so well, but a WiMax project seems to be off to a stronger start.

WiMax, widely seen as the next generation of mobile data access after Wi-Fi, stalled over the past few years because of the complexity of the technology, changes in partnerships and reluctance on the part of city officials to adopt an emerging technology. Even so, WiMax promises more ubiquitous access than Wi-Fi, because Wi-Fi hot spots require users to seek them out whereas WiMax is available throughout a given area. WiMax requires fewer base stations and has a lower infrastructure cost, and it uses licensed spectrum that does not interfere with other wireless LANs.

Tim Sweeney, a product manager at Intel Corp., says the prospects of WiMax in cities are strong because it can provide greater bandwidth for city services.

“Wi-Fi was never intended to support a wide area; it is really for inside buildings,” Sweeney says. His vision of future municipal WiMax deployments includes cars using the technology to report their fuel tank levels, gas stations bidding on the cost of fuel, and electric cars communicating with smart grids about their energy use –

Sustainable Data Centers

Sustainability is a key part of the city of the future. The idea is that a highly efficient, well-monitored green data center could allow a city to realize major energy savings. The vision also calls for such data centers to be used for most city services, not just computing. For example, a single city data center could support government services and monitor automobile traffic. Today, those functions are difficult to consolidate.

Enderle says most city services aren’t connected to one another today, but some individual components, such as applications that monitor electricity usage in government buildings, have sensors that could be used to create more integrated systems. At some point in the next 10 years, cities will decide that patching an aging infrastructure no longer makes sense and will instead start using more modern technology, Enderle says. In a sustainable data center model, city services could be part of a vast “network of networks” that monitors real-time power, water, wireless and data usage for all citizens.

Thomson Reuters offers a model for such a sustainable system. The news and information-gathering service operates multiple data centers that occupy a total 100,000 square feet of space for its Westlaw online legal research service in Eagan, Minn. Rick King, the company’s global head of technology and operations, has designed those data centers so that they have close ties to the local utility, the Dakota Electric Association.

Thomson Reuters has about 900 batteries in one data center and four diesel generators in another, which it uses as a backup for power delivered by the local utility. It also has two massive diesel fuel tanks. Today, the company uses the batteries for short bursts (about 15 minutes) of backup power and can use its generators for a day or two as needed, allowing the local utility to sell the unused power.

Enterprise IT offers other examples of how future cities could operate. Thomson Reuters monitors 15,000 IT assets, such as servers and storage arrays, in real time, and the power usage is controlled automatically — when the diesel generators are needed, they start up. Extending this model to a city could mean that power companies are highly connected and that a smart grid would allow homeowners to monitor their own use at the individual appliance level, enabling them to adjust usage patterns.

A highly connected city with smart grids, widely available wireless access and a sustainable data center is well within reach. Over the next 20 years, cities in the U.S. and abroad will likely take steps toward that goal, building the infrastructure with a view toward better connectivity and better living.

Brandon, a regular contributor to Computerworld.com, worked as an IT manager for 10 years and has been a tech journalist for another 10.

This version of this story originally appeared in Computerworld’s print edition. It’s an edited version of an article that first appeared on Computerworld.com.

IN the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.

But the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe.

The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.

That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.

“What wasn’t recognized was the importance of a different species of risk — liquidity risk,” said Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.”

In the future, experts say, models need to be opened up to accommodate more variables and more dimensions of uncertainty.

The drive to measure, model and perhaps even predict waves of group behavior is an emerging field of research that can be applied in fields well beyond finance.

Much of the early work has been done tracking online behavior. The Web provides researchers with vast data sets for tracking the spread of all manner of things — news stories, ideas, videos, music, slang and popular fads — through social networks. That research has potential applications in politics, public health, online advertising and Internet commerce. And it is being done by academics and researchers at Google, Microsoft, Yahoo and Facebook.

Financial markets, like online communities, are social networks. Researchers are looking at whether the mechanisms and models being developed to explore collective behavior on the Web can be applied to financial markets. A team of six economists, finance experts and computer scientists at Cornell was recently awarded a grant from the National Science Foundation to pursue that goal.

“The hope is to take this understanding of contagion and use it as a perspective on how rapid changes of behavior can spread through complex networks at work in financial markets,” explained Jon M. Kleinberg, a computer scientist and social network researcher at Cornell.

At the Massachusetts Institute of Technology, Andrew W. Lo, director of the Laboratory for Financial Engineering, is taking a different approach to incorporating human behavior into finance. His research focuses on applying insights from disciplines, including evolutionary biology and cognitive neuroscience, to create a new perspective on how financial markets work, which Mr. Lo calls “the adaptive-markets hypothesis.” It is a departure from the “efficient-market” theory, which asserts that financial markets always get asset prices right given the available information and that people always behave rationally.

Efficient-market theory, of course, has dominated finance and econometric modeling for decades, though it is being sharply questioned in the wake of the financial crisis. “It is not that efficient market theory is wrong, but it’s a very incomplete model,” Mr. Lo said.

Mr. Lo is confident that his adaptive-markets approach can help model and quantify liquidity crises in a way traditional models, with their narrow focus on expected returns and volatility, cannot. “We’re going to see three-dimensional financial modeling and eventually N-dimensional modeling,” he said.

J. Doyne Farmer, a former physicist at Los Alamos National Laboratory and a founder of a quantitative trading firm, finds the behavioral research intriguing but awfully ambitious, especially to build into usable models. Instead, Mr. Farmer, a professor at the interdisciplinary Sante Fe Institute, is doing research on models of markets, institutions and their complex interactions, applying a hybrid discipline called econophysics.

To explain, Mr. Farmer points to the huge buildup of the credit-default-swap market, to a peak of $60 trillion. And in 2006, the average leverage on mortgage securities increased to 16 to 1 (it is now 1.5 to 1). Put the two together, he said, and you have a serious problem.

“You don’t need a model of human psychology to see that there was a danger of impending disaster,” Mr. Farmer observed. “But economists have failed to make models that accurately model such phenomena and adequately address their couplings.”

When a bridge over a river collapses, the engineers who built the bridge have to take responsibility. But typically, critics call for improvement and smarter, better-trained engineers — not fewer of them. The same pattern seems to apply to financial engineers. At M.I.T., the Sloan School of Management is starting a one-year master’s in finance this fall because the field has become too complex to be adequately covered as part of a traditional M.B.A. program, and because of student demand. The new finance program, Mr. Lo noted, had 179 applicants for 25 places.

In the aftermath of the economic crisis, financial engineers, experts say, will probably shift more to risk management and econometric analysis and concentrate less on devising exotic new instruments. Still, the recent efforts by investment banks to create a trading market for “life settlements,” life insurance policies that the ill or elderly sell for cash, suggest that inventive sales people are browsing for new asset classes to securitize, bundle and trade.

“Good or bad, moral or immoral, people are going to make markets and trade via computers, and this is a natural area of financial engineers,” says Emanuel Derman, a professor at Columbia University and a former Wall Street quant.

A Data Center Shortage for Silicon Valley?

August 12th, 2009 : Rich Miller If Silicon Valley winds up with a shortage of wholesale data center space, it can blame Washington. Data center projects planned for Santa Clara, Calif. are now taking a back seat to the red-hot northern Virginia market, where the Obama administration’s stimulus funding and focus on cloud computing are expected to boost data center construction.

• Several data center developers are focusing their limited capital on Virginia projects, and delaying or downsizing projects in Santa Clara, the leading data center hub in Silicon Valley. That’s a big change from just 18 months ago, when there was a full pipeline of data center construction projects planned for Santa Clara. But since the economic meltdown last fall, plans for more than 1 million square feet of new space in the city have been postponed or placed on hold.

  Data center developers haven’t lost interest in Silicon Valley. If capital were freely available, these companies say, they would proceed with projects in both Santa Clara and Virginia. But in a capital-constrained environment, data center builders are having to make tough choices, and are prioritizing their spending in northern Virginia (and in some instances, New Jersey). For the time being, it’s clear that the center of gravity in the data center market has shifted East.

  It’s too early to say with certainty that these delays will lead to space shortages in Silicon Valley. But they set the stage for a tight supply-demand scenario in which landlords with space will have significant leverage. Here’s a look at the status of projects planned for Santa Clara:

  DuPont Fabros Technology
  Last October DuPont Fabros said it would suspend construction on a $270 million data center campus in Santa Clara. The company planned to build a pair of 300,000 square foot data center buildings with a power capacity of 72 megawatts. DuPont Fabros said its decision was driven by spending constraints after it raised just $100 million, rather the $300 million it had hoped, from a refinancing of one of its Virginia properties.

  DuPont Fabros said last week that its new development priority is completing its ACC5 data center in Ashburn, Virginia. As a result, it will take $35 million of the equipment it purchased for the Santa Clara project, and redeploy it in Phase II of ACC5. The company also said that its next priority will be its data center project in Piscataway, New Jersey, where there is strong demand for data centers from Wall Street firms.

  Read the rest of this entry »

Hedge fund GLG looks to seed UK-listed oil

producer

© Thomson Reuters 2009 All rights reserved

Spitzer: Federal Reserve is ‘a Ponzi scheme, an inside job’

The Federal Reserve — the quasi-autonomous body that controls the US’s money supply — is a “Ponzi scheme” that created “bubble after bubble” in the US economy and needs to be held accountable for its actions, says Eliot Spitzer, the former governor and attorney-general of New York.

In a wide-ranging discussion of the bank bailouts on MSNBC’s Morning Meeting, host Dylan Ratigan described the process by which the Federal Reserve exchanged $13.9 trillion of bad bank debt for cash that it gave to the struggling banks.

Spitzer — who built a reputation as “the Sheriff of Wall Street” for his zealous prosecutions of corporate crime as New York’s attorney-general and then resigned as the state’s governor over revelations he had paid for prostitutes — seemed to agree with Ratigan that the bank bailout amounts to “America’s greatest theft and cover-up ever.”

Advocating in favor of a House bill to audit the Federal Reserve, Spitzer said: “The Federal Reserve has benefited for decades from the notion that it is quasi-autonomous, it’s supposed to be independent. Let me tell you a dirty secret: The Fed has done an absolutely disastrous job since [former Fed Chairman] Paul Volcker left.

“The reality is the Fed has blown it. Time and time again, they blew it. Bubble after bubble, they failed to understand what they were doing to the economy.

“The most poignant example for me is the AIG bailout, where they gave tens of billions of dollars that went right through — conduit payments — to the investment banks that are now solvent. We [taxpayers] didn’t get stock in those banks, they didn’t ask what was going on — this begs and cries out for hard, tough examination.

“You look at the governing structure of the New York [Federal Reserve], it was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous, it is time for Congress to say enough of this. And to give them more power now is crazy.

“The Fed needs to be examined carefully.”

Spitzer resigned as governor of New York in March, 2008, after news reports stated Spitzer had paid for a $1,000-an-hour New York City call girl.

At the time, Spitzer had been raising the alarm about sub-prime mortgages. In the wake of the economic meltdown triggered last fall by sub-prime loans, some observers have suggested that Spitzer may have been targeted by law enforcement because of his high-profile opposition to Wall Street financial policies.

Investigative reporter Greg Palast wrote that federal agents’ revealing of Spitzer’s identity as a call-girl customer was no coincidence.

Palast wrote that the principle of “prosecutorial discretion” is often used to keep the names of high-profile persons out of the media when they are tangentially linked to a criminal investigation. In the case of Spitzer, the Justice Department chose not to invoke prosecutorial discretion.

Funny thing, this ‘discretion.’ For example, Senator David Vitter, Republican of Louisiana, paid Washington DC prostitutes to put him in diapers (ewww!), yet the Senator was not exposed by the US prosecutors busting the pimp-ring that pampered him.

Naming and shaming and ruining Spitzer – rarely done in these cases – was made at the ‘discretion’ of Bush’s Justice Department.

Spitzer recently told Bloomberg News that President Obama’s regulatory reforms of the financial sector are “irrelevant” because regulatory agencies have not been enforcing corporate laws to begin with.

“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”

– Daniel Tencer

Twitter and Compliance

By Doug Cornelius

I was struck recently by the power and misconceptions around Twitter, the current press darling of Web 2.0. On one side is the enormous power of Twitter to crowdsource the news. The fallout of the Iran elections was better covered on Twitter than the mainstream media. At one point I watched CNN only to see the anchors reading from Twitter and displaying images posted to Twitter applications.

On the other side is the misconception that Twitter communications are not regulated by the SEC or FINRA. Everyone can acknowledge that the regulations have not caught up with the current tools of web 2.0. But the existing rules were drafted broad enough to cover all electronic communication. Twitter is clearly electronic communication.

Last week at at Jeff Pulver’s 140 Characters Conference in New York an attendee said “Twitter allows us to say f— you to the SEC!”  Earlier this week there was a quote in Forbes.com that “Since brokers have to save instant messages and e-mail, but thus far have no such mandate for tweets….”

The SEC and FINRA may have more pressing issues on its hands, but the existing rules cover the use of Twitter. Sure the rules could be more explicit. But ignore them at your peril.

If you are a registered representative, you should take a look at FINRA’s Guide to the Internet.  The features of Twitter could be considered an advertisement, sales literature, or correspondence. The direct message feature is correspondence. If your Twitter feed is unprotected, each twitter post would be considered an advertisement. If your Twitter feed is protected it would be considered sales literature.

The SEC’s Guidance on the use of web sites (SEC Release 34-58288) does not give the clearest guidance. But it is clear that the rules are independent of the platform and the technology.

Insider trading, wrongful public disclosure and fraud and prohibited regardless of the communication tool. That includes Twitter.

Companies that have to monitor electronic communications should add Twitter to the mix. As the Iran election showed us, blocking access is ineffective. You should adopt a policy for Twitter or a revise your existing policies to specifically include it.  Twitter has become too popular and powerful as a tool to ignore.

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Please feel free to leave us a comment below on this article.  You can also contact us if you have any questions or would like to start a hedge fund.  Other related hedge fund law articles include:

• Hedge Fund Websites
• SEC Emphasizes IA Compliance for Hedge Funds
• Overview of the Securities Laws
• Hedge Fund Attorney
• Regulation D Overview
• Interpretive Release on Regulation D
• Forex Hedge Fund

…I also heard Lo commenting on the arrest of the gentlemen who comprimised the codebases of an un-named “Financial Institution” today rumored to be Goldman Sachs.

REVIEW:

Hedge Funds: An Analytic Perspective by Andrew W. Lo is a highly technical and intellectual analysis of hedge funds. Mr. Lo has filled his book with many advanced, detailed concepts and statistics about the hedge fund industry. The book is so technical that it reminded me of one of my old college statistics textbooks, filled with complex formulas and mathematical terms.

Warning: This book is not for the average investor (including me). This was the book that I chose to bring with me on vacation. Phrases such as: “Filtered and constrained Sharpe ratio trajectories of tangency portfolios for filtered and constrained mean-variance-liquidity efficient frontiers for 13 CSFB/Tremont hedge fund indexes” is not what I had in mind to read while I sat on the beaches of Long Beach Island, NJ with waves crashing in the background.

I felt like the late Phil Hartman’s Saturday Night Live character, “The Unfrozen Caveman Lawyer” while trying to read this book. “My primitive mind can’t grasp these concepts”, Hartman’s character would say. Despite all of the advanced terms, I was able to decipher some of the strategies used by certain Hedge Funds which was interesting.

I would recommend this book for those with a good understanding of statistical analysis or for those with a PhD in statistics or mathematics. However, the average investor, like myself, will find themselves frustrated pouring over pages of strange formulas and terms such as: “Average regression coefficients for multivariate linear regressions”.

COMMENT:

I have not read the book but as a hedge fund professional, I question the usefulness of such a technical book. Quantitative tools can surely complement qualitative analysis but drawing too many conclusions from a monthly return stream is a farce. No amount of analysis would have predicted what happened to most hedge fund returns in 2008. There is no substiute for common sense but unfortunately too many quants are lacking in this area….