According to Dow Jones, the preliminary 2008 results for Citadel Investment Group’s main hedge funds are out and the numbers are not pretty. The $10 billion Kensington and Wellington hedge funds lost approximately 53% for 2008 and were down about 9% during the first 24 days of December. Chicago-based Citadel last month barred investors from withdrawing money from these two hedge funds until at least March 2009. With such “wonderful” performance, one has to wonder how much of the funds’ investors have queued up to leave once it is again possible to do so.

Toomre Capital Markets LLC (“TCM”) previously has written about Citadel in the post Citadel Investment Group To Try To Raise $500 Million. With this type of performance, though, TCM is now wondering whether Citadel Investment Group will survive the on-going credit crunch. In order to get back to their “high water” mark (at which point they can again start to earn performance fees), Citadel will need more than a 100% gain from their 2008 year-end balances. Citadel earned more than thirty percent in 2007. It will need approximately three years of such “lights out” performance before it will pass the former “high water” mark. Can they really successfully run the hedge fund company just on management fees? Time will tell. Reader comments and thoughts are welcome.

The weekend edition of the Wall Street Journal on Saturday, December 6th contains a small article about how Citadel Investment Group Seeks to Raise $500 Million. The funds supposedly are going to be added to the $2 billion Citadel Tactical Trading fund, which is up more than 40% this year. This is a smaller fund to the much larger Kensington and Wellington funds and now includes Citadel's profitable market-making business.

The larger Kensington and Wellington funds have performed miserably this year. Supposedly they are down approximately 47% through the end of November 2008 and lost approximately 13% during the month of November alone. CEO Ken Griffin's plan apparently is to use the funds raised for the Citadel Tactical Trading fund to purchase approximately half of the combined equity portfolio from both of the larger multi-strategy funds.

According to the letter sent out from Citadel Investment Group about this limited offer, “Citadel Kensington and Citadel Wellington will experience reduction in the risk associated with their portfolios and enhanced liquidity from the transfer of a substantial portion of the Global Equities portfolio." Apparently, Citadel’s stock-picking team, with about 80 employees, has made money this year and will manage the equity positions of the Tactical Trading fund, the letter said.

Toomre Capital Markets LLC ("TCM") wonders though whether in this case Citadel Investment Group and Ken Griffin are talking out of both sides of their mouth. The two multi-strategy funds will be losing a substantial portion of the Global Equities portfolio, one that was supposedly profitable for 2008. Does that not mean that existing investors in the two funds will have more concentration in other strategies that contributed such miserable return numbers?

On May 28^th 2008, The New York Times is reporting (via Reuters) that Liquidators Of Bear Stearns Funds Lose Court Appeal. Apparently the representatives of the two collapsed Bear Stearns Cos Inc hedge funds -- the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund -- linked to risky mortgage investments have lost a court appeal seeking to have the funds liquidated in the Cayman Islands instead of in the United States.

The ruling by U.S. District Judge Robert Sweet in Manhattan upholds a bankruptcy court's decision last year requiring that the funds be liquidated in U.S. courts. Holding the proceedings in the Cayman Islands, home to many hedge funds for tax reasons, could have shielded the funds' assets from some U.S. creditors. The ruling could have implications for other funds that seek protection under Chapter 15 of the U.S. Bankruptcy Code, which covers cross-border insolvencies. The judge upheld the bankruptcy court's finding that the funds' "center of main interests," as defined by Chapter 15, was in the United States.

"It is hoped that resolution of these issues may provide some aid to navigation in these uncharted waters," Sweet wrote in the decision, dated May 22 and made public on Tuesday.

"The process by which the financial problems of insolvent hedge funds are resolved appears to be of transcendent importance to the investment community and perhaps even to the society at large."

Toomre Capital Markets LLC ("TCM") has previously written about the hedge fund con artist Kirk S. Wright and his now-defunct Atlanta-based hedge fund management firm International Management Associates. (Interested readers might want to review the TCM posts entitled Update on Kirk Wright and IMA hedge fund fraud scandal or Kirk Wright, IMA Hedge Fund Manager, Arrested in Miami Beach.)

According to The International Herald Tribune, on Wednesday May 21^st 2008, this con artist was convicted in Atlanta Federal court of many fraud counts that effectively would lead to spending the rest of his life in Federal prison upon sentencing. From the article,

According to authorities, Wright and his company collected more than $150 million spread across thousands of client accounts since 1997 and used false statements and documents to mislead some of them to believe the value of those investments was increasing. Much of that money is missing.

Prosecutors said Wright had been lying to his investors since at least 2001 about their investments' performance and the balances in their accounts. He reported substantial investment gains almost every month; the evidence revealed that he lost almost every dollar invested in the market, prosecutors said.

They said he diverted millions of dollars of investor's money for personal expenses, including cash for himself and family members, jewelry, house renovations, a $500,000 wedding, up to six luxury vehicles, and multiple pieces of real estate, mainly in Atlanta and California….

According to the U.S. Attorney's Office in Atlanta, Wright could receive a maximum sentence of 710 years in prison, a fine of up to $16 million and be ordered to pay restitution to the victims. He already has been hit with a $20 million judgment as part of a civil suit filed by the Securities and Exchange Commission. Sentencing is set for Aug. 26.

Toomre Capital Markets LLC ("TCM") has watched the deleveraging of the financial system progress through one after another area of the Capital Markets. First it was the sub-prime mortgage sector and the intense focus on where the ABX was trading down to. Then, there was an awe-like focus on Collateralized Debt Obligations ("CDOs"), Asset-Backed Commercial Paper ("ABCP") and Structured Investment Vehicles ("SIV"). Next focus shifted to whether the monoline credit insurers likeAmbac and MBIA might survive. More recently, leveraged loans, Alt-A mortgages and commercial mortgage-backed securities ("CMBS") have been sinking in value. Finally, in the last ten days, there was intense speculation about whether the investment banks and primary dealers might survive, culminating the virtual bankruptcy of Bear Stearns last weekend.

This week the earnings reports from Goldman Sachs, Lehman Brothers and Morgan Stanley all exceeded the much diminished analyst expectations for their first quarter earnings reports. What was relatively impressive is that diversified trading operations produced sufficient revenues to offset asset write-downs of between $1.5 and $2.5 billion. As a result, the pressure on the investment banks (for the moment at least) seems to have eased. The question now is in what sector of the capital markets will the next stage of the credit crisis appear? Will it be with the three wounded ducks (Citigroup, Merrill Lynch and UBS), the European banks or the many hedge funds seemingly just barely hanging on?

Toomre Capital Markets LLC suspects that next focus will be on the hedge fund community. By way of example, consider what has happened with Endeavour Capital LLP and JWM Partners LLC this year. From the website www.egoli.com.au comes the news that:

Toomre Capital Markets LLC ("TCM") earlier in 2007 was quite worried about liquidity risk and the level of risk premiums that investors were assuming through their various investment strategies in the proverbial search of yield or return. Interested readers might perhaps want to reread the February 12th 2007 TCM post entitled Hedge Funds, Investment Banks and the Value of Liquidity? where we wrote:

Economic times presently are pretty good world-wide. When the inevitable turn in the vastly more inter-connected global economy next comes, credit spreads surely will widen and the valuation of various financial instruments will come under stress. Are hedge funds (and by proxy the investment banks) prepared for coming "Great Unwind" forecast by Mr. Stiamann and Knips? Some hedge funds inevitably will do very well then, while others will fail, perhaps as spectacularly as Amaranth Advisors did in September 2006.

The financial markets now are full of much liquidity. Are investors, speculators and their bankers appreciating and pricing in liquidity risk? Toomre Capital Markets LLC would suggest that liquidity risk presently is greatly under-valued in the search for "alpha", absolute return and portfolio yield. The stretch to get ten percent return (after fees) appears to be making rational people start to do irrational things.

Sadly, many institutional investors did not heed this warning about the then insane pricing of liquidity risk. Over the past week, Lars Toomre has had the chance to catch up some of his much neglected reading. Several stories in particular are noteworthy in the context of liquidity risk and the consequences of reaching for yield. Lars will try to complete write-ups in the next few days about several of these sad tales to remind future investors of the consequences of investing in something not well understood for the promise of that incremental return or enhanced yield.

As many readers of the Toomre Capital Markets LLC ("TCM") blog may already be aware, the next Hedge Fund Executive Forum Series event entitled Real-Time Decisions & Risk Reduction: Technologies that Reduce Latency and Sharpen Business Intelligence to Drive Results will be held in New York City on Thursday November 29th 2007 and then repeated in Stamford, CT on Tuesday December 4th. Lars Toomre will be one of the speakers at this event. Both Aldon Hynes and Lars Toomre hope that you will be able to join the Incremax and Toomre Capital Markets team at either of these venues.

These Hedge Fund Executive Forum Series events are designed to help key investment decision makers quickly get beyond buzz words and learn which strategic technologies and solutions will help drive the best results from every aspect of their organization -- the front, middle and back-offices as well as client service functions. Designed for investment managers with more than $500 million in assets under management ("AUM"), the focus of this particular event will be on data, input/output ("I/O") and how "push vs. pull" can be implemented.

The key challenge this forum event will address is how to create better real-time decision opportunities that result from first transforming fast-moving data into information and then into knowledge that ultimately adds to economic value. Some of the key solutions and technologies from Advent Software, AMD, Cisco, Microsoft, Reuters and Streambase Systems will be highlighted for further discussion.

Please circle the appropriate date on your calendar and plan on attending. Advanced registration is required and can be completed at this web link. Aldon Hynes and Lars Toomre look forward to speaking with you directly on the 29th or 4th. Hopefully, we will see you then. Please feel free to contact TCM directly if you have any questions or comments.

On Tuesday October 23rd 2007, The Telegraph newspaper out of the United Kingdom states in an article written by Ambrose Evans-Pritchard that a New Credit Crunch Looms. The article suggests that fresh turmoil in the global debt markets has set off sharp falls in commodity prices and higher-risk assets as investors scrambled for the safety of relative safer investments.

In one of the most dramatic currency moves of the year, the dollar soared as US investors liquidated foreign holdings, ending at $1.4129 against the euro and £2.0276 against the pound. Libor spreads in Europe's interbank market jumped to 64 basis points, roughly the level that set off the credit crisis last summer and prompted a liquidity rescue by the European Central Bank. The iTraxx Crossover index that measures spreads on corporate bonds has jumped 100 basis points since last week to 364 bp yesterday.

"It's the summer that won't end," said Peter Berezin, a strategist at Goldman Sachs. He said investors were shaken by last week's drop in US home-builder sentiment to an all-time low and by fresh falls in the ABX index for sub-prime debt. "We continue to learn that it pays to respect the sell-offs in ABX and housing-related credit. This has elements of the February and August sell-offs, where credit markets signaled problems," he said. The lowest tier of ABX debt has fallen to a record low of 20.72 – from par of 100 – pointing to huge losses that have yet to surface.

Toomre Capital Markets LLC ("TCM") has been very concerned about the evolution of this credit crunch and has privately argued that it is very much like a slow motion train wreck. Unlike some of the market sectors like United States equities where the markets seemingly quickly react to market moving news, the credit markets, and particularly the primary mortgage market which is composed of many, many local markets, react much more slowly. It takes considerable time for the delinquencies to first appear and then the stress of missed payments to turn into actual foreclosure actions. It also takes some time for individual homeowners to realize that the prices of their homes may not longer be appreciating, and seemingly often most recently, the value of the homes has in fact declined. It is psychologically hard to sell an asset at a loss and TCM suspects that many homeowners will hold off on selling homes in which they have a loss. Hence, the true state of both the magnitudes of the delinquencies/foreclosures as well as the losses given default are not likely to be known for some weeks and even months to come.

Sometimes it helps to search for certain key phrases among the many news sources that are indexed by the Google News search service. A search for the term "Lars Toomre" on Friday October 12th 2007 reveals that Mr. Toomre was quoted by eFinancialNews in an October 1st 2007 story entitled Dow Jones’ News Feed Makes Headlines.

Toomre Capital Markets LLC (“TCM”) has written previously about how many people are employed by the Wall Street structured finance deal machines in the post Can Wall Street be Trusted to Value Risky CDOs? Today rumors are flying that major layoff announcements are about to be implemented by many of the big investment banks. Supposedly, many of the well-paid investment banking personnel focused on structured finance will be let go within the next few weeks.

During the past few weeks, various portions of the credit markets have seized up, particularly in the structured finance sectors like non-conforming mortgages, Collateralized Debt Obligations (“CDOs”) and Asset-Backed Commercial Paper (“ABCP”). Rumors are rampant about the big losses being suffered by the structured finance areas of various investment banks and hedge funds.

There have been all sorts of crazy talk about how much this or that firm has lost. Some rumors suggest that many smaller hedge funds have suffered losses since Memorial Day in excess of 25%. The numbers being tossed around are literally hundreds of millions of dollars and the investment banks collectively are said to have lost a low ten billions of dollars.

The morning of Thursday, July 26th began with a front page story in The Wall Street Journal entitled Banks Delay Sale of Chrysler Debt As Market Stalls. Written by reporters Dennis K.

Maybe Toomre Capital Markets LLC ("TCM") is a bit naïve. After all, who really will miss a fifty or two? Fifty Billion or Hundred Billion in losses, that is? Maybe the reader can pay this structured finance bill due to sub-prime and Collateralized Debt Obligations ("CDOs") valuation mark-downs from his or her wallet, but the Toomre Capital Market's wallet is likely to be more than a few dollars short on this monsterous tab!!

Toomre Capital Markets LLC ("TCM") provides advisory services to firms either directly engaged in the capital markets or providing technology solutions and services to the financial services industry. Our specialties include applying emerging technology and innovative financial engineering, structured finance and risk management ideas to the broad field of financial services and Enterprise Risk Management ("ERM").

Reporter Neil Shaw of Reuters asks whether Wall Street can be trusted to value risky CDOs? Rather cynically Toomre Capital Markets LLC ("TCM") as well as many investors with a modicum of gray hair near their temples would answer with a resounding "No!!!"

On Tuesday July 2nd 2007, Och-Ziff Capital Management Group LLC, also known in the hedge fund community as OzCap, filed a registration statement for an initial public offering with the United States Securities and Exchange Commission ("S.E.C.").