Plenty of money managers and their friends should be without gifts this holiday season.
Indeed, 2007 was characterized by plenty of misdeeds an attempted kidnapping of a former mistress, overzealous politicians, pipe bombs and through-the-roof leveraging.
But there was some good to be had. Santas elves might be working overtime to reward Har¬indra De Silva and Roger Clarke for introducing 130/30, the 5-year-old strategy that has become uber-successful this year. Kudos also to T. Brit¬ton Harris IV, chief investment officer at the $112 billionTeacher Retirement System of Texas, for his bold move into alternative strategies.
Pensions & Investments has named the 10 naughtiest and 10 nicest individuals or firms who affected institutional investors in 2007. Heres our list:
Whos been naughty?
Albert Hsu: This former Connecticut hedge fund manager wont be home for Christmas. Hes serving 2½ years in prison for attempting to have his former mistress kidnapped and raped. According to media reports, Mr. Hsu posed as his former lover online and posted an ad on a bondage website requesting a realistic kidnap and rape scene.
The Bishop: John P. Tomkins, a.k.a. The Bishop, was arrested by federal agents in April for allegedly mailing two partially disconnected pipe bombs along with threatening letters to American Century Investments and Janus Capital Group. Mr. Tomkins, a former machinist, also is accused of sending threatening letters to more than a dozen investment firms over the past two years. On Sept. 27, Mr. Tomkins pleaded not guilty, according to the Chicago Tribune. His trial is set for March 19.
Joel Anderson: This California Assemblyman stepped on fiduciary toes when he pushed through an anti-terror law that will force CalPERS and CalSTRS to divest some $3.4 billion in holdings in defense- and energy-related companies that do business in Iran by year-end 2008. No one wants to support terrorism. But forcing pension funds to sell off holdings violates trustees fiduciary duty to focus on risks and returns.
Ralph Cioffi: Two Bear Stearns hedge funds managed by Mr. Cioffi collapsed in June after the funds were unable to meet redemption requests and margin calls. The Bear Stearns funds were walloped by subprime-mortgage market woes, but their high levels of leverage made them sitting ducks when the mortgages imploded.
Christopher Cox: The SEC chairman upended his pledge to be investors best friend by failing to update the commissions proxy-access rules. On Nov. 28, the Securities and Exchange Commission voted against a proposal that would have made it easier for investors to nominate board candidates. However, Mr. Cox has a chance to redeem himself; he said he plans to revisit the issue in 2008.
Stephen Schwarzman: Mr. Schwarz¬man, chief executive officer of Blackstone Group ushered in the largest-ever initial public offering for a private-equity firm, but the companys stock has plummeted since its debut in July. As of Dec. 4, it was down 39%. Meanwhile, Mr. Schwarzmans own conspicuous consumption (a multimillion-dollar birthday party featuring a performance by Rod Steward comes to mind) piqued the interest of Washington bigwigs. That leads to
Rep. Charles Rangel: Mr. Rangel saw low taxes paid by super-wealthy private-equity and hedge-fund managers such as Mr. Schwarzman as an easy way to pay for relief from the alternative minimum income tax. In November, Mr. Rangel pushed a bill through the House that would up tax rates on carried interest paid to limited partnerships to as much as 39.6% from 15%. The Senate did not adopt this provision.
Alan Greenspan: The former Federal Reserve chairman has been lambasted for pushing interest rates artificially low after the Sept. 11, 2001, terrorist attacks rocked securities markets. That easy credit lured many investors into risky assets to enhance returns, and to a housing-market bubble that is only now being burst. Alan Greenspan really made a mess of all this. He pushed out too much liquidity at the wrong time, Joseph Stiglitz, the Nobel Prize-winning econo¬mist, reportedly said.
Stanley ONeal: Mr. ONeal, former chief executive officer of Merrill Lynch, got booted by his board in October after the firm took an $8.4 billion write-down on subprime assets and Mr. ONeal put out feelers behind the boards back to Wachovia about a potential merger. Mr. ONeal had helped Merrills business boom by taking on riskier assets, but that strategy ultimately backfired.
State Street Global Advisors: SSgA officials are in an unwanted spotlight after a number of supposedly low-risk bond strategies suffered double-digit losses this summer. The managers reputation for risk management now is being questioned, and the firm is facing three lawsuits alleging it acted imprudently. While saying they will vigorously defend their actions in court, SSgA executives revamped the team responsible for its active bond strategies.
Whos been nice?
T. Britton Harris IV: Whoever said pension funds are stodgy hasnt been paying attention to Texas Teachers. The CIO this year got the OK to move up to 29% of the $112 billion pension funds assets into alternative assets, from 5.5% now. The shift to alternatives designed to reduce volatility at no cost to returns is the largest such allocation by any public fund.
John Paulson: While many hedge funds were reeling from subprime losses, Mr. Paulson was raking in the cash. Realizing the subprime mortgage market was bound to crash, he started shorting the market in April 2005. The gain: The Paulson Credit Opportunities I fund was up 587.54% net of fees by the end of November; the Credit Opportunities Fund II was up 350% in 2007.
Russell Read: Mr. Read, chief investment officer of the California Public Employees Retirement System, has lots of ideas on how to improve performance at the $259.5 billion fund. He has introduced a pilot commodities program as part of a new inflation-linked asset class awaiting board approval on Dec. 17. He also wants to hike international stocks and lower U.S. equities to follow global equity benchmarks cap-weighting. And he wants to pay long-only equity managers only for the alpha they deliver.
Harindra De Silva and Roger Clarke: Considered the fathers of wildly popular 130/30 strategies, the Analytic Investors officials wrote about the benefits of this long-short strategy five years ago. But it took until 2007 for investors to embrace these strategies, which give managers limited freedom to use shorting and leverage to enhance returns.
Clapman Report: The Clapman Report, issued by two Stanford University units, helps investors hold up a mirror to their own corporate practices. The report outlines principles investors can follow to ensure strong corporate governance, such as having transparent policies that address conflicts of interest and having financially savvy trustees.
William Gross: The bond king got it right this year after being wrong for so long. OK, so he wasnt wrong as much as he was early. The PIMCO CIO has long believed that an economic slowdown was on the way, led by the U.S. housing sectors decline. In the past, this cost him valuable returns, but this year, he was proven right.
John Thain: Mr. Thain, former head of the New York Stock Exchange, has plenty to brag about. In an April deal, Mr. Thain orchestrated a merger between the NYSE and Euronext, creating the worlds first global stock exchange. Last week, he took the helm at Merrill, and plans to revamp the firms risk management following billions of dollars in subprime-related losses.
Richard Bookstaber: Mr. Bookstabers A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation, describes how increasingly complex investment instruments have introduced risk into the markets and gives the reader a front-row view of the events leading to more recent disasters like the collapse of Long Term Capital Management. A must-read.
Knut Kjaer: A decade ago, Mr. Kjaer became the first employee of the worlds second-largest pension fund. Norways 2.18 trillion kroner ($398 billion) Government Pension Fund-Global has become the poster child for sovereign funds for its sophisticated structure and transparency. Mr. Kjaer, the executive director of Norges Bank Investment Management, which oversees the fund, now is leaving for greener pastures.
Thomas DiNapoli: The New York state comptroller has added internal and external controls to prevent abuse at the $154.5 billion New York State Common Retirement Fund. His predecessor, Alan Hevesi, resigned after admitting that state employees chauffeured his ailing wife. Mr. DiNapoli loses points, though, for fighting against creating a board of trustees to oversee the fund.