Financial News Online

Lehman Brothers was yesterday prompted onto the increasingly familiar territory faced by several financial institutions, in publicly acting to quash market speculation about its liquidity position, which wiped almost 9% off its share price yesterday.

In a statement Lehman Brothers said: “There are a lot of rumors in the marketplace that are totally unfounded. We are suspicious that the rumors are being promulgated by short-sellers of our stock that have an economic self-interest.”

Statements aside, Lehman Brothers closed down 8.9% at $38.71 yesterday.

At the same time, the price of insuring Lehman’s debt against default rose.

The swing in sentiment made clear that the boost afforded by the bank’s better-than-expected earnings last week and unprecedented intervention by the US Federal Reserve has faded amid concerns about investment banks’ fundamental businesses, according to a Dow Jones Newswires report.

Lehman Brothers is not alone in having to deny rumors of losses and liquidity—Bear Stearns, the UK’s HBOS and US fund manager BlackRock all have had to confront the speculation. With the exception of Bear Stearns, all have proved untrue.

Yet traders in the options markets continued to bet on a prolonged decline in Lehman’s share price, where three times as many put options traded, which reflects a bearish view, compared to call options, which reflect a bullish view, according to Bloomberg data.

The most popularly traded contract was the April put with a strike price of $30, which gives the buyer of the option to right to sell the stock up until the third Thursday of April for $30.

By 4:30 EST in New York, 28,136 contracts had traded, according to Bloomberg data.

A spokesman for Interactive Brokers, a futures broker, noted that April had 140,000 puts in April contracts, by the close of trading today which was “massive”.

Rebecca Engmann Darst, an equity options strategist with Interactive Brokers, said the catalyst for the decline in Lehman Brothers’ share price may have been the activity surrounding a July contract for a 10,000 put spread.

A put is an options contract that is purchased with the anticipation that the underlying asset’s value will decline. The owner either profits by selling the put option at a profit or by exercising it. A call is an options contract that allows the owner to buy a certain amount of an underlying security within a specific time frame.

A spokesman for Interactive Brokers said: “Three times the amount of puts were traded compared to calls. It was bearish day all around.”

The S&P 500 closed down 1.15% and other broker-dealers, including Goldman Sachs, Morgan Stanley and Merrill Lynch closed down more than 4% yesterday.

Credit default swaps on Lehman Brothers rose to a high of 290 basis points yesterday, according to Phoenix Partners Group. The contracts closed at 255 basis points on Wednesday.

Wealth-Bulletin.com

Citadel Investment Group's appointment last week of macro specialist Kaveh Alamouti from Moore Capital Management represents another vote of confidence in global macro hedge fund investment styles in a challenging environment.

Global macro funds, which were the titans of finance in the 1990s, make bets on macroeconomic trends through liquid assets, including stocks, bonds, currencies and commodities. They fell out of favour in the early part of this decade when low volatility across global markets made it difficult for them to make money.

However, the growing uncertainty in capital markets and actions by central banks - which have continued to add liquidity to the banking system to avert a crisis - mean volatility is on the way back up and macro managers are outperforming again.

The HFR macro systematic diversified index, which is published by Chicago-based Hedge Fund Research, is up 11.5% for the year to March 7 and the HFR macro index, is up 7.5%. Both strategies are top performers.

Alamouti joined Moore, a macro specialist, in July 2002. Seen as a big hitter, hedge fund sources say he managed $3bn (ˆ2bn) at one stage. At Citadel, a large multi-strategy firm best known for convertible arbitrage, Alamouti will take responsibility for global macro strategies which will feed into existing funds.

Alamouti has often used leverage to maximise returns and analysts say Citadel is big enough to provide him with capital on its own account. Alamouti said: 'There are tremendous trading and arbitrage opportunities in global markets, creating a very attractive environment for a multi-strategy macro business.'

David Smith, the chief investment director at GAM, one of the world's largest fund of hedge fund managers, said: 'Our investments in global macro funds are up 6% to 7% this year. It makes money in times of market dislocation and policy mistakes, so this year should be like the early 1990s when they made huge amounts of money.'

Managers such as George Soros and Julian Robertson made their reputations over the decades following the last oil shock. Soros's bet against the pound, which pushed it out of the exchange rate mechanism in 1992, inspired many imitators.

Sean Capstick, global co-head of the hedge fund capital group at Deutsche Bank in London, described the bullish call on macro as a 'mini boom of interest' on the back of strong performance in the first two months of this year. He said: 'Global macro was in the doldrums but it is back in vogue. A lot are benefiting from commodity and currency plays.'

However, he said the largest groups and strategies, such as multi-strategy equity long/short, would continue to attract the greatest fund flows this year.

However, global macro has become diluted by different takes on the style. Ian Carton, co-head of global markets, financing and services at Merrill Lynch in London, said: 'Global macro has the benefit of being unconstrained and opportunistic. In the current environment that freedom of opportunity has appeal for managers and investors alike.'

He said the definition of what the strategy involves continues to be stretched in different directions.

Several managers using other styles have moved beyond their areas of specialty, such as Greg Coffey, an emerging markets specialist at GLG Partners, whose approach has become more macro-orientated.

The volatile market conditions that favour macro also produce a wide dispersion of returns between its managers.

For example, the Moore Global Fixed-Income fund, managed by Louis Bacon, was up 6.2% for the year to February 21 and the Moore Global Investor fund was up 3.5% over the same period, according to investors.

Brevan Howard's fund, managed by Alan Howard, was up 13% for the year to February 15 and the Peak Partners offshore fund, managed by Timothy Rudderow at New Jersey-based hedge fund Mount Lucas Management, was up 15.1% for the year to February 22, according to investors.

Gamut Investment fund, which is managed by Bruce Kovner at Caxton Associates, was up 2.6% for the year to February 20 and the Traxis fund, which is managed by Barton Biggs, Madhav Dhar and Cyril Moullé-Berte, was down 6.5% for the year to February 15, according to investors. Morgan Stanley owns a minority stake in Traxis.

Financial News Online

The number of US hedge fund shutdowns dropped last year compared to 2006 despite the credit crunch, according to a media report.

In 2007, there were 49 hedge fund shutdowns in the US representing $18.8bn (ˆ11.3bn) at their peak, a little over half of the 83 hedge funds that closed down with peak assets of $35bn in 2006, according to industry publication Absolute Return

Absolute Return's criteria limited the hedge funds included in the report to those managing $25m or greater in assets under management.

The largest fund that failed last year was Sowood Capital’s Alpha fund which managed $3bn at its peak, according to by Absolute Return.

The Sowood fund was undermined when it was caught out by widening credit spreads. Citi Alternative Investments had $2.5bn in peak assets. Three of Bear Stearns hedge funds with a peak total of $2.3bn were included in the 2007 hedge fund shutdowns following the downturn in the subprime mortgage market.

The subprime crisis set the stage for hedge fund losses and exposed the weaknesses of banks and ratings agencies, which gave mortgage-backed securities tied to sub-prime mortgages AAA ratings before downgrading them last year.

At its height Amaranth had $9bn in assets under management. Its collapse was spurred by bad bets in the energy sector.

Only two hedge funds with $3.9bn in assets under management have shut down in the US for the year to date, including Peloton’s ABS Fund and Sailfish Multistrategy Fixed Income Fund, despite the continued credit crunch.

Investments tied to the mortgage market are undermining even strong performing funds.

Although Peloton's fund was based on a strategy of investing in asset-backed securities that thrived in 2007 following the downturn in subprime mortgages, they lost value when the subprime crisis infected other parts of the mortgage market.

Heavily leveraged funds as well as those invested in mortgage- backed securities have been hit particularly hard by the credit crunch.