Singapore Hedge Fund

Alternative asset management in Singapore

A new (and some old) rogue traders

PVM Oil Futures Limited said on Friday Steve Perkins, a senior broker based at the firm’s London office, was responsible for unauthorized Brent crude futures trades which landed the firm with a loss of nearly $10 million.

The loss, however, was relatively small compared with other trading scandals in the past, often costing companies billions of dollars.

Following is a list of some of the major financial market trading scandals in a chronological order.

May 2009 – A former Morgan Stanley trader, who built up a hefty unauthorized oil futures position after a long liquid lunch and then hid the deals overnight, earned a ban from Britain’s financial watchdog.

The Financial Services Authority (FSA) said in May David Connor Redmond was a freight and oil trader with Morgan Stanley when he took a lunch break of more than three hours on February 6, 2008. The size of the loss was not disclosed.

January 2008 – French bank Societe Generale said unauthorized trade by a single dealer had caused it a 4.9 billion euro ($6.87 billion) loss. The loss caused by Jerome Kerviel, then a junior trader with the bank, resulted in the resignation of chairman Daniel Bouton.

Kerviel was freed from prison in March 2008.

November 2006 – Mitsui & Co, Japan’s second-biggest trading house, shut Mitsui Oil Asia (MOA) after the Singapore office racked up losses amounting to $81 million in naphtha trading up to November 17, 2006.

Noiyuki Yamazaki, who made false accounting entries, was sentenced in 2009 to five years in jail.

March/April 2006 – Hedge fund Amaranth Advisors LLC and its former head trader, Brian Hunter, made up to $6.4 billion in losses from natural gas contracts before it folded in 2006.

In July 2007 the Commodity Futures Trading Commission sued Amaranth and Brian Hunter, alleging that they tried to manipulate natural gas futures prices.

June 1996 – Japan’s trading house Sumitomo Corp suffered a $2.6 billion loss over 10 years from unauthorized copper trades, primarily by chief copper trader Yasuo Hamanaka.

Sumitomo fired Hamanaka, once dubbed “Mr Five Percent” because his trading team was believed to control five percent of the world’s copper trading. He was jailed for eight years.

September 1995 – Japan’s Daiwa Bank suffered a $1.1 billion loss from unauthorized bond trading by Toshihide Iguchi, one of its executives in the United States. He was imprisoned in 1996.

February 1995 – One of Britain’s oldest investment banks, Barings Plc, collapsed after lone futures trader in Singapore, Nick Leeson, lost some $1.4 billion in derivatives trading. Leeson was jailed in Singapore. Barings was sold to Dutch bank ING for one pound.

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Savvy Fund Sees an Asia Backfire

The traders behind a Singapore-based hedge fund that outperformed last year are betting government efforts to stabilize Asia’s markets will backfire, yielding opportunities in foreign exchange and credit.

Last year, Artradis Fund Management’s flagship Barracuda fund returned 27% by betting on price swings in Asian stock markets through derivatives, or financial instruments whose value is based on an underlying investment. By contrast, the benchmark MSCI Asia ex-Japan index fell 27% in 2008.

While the plays on stock volatility were good to Artradis last year, now the firm is changing gears.

“We felt that the glory days of equity derivatives business in Asia were going to be restricted going forward,” partly because hedge funds bid up the prices of derivatives, squeezing returns, says Steve Diggle, one of the firm’s founders.

In addition, issuance of structured products containing derivatives has slowed, as wealthy individuals who bought these products in the boom have been burned and pulled back. “In order to grow, we needed to broaden to other markets and products,” Mr. Diggle says.

Artradis is wagering that government efforts in Asia to stimulate the economy and create stability will actually create market imbalances and, as a consequence, lucrative trading opportunities.

“Asian markets have a long history of government involvement,” with mixed results, says David Dredge, 44 years old, who recently left his job as deputy head of local markets at Royal Bank of Scotland Group in Singapore to help spearhead Artradis’s new effort.

Mr. Diggle and Richard Magides, in their mid-40s, previously worked together on the derivatives desks of Barings Bank in Singapore, where the rogue trader Nicholas Leeson caused the bank’s collapse in 1995. They founded Artradis in 2002 with about $4.5 million of mostly their own money. Since then, they have built it into one of the largest home-grown Asian funds, with about $2.5 billion under management.

When shares were rising, their funds produced lackluster returns. The situation reversed in mid-2007, when markets got clobbered and their bets on volatility paid off. Even amid success, Artradis was hit with massive redemptions of approximately $2.3 billion, which the firm attributes to the liquidity squeeze that forced clients and competitors to sell assets and raise cash quickly.

Also hurting the fund was the bankruptcy of Lehman Brothers, which the fund says owes it more than $100 million because of trades in which Lehman acted as counterparty and assets that have been frozen at the firm.

For investors in Asia, the ripple effects of U.S. stimulus efforts offer a road map, Mr. Dredge says. He points to moves by the U.S. Federal Reserve to stimulate lending. Concerns about inflation and the U.S. dollar have partly prompted investors to dump U.S. Treasury bonds, pushing up their yield and undoing Fed efforts to keep rates low. The trick for investors, he says, is to spot opportunities where government actions won’t be enough to override market forces.

The past week, short-term bank lending rates rose sharply in Asia as the region’s banks displayed concerns about the Fed’s ability to manage rates. “It follows that interest-rate volatility in the U.S. will be mirrored in Asia,” Mr. Dredge says.

Separately, the dollar’s weakness has led to gains in most Asian currencies this year, including the rupiah, the rupee and the baht. But expections that the dollar will continue declining could come to an abrupt halt, Mr. Dredge says. Some currencies, such as the Australian dollar, have weakened slightly this week amid worries that an economic recovery isn’t coming to fruition anytime soon.

Another possible macro shock could come if China and Hong Kong let their currencies appreciate against the U.S. dollar. While Hong Kong pegs its currency at a fixed rate to the dollar, China allows its currency to fluctuate, albeit in a highly managed way.

Big changes seem unlikely with either currency right away, though the wisdom of being so tightly bound to the dollar has come into question as fears grow about the dollar’s long-term prospects. Recently, Hong Kong’s monetary authority has intervened aggressively to uphold the 26-year-old peg.

From Laura Santini at the Wall Street Journal

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