Category Archives: Uncategorized

Billy Walters: The Greatest Sports Gambler Of All Time

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A Beginner’s Guide To Stock Trading Styles

Before you get serious about investing in the stock market, it is important to learn as much as you can about this ever-changing and fluctuating business This is why it is vital you determine which stock market style best suits you and your goals.

Learning the popular forms of capital market trading may help you determine your trading style and help you find your own path in the business world, whether you’re looking to buy gold at BullionVault or you want to invest in property abroad. There are various types of trading, including Scalping Trading, Swing Trading, Trend Trading and Momentum Trading. Below is a brief definition of each style to help you out.

The different types of trading are best differentiated by their time frame rather than their techniques. Different techniques are used in different trading styles in order to reap profits.

Scalping Trading – This is the term used to describe the method where trades are opened and closed within a very short time scale. This could be anything from a few seconds to a few minutes. This day-trading method sees Scalpers make several trades a day.

Momentum Trading – This is another form of day-trading where the trader takes a long or short position in the stocks with the hope that its momentum will continue in the direction they want. They only take advantage of this trade after seeing an acceleration in a stock’s price, earnings or revenue. However, after the momentum slows, the trade is exited.

Swing Trading – This style is normally used by private or home traders. Traders attempt to capture gains in a stock within one to four days. The individual aims to exploit the short-term stock movements without the competition of major traders. Traders tend to focus more on the stock’s price trends and patterns rather than their value.

Trend Trading – Here, traders will try holding their commonly for up to a month. After analysing a stock for some time, the trader attempts to gain profits by following the asset’s momentum in a particular direction.

Ackman vs Icahn: This Is Epic !

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A Quick Peek Inside Steve Job’s Secret Hedge Fund

Apple (Nasdaq:AAPL) is widely considered to be the most successful company of all time. Rising from the ashes, in 1998, when Steve Jobs retook the helm, Apple is also one of the most admired company’s on earth.
The high tech giant boasted a market cap of an astounding $622 billion in the spring of 2012, beating Exxon Mobil (NYSE:XOM) as the world’s most valuable brand.

The runaway success of its iPhone and iPad products combined with Steve Jobs careful succession planning is credited for these accomplishments. Basically, the company gave the public what it needs in an easy and even fun to use format.

Consumers flock to Apple’s products since they make everyone’s life easier, thereby enriching Apple beyond even Steve Jobs wildest dreams.

This uber success has earned Apple a monster pile of cash. Estimated to be nearly $120 billion, the company has its own subsidiary to manage its hoard of lucre. This subsidiary is named Braeburn Capital and is located in Reno, Nevada. Braeburn is considered the world’s largest hedge fund, dwarfing second place Ray Dalio’s Bridgewater Fund by $20 billion.

“Wow, this is great information!”, was my first thought. “All I need to do is review the 13F filings to find out how this seldom heard of behemoth is investing its money”.

I am a huge proponent of following the big money when it comes to investing and what could be bigger than Braeburn? Well, after much digging and asking around, I found out that Braeburn is not a typical money management company. It doesn’t file the expected forms such as 13Fs revealing its holdings. This is because Braeburn only has one investor, Apple. This fact is one reason it can skirt around some of the traditional fund regulations, namely revealing its specific holdings. Obviously, this made my mission much more opaque determining Braeburn’s investments.

Steve Jobs

Fortunately, we are not completely in the dark regarding Braeburn’s holdings. By studying Apple’s 10-K filing in fiscal year 2011 and comparing it to fiscal year 2012, light can be shown on how Apple is investing its massive mountain of cash. While the exact holdings are not revealed, based on what is in the 10k’s, it can be extrapolated how investors can follow Apple’s secret hedge fund’s primary investment themes.

The first thing to note is that Braeburn has grown from just under $80 billion in assets under management (AUM) to just under $120 billion over the last fiscal year. This is explosive growth no matter how you look at it.
However, it’s surprising how they chose to invest the money

Here are the primary investment themes of Braeburn and the best way to replicate these ideas in your portfolio.

1. Corporate Securities
Braeburn’s number one investing theme is corporate securities. The firm holds just over $46 billion of this asset class. Corporate securities are a broad sector. It can be bonds, stocks or derivatives. Braeburn increased its percentage owned of corporate securities by 31.5% from fiscal 2011 to fiscal 2012. Provided the size of Braeburn, it is likely that they are buying wide swaths of top rated, blue chip stocks and bonds. ETF’s such as SPDR S&P 500 (NYSE:SPY) for tracking equities and Vanguard’s Long-Term Corporate Bond ETF (NYSE:VCLT) likely fit this investment theme. It’s important to note that these ETF’s pay nearly 3% and just over 4% annual dividend yields making them potential candidates for Street Authority’s Carla Pasternak’s Retirement Savings Stocks.

Extrapolating further, we do know that Steve Jobs was a huge investor in Disney (NYSE:DIS). After his death, Job’s $4.6 billion worth of Disney shares were transferred to a trust administered by his wife Laurene Powell Jobs. Obviously, I don’t know for certain, but think it can be a safe bet that Braeburn also owns a large number of Disney shares, reflecting the investing spirit of Steve Jobs. The company just raised its annual dividend from $0.60 to $0.75 but it still just yields about 1.5%. Earnings are expected to grow to approximately $3.45 in 2013 and the company’s acquisition of comic book powerhouse Marvel has renewed the public’s interest in the entertainment giant. Technically, shares just jumped higher to heavy technical resistance at $52.50. This company looks good as a classic daily close break out buy strategy above $52.50.
2. U.S. Treasury Securities
U.S. treasury securities make up just over 20% of Braeburn’s holdings. However, the fund ramped up its investment in U.S. treasury securities by nearly 80% between fiscal year 2011 and 2012. This asset class is secured obligations of the U.S. government. In other words, these securities are government debt. Anyone of the number of U.S. treasury bond ETF’s should more or less track Braeburn’s holdings. I like PIMCO’s 7-15 Year Treasury ETF (NYSE:TENZ) as a proxy for the debt of the U.S. government. The ETF has been uptrending on the weekly chart since April, 2010 but has recently hit technical resistance at $88. It trades very light volume, so be certain to always use limit orders to enter positions. It appears to be a solid pull back entry play right now with support at the 50 week moving average just under $86 per share. Entering now with stops at $84 makes technical investing sense.

3. Mutual Funds, Money Market Funds, Commercial Paper
The firm doubled its exposure to mutual funds by increasing holdings from just over $1 billion to more than $2 billion. Despite this 100% increase, mutual funds still only account for the third smallest capital allocation. Money market funds and commercial paper account for the smallest and next to smallest allocations.

Risks to Consider
It’s critical to remember that I am only trying to replicate the overall investing themes of Braeburn. The fund does not reveal its exact holdings and I am only speculating on how investors can replicate its holdings based on the investing themes found in Apple’s 10K filing. Always use stops and position size wisely.

Action to Take

ETF’s make it easy for investors to replicate the themes of the world’s largest hedge fund. This fund is dealing with a tremendous amount of capital, forcing it to only invest into macroeconomic themes and the largest companies. Judging by Braeburn’s increase in U.S. treasury securities and Corporate securities, I think its a safe bet to say the fund is very bullish on the economic future of America.


This is a test.

Buy Options On The Facebook IPO

This is interesting.

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The 1.4 Billion Euro Worthless Home

This guy built his house out of shredded euro’s. It is said that art imitates life, does this signal that the euro will soon be worthless? Artists are generally the first to key in on radical changes. Time will tell.

A Typical Morning In The Life Of A Stock Trader

PTJ watching his movie

I am often asked how I organize my day before the market opens. Many beginning investors and wannabe day traders wonder how market professionals approach each trading day, so in this article I will lay out my basic strategy on how I prepare for the trading day.

8:00 AM—- Wake up, check the world and business news, while preparing a light and tasty breakfast. This can be as easy as turning on CNBC or Bloomberg TV. Notice if the Index Futures are up or down and by how much. Listen for hints on what is expected to happen today. Is Fed Chairman Bernake speaking? Are there any earning announcements or economic numbers being released? What’s the general sentiment of the guests and hosts on the show? All these questions should be asked when watching televised business news with a critical eye. Analyze what you see and hear to make a good guess if the open will be bullish or bearish. Some traders take this step a little further by subscribing to a real time news analysis service like Trade the News

8:30 AM Begin to watch the pre-open action. If you have a watch list developed, watch how these stocks are acting on the Level II screen. Are any acting unusual, any odd volumes or large gapping moves? If you notice unusual activity in the pre-open these are the stocks you want to pay close attention to during the day. It can mean the big money players are positioning themselves prior to news being made public. If you do not have a pre-made watch list, simply use a real time scanner looking for unusual activity in the pre-open— you may want to do this anyway, even with a watch list to catch potential big movers at the open. I use and recommend as a great real time screening tool.

9:00 AM Check the PREM levels for potential program buying/selling during the day.

This is something most traders neglect. These numbers will tell you when the programs should kick in. Knowing when programs are likely to hit is critical knowledge for the intraday stock trader. A good free daily provider of these figures is HL Camp and Co. Mark these levels on your PREM chart, and get ready to jump on board should they get hit during the day and one of your stocks takes off.

9:15 AM Take a break until market opens! This is important to maintain concentration at the open. Take a walk around, make a phone call, anything that isn’t market related. This helps you have a clear mind at the open so that better decisions can be made.

9:30 AM Let the trading day unfold!

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Man, Too Bad We Are Not Still Invested In Red Kite, Might Be Back To Even By Now

NYC 2007 Good Times Before The Fall

NYC 2008 Good Times Before The Fall

This is a very interesting Bloomberg article. However, it’s important to note that Mr. Farmer didn’t do quite as well when we referred clients to him. I guess past performance really doesn’t equal future results. I am quite pleased to see him doing excellent now, however!


On a dark, drizzly November morning, Michael Farmer steps to the pulpit to deliver a stern message to fellow parishioners at St. Helen’s Bishopsgate, an 800-year-old church in the shadow of the London Metal Exchange and in the heart of the City, London’s financial district.

“We live in a cursed world — cursed by God,” Farmer tells the men and women who fill the church, most of them workers in the financial industry. “We live in a broken society; we have broken nations. Look at the euro zone. Life is a struggle and, in the end, is death.”

Yet those who believe in Jesus Christ need not fear, says Farmer, a thin man dressed in a charcoal suit and blue tie. Jesus will provide salvation from the daily hardships of disease and poverty — and the firings that have left thousands of City workers unemployed, he preaches.

Farmer, 67, is a Conservative Evangelical who attends services every Tuesday at St. Helen’s, Bloomberg Markets magazine reports in its February issue. He also runs London- based RK Capital Management LLP, a metals-trading hedge-fund firm with $1.3 billion of assets under management. Its $400 million Red Kite Compass Fund tops Bloomberg Markets’ ranking of midsize hedge funds for the first 10 months of 2011, with a return of 47 percent, according to investors.

The $200 million Red Kite Metals Fund rose 34 percent, and the $100 million Red Kite Prospect Fund surged 50 percent, clients say.

China Copper Glut

RK Capital specializes in the buying and selling of copper and prospered by betting that the price of the red metal would fall in 2011 as the pace of construction in China slowed, investors say. The assessment proved correct, with copper retreating 26 percent as of yesterday from a record $10,190 per metric ton in February 2011.

Farmer says his faith makes him a better money manager by keeping him humble. The firm’s offices match his humility, featuring a simple orange sofa in the reception area, gray carpeting and walls free of art or photos. There is no receptionist; visitors press a button on the coffee table to let Farmer and Red Kite’s other co-founder, David Lilley, know they are there.

“Jesus warns us that there are many dangers to money,” Farmer says. “I know that in my heart there is greed, there is wanting just a little bit more. It helps that the Bible tells me to be wary of this and that one day I will fall off my perch.”

Tory Supporter
Farmer is active both in the church and in politics. He has given millions of pounds in donations to Britain’s ruling Conservative Party, saying it has done more than rivals to promote family values.

Farmer and Lilley, 45, aren’t just owners of futures and options contracts tied to copper; they also trade the physical metal, buying the commodity in North and South America, storing it in warehouses around the world and selling it when the price is right to companies that turn it into the wire and pipes used in the construction of homes, office buildings and vehicles.

Farmer previously ran MG Plc, which before its sale in 2000 was the world’s biggest copper trader. Lilley also worked at London-based MG. Farmer used that experience as a marketing point when he started RK Capital in 2005.

Physical trading also formed the backbone of what was once the firm’s biggest hedge fund, Red Kite Metals, which oversaw more than $1 billion at its peak, according to investors. The fund — named after an endangered bird of prey native to Europe and North Africa — proved as volatile as the prices of the metals it buys.

Volatile Metals Fund
Red Kite Metals surged 188 percent in 2006 on the back of a global commodities boom, according to investors. It then plunged 50 percent in 2007, rebounded with a 19.8 percent rise in 2008, then fell 0.9 percent in 2009 and 25 percent more in 2010, when Red Kite’s bet that copper would decline proved premature.

Clients fled the metals fund, reducing assets to $200 million as of November, investors say.

Farmer says that from 2008 to 2010, the U.S. Federal Reserve buoyed markets, including those for commodities, by pouring billions of dollars into the economy. At the same time, he says, analysts mistook China’s aggressive buying of copper as a sign that its construction boom was continuing, when in fact the Chinese were stockpiling the metal.

The sluggish world economy makes Farmer a pessimist.

“We are not very positive about things,” he says. “The world is in a bad place. We are still fighting to recover from a very serious recession, and I think it is going to go on for another four or five years.”

Derivatives Trader
One reason the assets of Compass surged ahead of Red Kite Metals is that Compass deals only in futures and options, not the physical metal.

“We avoid physical games because it includes other risks and is less liquid,” says hedge-fund investor Marcus Storr of Feri Trust GmbH, whose Bad Homburg, Germany-based firm manages 16 billion euros ($20.4 billion). “We’d rather stick to hedge funds trading mainly in equities of commodity companies and financial derivatives.”

Farmer and Lilley say clients often prefer funds that trade derivatives due to investor suspicion of money managers in the wake of the Bernard Madoff scandal. The contracts Compass buys can be more easily placed in individual accounts that clients control, they say.

The Compass fund grew 10-fold to $400 million in October from $40 million at the end of 2009.

RK and China
Success in forecasting copper sales and prices depends on an understanding of the Chinese market, which consumes 39 percent of the world’s copper, according to Morgan Stanley (MS) estimates. RK Capital is now involved in transactions that account for as much as 15 percent of China’s supply of copper in a given month, Farmer says.

“At Red Kite, you are dealing with people who have many years in metals, with great expertise in China and the physical world,” says Robin Bhar, a metals analyst at Credit Agricole SA (ACA) in London. “What you can get from the physical market in terms of flows and views helps immensely to form a view in trading. They have very good market intelligence.”

Ren Gang, head of research at Shanghai-based Maike Futures Co., says Chinese copper demand could be weak in 2012 because local companies can’t borrow money for real-estate projects.

“Companies are short of money as credits are very tight,” Ren says. “There’s not much restocking of copper.”

Importing Copper
Ren’s company is a unit of Maike Holding Group Ltd., which imported 600,000 tons of copper into China in 2010. In 2008, Maike partnered with RK Capital to set up an investment fund in Hong Kong.

Not everyone is bearish. Goldman Sachs Group Inc. (GS) analysts Max Layton and Allison Nathan say market jitters in Europe have led traders to take their focus off the fact that copper supplies are under pressure. Strikes by workers in Latin America have created a copper deficit, which will trigger a “strong rally” in the second quarter of 2012, the analysts wrote in a Nov. 20 report.

Copper rose to a one-month high of $7,820 a metric ton in London trading today after analysts, including Royal Bank of Scotland Plc’s Nikos Kavalis, predicted China will ease monetary policy in an effort to spur growth.

Some Red Kite funds have been volatile. Hedge funds with big performance swings risk pushing away institutional investors such as pension funds and insurance companies, says Neil Campbell, London-based head of alternative investments at brokerage Tullett Prebon Plc.

“It’s very hard for an institutional investor to be convinced that a fund that is up 100 percent in any year is able to manage the downside risk,” Campbell says. “Very few investors will have the stomach to deal with that volatility.”

‘Roller Coaster Ride’
Farmer says his firm accommodates investors eager to limit risk.

“We have had the roller coaster ride,” he says. “We learned from that and try to reflect our investors’ wishes. If they want less risk, we can build a managed account that is less risky.”
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Some of the volatility stems from the rapid growth in metals trading. Copper and other industrial metals bought and sold on the London Metal Exchange rose to $11.6 trillion of contracts in 2010 from $2.5 trillion in 1999.

The assets of hedge funds that trade metals rose to $86.8 billion in the third quarter of 2011 from $13.4 billion for the same period in 1999, according to BarclayHedge Ltd., a Fairfield, Iowa-based data provider.

Financing Mines
RK Capital earned a net 116.2 million pounds ($179.6 million) from 2006 to 2010, with the profits distributed to its four partners — Farmer, Lilley, Oskar Lewnowski III and a firm the three men control called RKX Services Ltd., according to government filings with the U.K.’s Companies House.

New York-based Lewnowski, 46, a former Credit Suisse AG (CSGN) investment banker, oversees a $400 million fund started by RK Capital in 2008 that provides financing for mining projects in return for the right to purchase metals pulled from the ground.

Called Red Kite Explorer, the fund has business deals with Calgary-based Rio Alto Mining Ltd., which is excavating gold and copper in Peru, and Nord Resources Corp., a firm that’s digging for copper in Arizona, according to press releases and filings with the U.S. Securities and Exchange Commission.

Farmer’s other life, as a Christian, didn’t start until he was 35. He says he had a “revelation” after his wife, Jenny, gave birth to the first of their three children.

‘I’m a Christian’
“It wasn’t so much me making a decision. It was more me seeing something that had been in front of me all my life, but I was blind to.”

At his November sermon at St. Helen’s, Farmer related a story about a job promotion offered to him in the 1980s when he worked at commodities trading firm Philipp Brothers. He accepted the position, with a caveat.

“I’m a Christian, and there are more important things to me than the company and making money,” Farmer says he told his boss at the time. “There is God. There is my family.”

Farmer says he once asked his church rector if he should give up finance and go to theological school. The rector told him the finance industry also benefits from the presence of Christians.

Lilley, for his part, sees little conflict between work and the faith he shares with Farmer.

Cross Trust
“God wants you to use your talents in the appropriate way,” he says. “If by the grace of God we can do something in business, then great, but try to make sure your faith also guides how you trade and the use of any proceeds.”

Farmer donated 150,000 pounds to St. Helen’s in 2010 and helps manage 2.48 million pounds held by a trust affiliated with the church, according to a government filing. The assets are invested in stock funds overseen by Zurich-based GAM Holding AG (GAM), the filing says.

Farmer and Lilley also fund a charity called the Cross Trust, which is focused on advancing the Christian faith and providing support for the poor, sick and elderly, according to filings with the U.K.’s Charity Commission.

The Cross Trust, of which Farmer and Lilley are directors, had assets of 1.5 million pounds in April 2010 after making 595,152 pounds of contributions in the preceding 12 months. The biggest donations were made to a Christian college and the Relationships Foundation, a U.K. group that encourages the government to promote family-friendly policies.

Since 2008, Farmer has given 205,296 pounds to the Conservative Christian Fellowship, which urges Christians to support Britain’s Conservative Party, according to the U.K. Electoral Commission. Farmer has donated an additional 3.28 million pounds directly to the Conservative Party since 2001.

Unwed Mothers
He says he was first inspired to donate a decade ago, in reaction to the then-ruling Labour Party government’s policy of giving public assistance to unwed mothers, which he saw as encouraging them to have more children out of wedlock.

Farmer and Lilley say they are sympathetic to the demonstrators who set up encampments in the vicinity of financial centers around the world to protest disparities in wealth between the barons of the financial system and ordinary citizens.

“There is a problem, and I am not sure that problem is going away,” Lilley says. “Those with resources can either use them to create jobs and employ people, or they can blow them on overpriced champagne and conspicuous consumption.”

Occupy London
The October Occupy London protests, centered in a tent encampment around St. Paul’s Cathedral in the City, forced the church to temporarily close.

The demonstrators heaped opprobrium on the bankers in the buildings around them. In his St. Helen’s sermon, Farmer said he wasn’t there to assign responsibility for the global financial crisis. He urged his audience to stay true to their Christian beliefs even in a year when almost 10 percent of London’s finance employees had lost their jobs.

“They can fire you, and that’s really bad,” Farmer said. “They probably won’t, because if you are a Christian, you are probably hardworking and honest. But if they do, you are still with the Lord.”

To contact the reporters on this story: Jesse Westbrook in London at; Chanyaporn Chanjaroen in Singapore at

Party Location Contact
Fund Registered Red Kite Prospect Fund I Limited (441) 298-5060
And Principal Office 20 Reid Street
Hamilton HM 11, Bermuda
Board of Directors:
Michael Farmer, Chairman
Oskar Lewnowski, III
R. Arliss Francis
Investment Manager Red Kite Management Limited (441) 278-3826
Gibbons Building
10 Queen Street, 1st Floor, Suite 103
Hamilton HM 11, Bermuda
Investment Advisor RK Capital Management LLP (1-207) 965-4650
4 Broadgate
London EC2M 2QS, United Kingdom
U.S. Advisor Red Kite Management (USA) L.P. (1-212) 596-3480
1211 Avenue of the Americas
Suite 2910
New York, NY 10036, USA
Administrator Olympia Capital International Inc. (441) 292-1018
20 Reid Street
Hamilton, HM 11, Bermuda
Corporate Secretary Winchester Fiduciary Services Limited (441) 292-3358
20 Reid Street
Hamilton HM 11, Bermuda
Auditors KPMG Bermuda (441) 295-5063
4 Par-la-Ville Road
Hamilton HM 08, Bermuda
Legal Advisors Bermuda Counsel
Wakefield Quin (441) 295-9294
52 Reid Street
Hamilton HM CX, Bermuda
U.S. and UK Counsel
Shearman & Sterling LLP (1-212) 848-8920
599 Lexington Avenue
New York, NY 10022, USA
SUMMARY…………………………………………………………………………………………………………………………. 1
THE FUND………………………………………………………………………………………………………………………… 10
INVESTMENT POLICY AND STRATEGY……………………………………………………………………………. 11
INVESTMENT MERITS………………………………………………………………………………………………………. 14
MANAGEMENT AND OPERATIONS…………………………………………………………………………………… 16
FEES AND EXPENSES ……………………………………………………………………………………………………….. 24
SHARES OF THE FUND……………………………………………………………………………………………………… 27
NET ASSET VALUATION…………………………………………………………………………………………………… 32
REDEMPTIONS AND TRANSFERS……………………………………………………………………………………… 35
CERTAIN RISK FACTORS………………………………………………………………………………………………….. 38
POTENTIAL CONFLICTS OF INTEREST……………………………………………………………………………… 44
ERISA ………………………………………………………………………………………………………………………………. 46
TAXATION……………………………………………………………………………………………………………………….. 47
ADDITIONAL INFORMATION……………………………………………………………………………………………. 53
NYDOCS01/1107051.7 1
The information set out below should be read in conjunction with, and is qualified in its entirety by, the
full text of this Private Placement Memorandum (the “Memorandum”), the Memorandum of Association
and Bye-laws of Red Kite Prospect Fund I Limited and the documents and agreements referred to herein,
copies of which are available from the Administrator (as defined herein) upon request. Capitalized terms
used and not defined in this summary are defined elsewhere in this Memorandum.
THE FUND Red Kite Prospect Fund I Limited (the “Fund” or the “Company”) is a
mutual fund company of unlimited duration that was incorporated with
limited liability under the Companies Act, 1981 of Bermuda, as amended.
As of the date of this Memorandum, the Fund has established two classes of
non-voting redeemable participating shares (“Shares”): a “Euro Class” for
investors making Euro investments and a “Dollar Class” for investors
making U.S. Dollar investments. At any time and in the sole discretion of
the Board (as defined herein), the Fund may divide its capital into additional
classes or series of Shares and thereafter issue such classes and series of
Shares, as circumstances dictate. Shares of a class other than a class
discussed herein may be subject to terms and conditions that differ from the
terms and conditions applicable to the Shares discussed herein. Such other
classes of Shares may be issued without the consent of or notice to the
Fund’s shareholders (the “Shareholders”), where the rights attached to any
existing class of Shares will not be deemed to have changed as a result of
the issue of such other classes of Shares ranking pari passu therewith. The
Fund is offering Shares as of the date of filing of this Memorandum with
the Registrar of Companies in Bermuda.
STRUCTURE The Fund invests all or substantially all of its assets in common shares (the
“Master Fund Shares”) of Red Kite Prospect I Master Fund Limited (the
“Master Fund”) via what is commonly termed a “master-feeder” investment
structure. The Fund will invest in the Master Fund alongside another feeder
fund, Red Kite Prospect Fund I, L.P., a Delaware limited partnership
(together with the Fund, the “Prospect

An Epic Battle

Man,, what a mess! From Reuters:

Reuters) – Hedge funds are taking on the powerful International Monetary Fund over its plan to slash Greece’s towering debt burden as time runs out on the talks that could sway the future of Europe’s single currency.

The funds have built up such a powerful positions in Greek bonds that they could derail Europe’s tactic of getting banks and other bondholders to share the burden of reducing the country’s debt on a voluntary basis.

Bondholders need to give up some 100 billion euros ($130 billion) of their investment in the planned bond swap, drawn up in October, but many hedge funds plan to stay out of it.

They either prefer letting the country go under, which would trigger the credit insurance they have bought, or hope to get paid out in full if enough others sign up. That puts them in direct conflict with the IMF, which wants to force Greece’s cost of financing down to an affordable level.

“The play is purely ‘they’ll be forced to pay me’. Greece will want to avoid a wider default. so if it managed to restructure 80 percent of the deal and pay the rest that’s still better,” said Gabriel Sterne at securities firm Exotix.

Without a deal, the IMF, the European Union and the European Central Bank — the so-called troika of official lenders — will not pay out a second bail-out package Greece needs to survive.

EU Economic and Monetary Affairs Commissioner Olli Rehn said on Tuesday that negotiators were “about to finalize shortly”. But time is running out.

Without the money, the country is likely to default around March 20, when a 14.5 billion euro bond falls due. A deal needs to come well before that, because the paperwork alone takes at least six weeks.

On Monday German Chancellor Angela Merkel and French President Nicolas Sarkozy, the euro zone’s two leading powers, insisted private-sector bondholders must share in reducing Greece’s debt burden.

But the hedge funds are resisting, unlike European banks holding Greek bonds, who have been pressured to agree by politicians.

There are other barriers too.

Banks represented by the Institute of International Finance (IIF) agreed last year to write off the notional value of their Greek bondholdings by 50 percent, a deal designed to reduce Greece’s debt ratio to 120 percent of its Gross Domestic Product by 2020.

But they have been unable to agree on the fine print of the refinancing – the coupon, maturity and the credit guarantees. These will determine the bonds’ Net Present Value (NPV), and thereby the actual hit the banks need to take.


There are 206 billion euros of Greek government bonds in private sector hands — banks, institutional investors, and hedge funds — and it is likely that hedge funds have been building up their positions in the past months.

They have been snapping up chunks of Greece’s next big maturing bond, the March 20, for around 40 cents on the euro. Yields on the bond began to rise sharply in September and it was priced at 41-45.5 cents in the euro on Tuesday.

The bet is that other creditors will sign up to a voluntary deal, and that Greece will pay out in full the hedge funds who do not to avoid a default and trigger pay-out of Credit Default Swaps, a form of credit protection.

“Time is on your side, since investors, until now, have received full repayment on Greek debt obligations,” said Kristian Flyvholm at asset manager Jyske Invest.

Sterne, whose firm Exotix specializes in illiquid bond investing and counts hedge funds among its clients, said the bet had already worked for some funds. Greece paid out smaller issues maturing in December and January.

But it is a dangerous strategy.

Europe is increasingly likely to force investors to take a cut on their Greek bondholdings if they do not voluntarily sign up to the deal, Reuters reported in November.

Also, Greece could change its laws, which for the largest part do not contain the so-called Collective Action Clauses (CAC) that force dissenting minorities into line when new conditions are imposed on outstanding bonds.

It is unclear how large hedge fund holdings of Greek debt are. About 20 to 25 percent of Greece’s creditors were unidentified, and half of these could be hedge funds, one source close to the creditors told Reuters.

Whatever the scale of the hedge fund threat, the proportion of creditors seen likely to sign up for their haircut has slipped. The hopes are now 60 percent can be convinced by the end of the month, the same source said, far less than the 90 percent take-up the IIF was targeting in June.

At that low a level, it is unclear whether the troika of international lenders will consider the uptake big enough to warrant a pay-out of the second bail-out package.

IIF Managing Director Charles Dallara is due in Athens later this week for troika negotiations, and technical staff from the IMF are expected in the Greek capital from January 16.


The IMF itself seemed to throw doubt on the debt swap in an internal memo cited by German magazine Der Spiegel on Saturday.

According to the report, the IMF believes Greece will still be sinking under the burden of its debts even after a deal is struck, and that further measures may need to be taken if the country is to avoid default. Markets fear this could lead to reopening the October agreement.

In a leaked paper in October, the IMF already acknowledged that its the assumptions may need to be reassessed. That would mean lower interest rate payments by Greece, and an even more bitter hit for the banks.

The NPV loss for creditors could be near 65-70 percent and the coupon around 4.5 percent, bankers have indicated. Reuters reported in November Greece wanted a 75 percent NPV cut, a far higher number than the low 60s the banks had in mind.