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Sent: Friday, January 24, 2003 12:14 AM
Subject: 01/23 11:00P (WJ) WSJ(1/24) Heard On The Street: Hedge Fund In
Japan Plummets
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> 01/23 11:00P (WJ) WSJ(1/24) Heard On The Street: Hedge Fund In Japan
> Plummets
> Story 12317 (DCM, DJDAY, J.NTT, J.NTX, J.SEA, NTT, JP3165650007...)
> By Henny Sender in New York and Jason Singer in Tokyo
> EVEN BY HEDGE-FUND standards, this was a spectacularly rapid demise.
> A $300 million hedge fund in Japan is being wound down after losing
> virtually all its capital in just seven trading days in early January --
the
> latest illustration of the perils of such secretive and increasingly
popular
> investment partnerships.
> Eifuku Master Fund, run by a former Lehman Brothers Tokyo-based trader,
> took
> huge bets with borrowed money on a limited number of trades that went
wrong.
> Investors in the fund, now facing a loss of their money, may include many
> wealthy individuals in the U.S., according to hedge-fund managers in both
> Tokyo and New York.
> "Substantial trading losses have consumed nearly all the fund's
capital,"
> John Koonmen, the manager, wrote in a letter to investors, dated Jan. 15.
> The
> letter details a nerve-racking, rapid downward spiral for the fund, whose
> Japanese name can be translated as "good fortune" or "prosperity."
> The swift reversal in the fund, which was up 76% in 2002, shows just how
> volatile hedge funds can be. Hedge funds -- lightly regulated and
generally
> available only to institutions and the wealthy -- sometimes need to take
> uncommon risks as they try to make money in sluggish markets. Currently,
> there
> is heightened scrutiny of the activities of these funds, which manage $600
> billion.
> What is unusual about Eifuku is the speed of the fund's demise, which
was
> accentuated by the heavy use of leverage, or borrowed funds.
> Securities-brokerage-firm executives in Tokyo say Mr. Koonmen was the
> biggest
> producer of trading commissions in Japan, as he used borrowed money to
wager
> far beyond the $300 million in his fund. While the fund's actual capital
was
> down to almost nothing as of the Jan. 15 letter, Eifuku still had long
> positions valued at $80 million and short positions at $117 million,
> according
> to the letter. At the beginning of this week, rumors of the fund's demise
> preyed on market sentiment in Japan.
> People familiar with the situation suggest that Mr. Koonmen borrowed
funds
> from three securities brokerages that multiplied the equity capital by a
> factor of at least three. None of the brokers, including units of Goldman
> Sachs Group Inc., Credit Suisse Group and Deutsche Bank AG, expect any
> losses,
> however, as all the money lent was backed by collateral from Eifuku, and
> when
> the positions started going wrong they demanded and got their money back,
> according to people familiar with the matter. Mr. Koonmen declines to
> comment.
> Even in the mercurial world of hedge funds, Eifuku's turnaround was
> startlingly swift. Established just three years ago, it became a quick
> success. It rose 18% in 2001, and then rocketed 76% in 2002, according to
> people familiar with the fund. Mr. Koonmen became a well-known fixture at
> the
> watering-holes where Tokyo's financial crowd hangs out. He made millions
of
> dollars from rapid-fire trading of stocks, bought a metallic-gray Aston
> Martin
> Vantage sports car, lived near the top of a luxury tower in a posh Tokyo
> district, and owned a plush home in Hawaii.
> Despite his busy social calendar, Mr. Koonmen was an intensely active --
> and
> secretive -- trader. He spread his transactions out to virtually all the
big
> brokerage firms in Tokyo, so no one firm would know the extent of his
bets.
> Mr. Koonmen hired a team of computer programmers from Romania to develop
an
> expensive proprietary trading system, a rare and costly move for a hedge
> fund.
> In early January, Eifuku made massive wagers on three trades, according
to
> the letter to investors. The largest of those trades, involving a total of
> $1
> billion, included a bearish position in NTT DoCoMo Inc., Japan's biggest
> cellular-telephone provider, and a long position in its parent company,
> Nippon
> Telegraph & Telephone Corp, according to people familiar with the trades.
> (Short sales involve the use of borrowed shares on a bet that they can be
> bought back later at lower prices.)
> In addition, Mr. Koonmen bet $150 million buying a "significant position
> in
> a Japanese tech stock [where] we detected a large degree of panic selling
> and
> aggressive and large short sales of the stock." The letter doesn't name
the
> stock, but people familiar with the trades say it is Sega Corp., a maker
of
> videogames.
> Mr. Koonmen's third trade involved both long positions and short
positions
> in Japanese bank shares.
> According to the letter, "things got off to a bad start immediately in
> 2003." In the first two trading days of the year, Jan. 6 and Jan. 7, the
> fund
> lost about 15% of its capital, the letter states. "This was very
concerning
> to
> us as it immediately put us in a precarious" situation with its lenders,
> "and
> forced us to consider unwinding positions."
> The incident underscores just how thinly traded even the largest shares
in
> the Tokyo stock market can be, making large, leveraged bets particularly
> treacherous. While the telecom trade Mr. Koonmen made would have been
> profitable for much of 2002, if a trader put one dollar on NTT itself at
the
> end of November and another dollar on a short position in DoCoMo, by
> mid-January, the loss would have been 15% as the market became more
> optimistic
> about DoCoMo's prospects, amid talk of share buybacks, market participants
> say. That in itself shouldn't have been a lethal blow, but the size of the
> bet
> and the leverage compounded the loss.
> The thinly traded Sega shares, meanwhile, were taking a pounding for
> reasons
> that aren't entirely certain.
> Trading results on Wednesday Jan. 8, "came as a real shock," the letter
> continues. While the fund tried to raise cash from some of its positions,
it
> "sustained a loss of an additional 15% of its capital," with "large
adverse
> moves in the last hour of trading." This loss created a margin call at the
> fund's main broker, identified by people close to the matter as Goldman,
> that
> "it could not meet."
> The fund talked with the main broker "throughout the day and they agreed
> to
> a day's grace period," the letter says.
> "Unfortunately," the letter adds, Jan. 9 "was as bad as Wednesday and
the
> fund lost another 16% of its capital." After the close of trading, the
> broker
> exercised its right "to supervise further trading/liquidation in the
> positions."
> The liquidation activity on Jan. 10 "had the effect of further losses in
> the
> fund's positions." The fund ended the day down a further 12% -- a loss for
> the
> week of about 58% of its capital, the letter says.
> Over the long weekend -- Monday Jan. 13, was a trading holiday in
Japan --
> the fund had "numerous discussions" with the prime broker, and the
decision
> was made to liquidate the fund's two largest positions as soon as
possible.
> The broker arranged several large block trades with its customers around
the
> world on Jan. 14. The trades "came at a dear cost and left the fund with a
> loss for the day of approximately 40%," the letter says.
> Still, dealers point out that despite increasing edginess in global
stock
> markets, Eifuku's demise doesn't give rise to any stress in the financial
> system itself. That alone marks an important contrast to the situation in
> the
> fall of 1998 when losses at hedge fund Long-Term Capital Management posed
a
> threat of significant losses for others, prompting the Federal Reserve
Bank
> of
> New York to organize a bailout of the highly leveraged fund.
> ---
> SELL, SELL, SELL: The volume of sell ratings on stocks has reached its
> highest point since the late 1980s. Wall Street currently rates 10% of
> stocks
> a sell, 46% a buy, and 44% a hold, according to Zacks Investment Research
in
> Chicago. That is the highest level since the number of sell
recommendations
> rose after the 1987 stock-market crash.
> The current market downturn, combined with new regulations that require
> investment banks to detail the percentage of buys, sells and holds their
> analysts assign to stocks, has fueled the more-negative outlook. The
> regulations went into place in September, and the percentage of sell
ratings
> rose within a week to 7.3% from 4.7%, according to
> Thomson First Call, which tracks analyst ratings. Throughout the late
> 1990s,
> less than 1% of stocks were rated sell.
> The level of sells varies widely from firm to firm. Prudential
Securities
> Inc., which has highlighted its lack of an investment-banking presence,
> rates
> 3% of its stocks sell, 58% hold and 39% buy, according to the most-recent
> data
> available. Big investment-banking firm Salomon Smith Barney, a key target
in
> New York State Attorney General Eliot Spitzer's probe of research
conflicts
> of
> interest, rates 26% of the stocks it covers sell, 42% hold and 33% buy.
> ---
> Lynn Cowan and Cheryl WinokurMunk contributed to this article.
> (END) Dow Jones Newswires
> 01-23-03 2300ET
> Additional Codes ( JP3419000009, JP3735400008, I/CTS, I/ENT, I/FIS, I/LDS,
> I/REC, I/TEL, I/TLS, I/TMF, I/X225, I/XATI, I/XBNY, I/XISL, I/XSTT,
P/5043,
> N/DJN, N/DJPF, N/ADR, N/ANL, N/CNW, N/DDY, N/DJSS, N/DJWB, N/DJWI, N/DJYY,
> N/EDC, N/FND, N/FRT, N/HGF, N/HRD, N/JNL, N/NJR, N/STK, N/WEI, N/WLS,
M/CYC,
> M/FIN, M/NND, M/TPX, M/UTI, P/PIC, R/ASI, R/FE, R/JA, R/NME, R/PRM, R/US,
> J/HST, J/MIM, J/TFR)
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