Last fall was a rough time in the hedge fund world, but no place was harder hit by bad news than bucolic Greenwich, Conn., home of some of the world's biggest hedge funds. First, Long-Term Capital Management went under and required a massive Wall Street bailout. Next, word came that Bank of America was writing off $372 million of a loan to D.E. Shaw Securities.

The already spooked equity markets were ripe for another scare, and on October 20, they seemed to get it. That day, Reuters reported that Paloma Partners Management Co. had lost 20 percent of its value in August and September. According to the report, “rumors that Paloma is in trouble” had “been circulating recently,” leading to a late 150-point sell-off in the market that day. The report went on to state: “Some traders said that, in addition to a late slide in technology stocks, the hedge fund talk might have worried Wall Street.”

The problem, gloats Paloma president Leon Metzger months later: “The report was completely inaccurate.” Metzger acknowledges that the fund lost upward of 20 percent in the turbulent late summer months, but asserts that those losses didn't come close to jeopardizing the fund's health. “Even if we lost 20 percent, the fund was not in trouble. We weren't leveraged like other funds were, and we were diversified—we had positions not only in fixed income but in convertible arbitrage and statistical arbitrage, among other things. Those strategies were doing quite well.”

Moreover, he says, the notion that such a rumor could have sparked a 150-point market move is ludicrous. Metzger was so incensed, in fact, that he whipped off a scathing press release refuting the report's claims. Reclusive chairman and CEO Donald Sussman even appeared on CNNfn to reassure investors that the reports of Paloma's death were greatly exaggerated.

Nevertheless, the autumn swoon caused Paloma to rethink its relative-value strategies. “As a result of the events,” says Metzger, “we reoriented our portfolio toward high-cash-flow-yielding convertible arbitrage trades. A lot of investors have withdrawn from those markets, so opportunities exist. We were quick on our feet.” The result: the fund hasn't had a losing month since last September.

The Hedge Fund Ripple Effect?

While Leon Metzger was fending off erroneous media attacks, Andrew Fisher was fending off angry lenders. Bank lending to Convergence Asset Management, his Greenwich, Conn.-based relative-value-trading hedge fund, dried up immediately after the LTCM bailout. “On [September 28] our first [lending] line was pulled,” he said at a hedge fund conference in Scottsdale, Ariz., in January. “They said ‘We'd really like to reduce our exposure to hedge funds.'” After a series of frantic phone calls, Fisher realized that no one was willing to offer him money, even though his fund's losses were minuscule compared with LTCM's. “We, over that week, basically sold out 8 percent of our portfolio that had taken us six months to build up. But we had to do that because of the writing that was on the wall. We understood it basically that the lending community had decided on an almost across-the-board basis to reduce its lending practices.” Ironically enough, Fisher says bank lending practices returned to normal a month later. But it wasn't soon enough to help Convergence. In early February, Convergence's net asset value had shrunk to $150 million, down from $440 million in January, and a major investor demanded that the main fund's feeder funds be liquidated. Meanwhile, an investors meeting is scheduled for this month in the Cayman Islands, at which time the liquidation proposal will be voted on. In leveraged investments, it appears, timing is everything.

Briefly

• NMS has appointed Bill Caccamise managing director in equity derivatives. He had been senior vice president at Santander Financial Products.
• T. Eric Kilcollin has resigned as president and CEO of the Chicago Mercantile Exchange.
• Paribas has named Andrew Auslander head of credit repo trading. He had been head of emerging-markets repo trading at Chase Manhattan.
• Bill Cuthbert, head of global financial markets at Rabobank International, has been named a member of the firm's managing board.
• Lehman Brothers has appointed John St. John cohead of global equity capital markets. He had been head of equities at Salomon Smith Barney.
• David Stoner has been named CEO of Caminus. He had been president and CEO at SS&C Technologies.
• EasyScreen has appointed Peggy Ogorek managing director. She had been a director at the Chicago Board of Trade.
• Tom Hoppe, former managing director of Chase Manhattan's global trading division, has been named head of the bank's foreign exchange and interest rate sales and trading for Asia. Christopher Harvey has joined Chase Manhattan as managing director in the company's global trading division. He had managed emerging markets derivatives sales and trading at JP Morgan.
• Infinity, a SunGard company, has announced a number of promotions: Ron Lang, former senior vice president of global marketing and managed product development, will be president; Juerg Hunziker, former managing director for Central Europe, has been named senior vice president and head of global distribution; Brian Robins, former head of product marketing, has been named senior vice president of global marketing; Ian Green, former senior vice president of the Panorama development unit, will manage the firm's global financial engineering group; and David Ehret, former senior vice president of the Devon System development unit, will be in charge of all North American development operations.
• Jamie Stewart has been appointed first vice president at the Federal Reserve Bank of New York. He had been vice chairman at Merrill Lynch.
• TransEnergy has named William Flores senior vice president and CFO. He had been senior vice president and CFO at Western Atlas.
• Hiromune Takamura has been appointed vice president of institutional trading at Sakura Dellsher. He had been in charge of Nikko Securities' sales and trading desk on the CBOT trading floor.
• NeoVision Hypersystems has named David Nelson CFO. He was formerly chief operating officer at Merrin Financial.
• Douglas Cramer has joined CDC Investment Management Corp. as vice president. He had been in charge of North American marketing at Spectrum Asset Management.
• Intermark Solutions has named Ravi Jain managing director. He had been deputy managing director and global manager of foreign exchange and precious metals at Republic National Bank of New York.
• Peter Needham, former treasurer at Morgan Stanley Trust, has been named U.S. regional product manager for equity and bond finance at Barclays Capital.
• Wilco International has appointed Robin Kneale, a former Synosys product development manager, senior technical architect.
• President Bill Clinton has appointed John Hawke Comptroller of the Currency. Hawke had been Treasury undersecretary for domestic finance.
• Max Whatmore has been promoted from head of European swaps trading to head of European fixed-income derivatives at Merrill Lynch.
• FNX has named Scot Kelly senior sales representative for North America. He had been a North American sales representative for securities lending software at SunGard/DML.
• Scott Padovano, formerly senior credit derivatives trader at Merrill Lynch, has been promoted to global head of credit derivatives trading.
• JP Morgan has announced that Nicolas Rohatyn, former head of emerging markets, will head a new credit markets group at the company.

Errata

“Spread Risk” by Steve Pelletier (January 1999) was missing a graph about 65-day moving correlations between five-year swap spreads and five-year yields. Some graph references were also out of order. A correct version of the article can be found at www.theoretics.com.

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