For anyone interested in how major hedge funds position themselves in emerging markets, the Sino-Forest story is starting to look like a cautionary tale. Sino-Forest is a major Chinese timber company traded on the Canadian exchange (TRE:CN), and the stock has cratered 80% over the past week, taking $350 million of John Paulson's money with it. What started with a negative research report from rabble-rousing Hong Kong-based ER firm Muddy Waters has expanded to a possible downgrade from Moody's. The stock was at $20 on May 31. It closed yesterday at $4. Here is Muddy Waters's Carson Block explaining why he thinks the stock goes to zero.
To be fair, there are a lot of people in the market who think Block is full of shit, most notably Richard Kelertas of Dundee Capital Management who has been covering the stock since 2004:
"We are going to provide you with some information on why Muddy Waters' research is a pile of crap," said Richard Kelertas, an analyst at Dundee Capital Markets, during a conference call with clients on Tuesday afternoon. "We believe there's nothing true in that report."
Muddy Waters also apparently pre-marketed the damning report to a number of hedge funds as much as five weeks before the report's release. This caused a surge in the short interest against the stock, obviously aiding Muddy Waters's previously disclosed short position. Before you get your panties in a bunch over that tidbit, there's nothing illegal about marketing a research report before it's released. It's how you get paid for doing the research in the first place. The only way it would be illegal would be if the report were based on inside information, and in this case it is not.
So I ask you guys: did Paulson get caught with his pants down? Or is this the most audacious Short-And-Distort in history?
That's a very interesting topic and I was surprised no one raised it before on the board.
It's clear there have been a lot of accounting issues with Chinese stocks in the past, especially on topics such as cash positions and inventories.
Remember Longtop Financial Technologies? Here's what Deloitte released shortly after the $322m cash position was proved a falsification: "Statements by bank staff that their bank had no record of certain transactions; confirmation replies previously received were said to be false; significant differences in deposit balances reported by bank staff compared with the amounts identified in previously received confirmations;...and significant bank borrowing reported by bank staff not identified in previously received confirmations (and not recorded in the books and records of the Group." This eventually led to Deloitte's resignation.
The funny part, which brings us back to the Sino topic here, is that, as the time, exactly as it is happening now with Dundee Capital Management, there were analysts who still supported LFT, even big brand names such as Morgan Stanley. So basically my point is those people simply have no clue. I'm not an expert in E.R. and the way Chinese Walls are supposed to work nowadays (no pawn intended) but I think the conflict of interest with these guys is huge. I'm not sure it could even happen in the US or in Europe, to have a firm publish this kind of research and being massively short on the stock.
Here, what's puzzling is the scale of the fraud as reported by Muddy Waters. I find it highly possible that some kind of fraud was undertaken and it took Paulson by surprise. I find it hard to believe it's just 100% short and distort, but only the future will tell. Looking forward to hearing the conclusions of this...
SEE NO FOREST
Disregarding this interesting detail makes Paulson look like a fool. Since Pellegrini left Paulson&Co the mastermind behind the trades is missing. Perfomance in the last 2 years came from gold and bank investments, things which Paulson had learned and practioned at Gruss Partners.
Where´s the risk management. Very tight clients, it wouldn´t suprise me Paulson&Co Assets will fall under $25 billion.
Paolo is smart, don't get me wrong, but don't give him too much credit. Didn't he open a fund of his own last year and lost money only to end up closing it? I don't think PSQR is still up and running.
Jokes aside, every fund manager I know in Quebec, Canada owns Sino-Forest and is a substantial part of their portfolio.. Some of my friends have worked for Dundee in Montreal, with Robert (the analyst who covers it), and they are as shocked as I of what has happened, I hope that the allegations prove false.
Sino-Forest has also taken action to refute the allegations. To summarize events to June 7: --> A committee of three independent board directors was established immediately after the allegations. James M.E. Hyde, CA, a Sino-Forest Director since 2004, was previously a partner with Ernst & Young LLP. James P. Bowland, CA, a director since February 2011, was previously Managing Director, Investment & Corporate Banking at BMO Capital Markets. William E. Ardell, the board’s Lead Director since June 2010, was formerly President and Chief Executive Officer and a director of Southam Inc. --> The independent committee appointed Osler, Hoskin & Harcourt LLP to support it in Canada and Mallesons and the Jun He Law Offices, to represent it in China. To assist in its investigations, the committee also appointed PricewaterhouseCoopers as its independent accounting firm. --> To deal with allegations over ownership of Sino-Forest’s timber plantations, the company created an online “data room,” on which it has posted (or will post) land purchase agreements, including signed copies of contracts and master agreements pertaining to its China holdings, which were the primary focus of Muddy Waters’ allegations. The company’s independent auditors had access to this information as part of the annual audit process for many years; however, this is the first public disclosure. --> The independent committee will ask its independent experts to separately examine and review such individual purchase agreements and related government documents. --> Sino-Forest has also uploaded bank documents in the data room to prove that its cash and short-term investments physically exist. It also promised to provide the sources and uses of its cash when quarterly financial statements are released on June 14. --> Sino-Forest has advanced the timing of its annual investment analysts’ tour of operations to July from October, and in a change of process, it will allow analysts the ability to choose which properties they wish to tour.
For anyone who's curious, here's a link to the Sino Forest data room you mention: http://dataroom.ansarada.com/sinoforest
Losing $500 million in a Commodity Crash (1 May 201, BlueGold Capital) is easier to explain than a "chinese fraud".
Paulson and other HF-managers made irreparable mistakes, damaging their reputation. In London John Paulson and Sino Forest creates a lot of rumour and speculation. The Sino Forest Jokes are amazing.
You can create Jokes with Sin, See, For*rest in peace...
John Paulson is done, not for the clients, but for all professionals. Myth is over, its time for him to think about early retirement. He´s worth $16 billion.
He reminds me on big boxers like Mike Tyson and Roy Jones Jr, both famous for continuing fighting and becoming worser. The lost their whole reputation gained in their "Prime" time. Same thing will happen to Paulson.
The Sino-Forest debacle isn't nearly as bad as Andurand getting socked for 20% in a week in a liquid market. While this does raise questions about how concentrated Paulson has to be to perform, I don't think the dude is done by a long shot.
I said done concerning reputation under professionals, i hear it every day. It´s not about the money, it´s about losing your reputation.
Clients of Paulson&Co will not be heavily affected, but John Paulson´s reputation is damaged for long time. That means not that he have no longer access to cash or big deals.
There´s another thing that would cost Paulson reputation, there´s a deal with DB, I think Long-Derivatives on Gold and Oil with low leverage. If the deal fails...
I mean suggesting that Gold and Oil will rise up is to 80% right, but the Commodity Crash shows that there´s a high volatility in the market.
Pierre Andurand is mainly doing Arbitrage Speculation on Oil Prices, he learned that at Vitol SA. The commodity crash was not that fast to liquidate his positions, I think he suggested lower volatilites and stayed in his positions. He´s the best commodity trader in London, at Vitol he generated profits in the $100 million range.
Okay Pierre Andurand lost 20% of his whole cash but you can be sure up to Q4-2011 he would have generated +$700 million, erasing the $500 million loss. Returning more than 50% a year is very easy for Pierre. Look at his track record.
I'd wait to see how the rest of the year shakes out before saying Paulson is done or that Andurand is going to finish the year up. I don't care what strategy you use, a 20% drawdown is massive.
Right
I heard of HF managers and Asset managers who were forced to close their funds after 20% drawdowns, or should i say its normal ?
If it's a smaller fund then yes, this is quite normal, institutional investors start getting worried that the managers will panic and swing for the fence.
Also you have to think about compounding returns - if you are down 20% you have to be up 25% in the next period to get to your high-water-mark, that's a fairly big year and you're probably not going to get paid for that year. A lot of managers just prefer to shut the fund and start over again. The nature of the hedge fund business is that to a greater or lesser extent the vast majority blow-up eventually.
Nevermind. He's closing his doors to outside investors a la Julian Robertson style (before making his comeback recently)
"Robertson's return on his $200-million personal trading account was 150 percent"
Maybe Pellegrini is working on a complexe trading strategy...
Pellegrini´s strategy generated the high earnings for Paulson&Co in 2007.
Paulson only said: Do it And when Pellegrini failed, he would have said: You´re fired
Returns PSQR :
2008: 40% 2009:60% 2010: -10%
I guess Pellegrini would never had bought Sino Forest.
Looks like the analyst who advised Paulson on buying the stock is out of the industry for good...
Additionally a Minskyan definition of a Ponzi financed firm, good work Carson Block.
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