Barriers to Entry for Hedge Funds

While the top five hedge funds were able to raise $13.7 billion in new capital in the first half of 2008, the number of new funds introduced fell by a whopping 50% over the same period. Personally, I think that this may be a good thing.

Yes, of course more competition is usually better, but the current state of the capital markets may suggest that experience may be needed more than anything else at this particular moment. While I certainly agree that the big boys on Wall Street haven't exactly proven that they're able to leverage their years of experience over the past year, newcomers to this ultra-risky segment may spell even greater doom for investors unprepared for what this economy may still hold for us all.

Goldman Sachs appears to be the market favourite, having raised an incredible 40% of the total among raised. Given that Goldman is among the few firms that has been able to keep its brand out of the headlines lately, it might be interesting to see a correlation between a firms ability to raise capital and its lack of press these days!

Lehman in trouble - to post first quarterly loss?

Wall Street is now brimming with rumours about Lehman Brothers' possible issue of new common stock to help it meet its obligations following what many believe will be its first quarterly loss since going public. 

It won't be a small loss either; those in the know are suggesting that it may top as much as $4 billion; with a market capitalization of $18.7 billion, that's a staggering sum of money. Already down about 50% this year, the stock fell another 8% in trading yesterday as these rumours swirled the Street.

From the perspective of an investor on the side lines, I have to say that this is great news - my apologies to the current shareholders. I'm waiting for the opportunity to pounce on the financials, yes - along with millions of others, and news like this along with the downgrades issued by credit ratings agencies this week, things are looking rosy. The question is, of course, when is the right time to buy?

Energy Fund's Public Offering Less Than Well Received

Eric Sprott's Sprott Inc. went public late last week at a price of $10 per share on an issue of about 16% of the total equity in the firm and proceeded to dip by as much as $0.50 and ended the week (before the Canadian long weekend) down $0.23. Having raised $200 million, this gives Mr. Sprott's firm a valuation of approximately $1.5 billion, which is great, but also leaves Mr. Sprott scratching his head as to the cause of the dip.

Mr. Sprott said, in an interview with the Globe and Mail newspaper, that he believed the less-than-stellar result in the companies first public showing to be the result of short-sellers betting against his company. What's surprising about this, however, is that even a freshman finance student knows that that's quite unlikely to be the case with any IPO. Short-selling requires a stock to be borrowed and then sold in order to profit from any decline in the stock's price. However, an IPO means that the stock is just entering the market and is unlikely to be available in brokerage accounts for any borrowing to take place. Consequently, many believe that the true cause of the fall in Sprott Inc.'s stock price is due to its fundamentals.

As a hedge fund betting on metals and energy, Sprott Inc. is certainly in the industries making the news these days. That said, they're making the news because their prices are constantly breaking record highs and many are questioning for how much longer this trend can continue. Ask Mr. Sprott and you're sure to get the answer that you'd expect, but apparently the market sees things differently and are valuing the fund at less than what Mr. Sprott had anticipated. Beyond the impact to Sprott Inc., this result has interesting implications for the economy as a whole; what is happening with the energy industry and how much longer can this go on. Is it, in fact, time to go short or do you believe some reports that gasoline may soon see double-digit prices per gallon at the pumps?