Trader’s Narrative

Everyone is riveted by the tumultuous events in Iran. The best sources of up to the minute developments is the Huffington Post’s Nico Pitney and the Atlantic’s Andrew Sullivan. The MSM has for the most part dropped the ball completely - with the exception of the BBC.

More closer to home the big news was the Obama administration’s reforms of the financial sector. For more economic and market news and to see what you may have missed in last week, check out the list below. It is just a few examples from news.tradersnarrative.com:

• Five Things to Know About the Financial Regulatory Overhaul Plan
• Not Everyone Is Cheering Fed’s New Role
• China’s Fake Booming Economy
• Soros urges governments to outlaw ‘’toxic’ credit default swaps
• Get a FREE Subscription to Financial Magazines
• Three Suggestions for Reforming Rating Agencies
• Breakdown and Snapback
• Did the Madoff Sons Know?
• Why the Fed Isn’t Igniting Inflation
• Financial overhaul is a curious mix of audacity and timidity
• Free trading videos
• Goldman to make record bonus payout
• The Good, the Bad, the Ugly: Financial Sector Regulation

For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

FDIC Chair on the Regulation Revamp

Lazy Sunday, perfect time to catch up on what you missed and to prepare for next week. Here are just a few choice readings from the past week’s list at news.tradersnarrative.com.

• Forward Discounting Mechanism? Why the S&P May Lag GDP
• The Bank Crisis’ Catch-22
• Get a 120 page report FREE from Global Market Perspective (limited time offer)
• How Volume Distinguishes Bear Market Rallies from Bull Markets
• Madoff’s right hand man may sing like a canary
• Who sez there’s “no free lunch”? Get a Free Subscription to Futures Magazine
• The Goldman Sachs Conspiracy (you’re not paranoid if they’re out to get you)
• How Leveraged ETFs Excacerbate Volatility
• Defined Benefits Pension Plans Haunt Wall St.
• Have you put in your 10,000 hours yet?

Follow the link below to get much, much more:

And remember to check regularly since there are new links added everyday.

Week Ahead: Short Term Skittish

Coming at the heels of such massive financial frauds as Madoff and Stanford, (as well as previous hedge fund collapses like Bayou) “Hedge Fund Operational Due Diligence” is well timed.

The recent batch of fraud dwarfs the largest trading losses in history, combined, and makes it crystal clear why all investors should take due diligence extremely seriously. The author, Jason Scharfman, previously at Graystone Research (a division of Morgan Stanley), is now at Corgentum, a full service hedge fund operational risk consultancy practice.

What is operational due diligence? Usually when we think of the risks involved with a hedge fund, the first we think of are related to the market. That is, how much an investment in them can depreciate as a result of trading losses. And although this is very important, there are two more areas of risk: credit and operational.

Credit is the risk associated with a counter-party being unable to meet their obligations (cough AIG cough). Operational due diligence encompasses a broad array of risks, including more ‘human’ frailties, such as internal controls, internal/external fraud, as well as business disruptions due to external or internal factors.

This is the risk that almost every single Madoff investor ignored - that says a lot because these were, by definition “sophisticated” but they ignored all the operational red flags and handed over millions of dollars.

Scharfman’s book explains not only how to diagnose and analyze the operational risks that may be present in a hedge fund, but how to continue to monitor them. This book is invaluable if you are running or thinking of starting a hedge fund, want to invest in one (or already have) or if you work in the field of asset management.

Because it is a thorough and exhaustive exposition, going through just about everything like a manual, it makes for an excellent reference resource. While the topic can be rather dry, Scharfman brings it to life by using nuanced hypothetical scenarios which read like stories (Chapter 5).

For example, would you or should you allocate money to a hedge fund if the head trader or manager has a criminal record? How would you treat this if the manager was pro-active in mentioning it? and not? what if it was not related to financial fraud?

If you’re impatient, you can skip to Chapter Six, which has the “Ten Tips for Performing an Operational Due Diligence”:

1. Avoid meeting with the wrong people or the wrong group
2. Get out of the conference room
3. Little white lies can turn into big problems
4. Be wary of phantomware
5. Focus on documentation and negotiation
6. Read the fine print (financial statement notes, etc.)
7. Reference checking: importance of in-sample and out-of-sample references
8. Credit analysis: are funds financially viable?
9. Long-term planning: Key staff retention, succession planning, and more
10. Growth Planning: is the manager proactive or reactive?

There has always been a struggle between hedge fund managers and investors. One side wants to disclose as little as possible, to protect proprietary strategies. And the other wants as much disclosure as possible to protect their assets. There has been an uneasy relationship between the two parties because of this. The trend is now shifting to more transparency not only because of the large fraud cases that have come to light but also because of a diminishing source of funds. Investors have a stronger position to make more demands for disclosure. And with Scharfman’s book, even the smaller investors have a blueprint to follow.

There’s a lot more in the book, of course, but that should give you enough to whet your appetite. You can purchase it at Amazon, or your favorite book seller (it is published by Wiley, a specialist in finance books).

Or be one of my lucky readers to win a free copy of Hedge Fund Operational Due Diligence. To enter for the chance to receive a copy of Jason Scharman’s book for free, just drop me a comment below. Make sure you write your email correctly (so I can contact you when you win the random draw!).

To see what you missed, here are just a few of the articles from this week’s reading list at news.tradersnarrative.com:

• Legacy of a Crisis - A Generation Shy of Risk
• Inside the Meltdown - PBS Frontline
• Congress’ new blockhead idea: a ‘Trader Tax’
• Bear Market in Chinese mistresses
• Chinese liquidity - and stocks - go BOOM
• Stanford a mini-Madoff fraud shut down after 15 years of dawdling
• Eastern Europe may take down Western European banks
• Dow Theory: Be Leery
• CDS jump for US banks

And remember to check regularly since there are interesting links added regularly throughout the week.

If that a head and shoulder pattern, or a symmetrical triangle? Will Keynes ghost save us? Why did John get all the brains (and hair) in the Paulson family?

To find out, take a look at this weekend’s reading list from news.tradersnarrative.com:

• Still no clues of a bottom for stocks
• From GMO: Grantham’s latest letter to clients
• Peter Schiff on the defense about his performance
• As January goes, so goes the year?
• The new financial bubble
• John Paulson lives up to the name “hedge fund”
• The power of high dividend stocks
• JP Morgan quietly exited Madoff funds
• Historical chart of the IPO maket

And remember to check regularly since there are interesting links added regularly throughout the week.