If someone wants to take on even more risk there are the frontier emerging markets of African countries that provide it.

But one place you’d think an investor of any type, especially a hedge fund, would avoid at all costs would be Iraq, Yet that is where portfolio manager Bjorn Englund is placing bets for his hedge fund, Babylon Fund, now. He claims that the country and the region are now “calm.”

Englund said that his fund’s 0.6% drawdown in June and the fact that it is up 1.7% year to date show how attractive investment is in Iraq. He claimed, according to published reports, that Iraq could be described as stable and secure compared to “virtually all deteriorating financial markets around the globe and lately even security-wise; for example relative to the worsening Afghanistan-Pakistan theatre.”

Englund said that except for the volatility of the fund’s investments in the international oil company stocks, which contributed to its drawdown, most of the other sectors the fund invests in were stable.

He is buying stocks of Iraqi companies for his portfolio. There’s one company in particular he likes as an investment—one of the largest Iraqi “stand alone” commercial banks.

For all you investors out there who can’t wait to get a piece of the Iraqi action, the fund, which has $22.6m in assets, has a minimum investment requirement of $100,000, charges a management fee of 2% and a performance fee of 20%. As for the risk that Englund might get killed or captured when he is visiting all those companies in that safe country—which of course is all because George W. Bush’s surge worked—you can measure it by counting the number of IEDs (improvised explosive devices) that explode in a day—supposedly much less since the surge.

Every year (in the 1980s) he would hold an event that came to be infamously known as “The Predator’s Ball” where investors seeking to take over companies using huge amounts of junk bonds danced with their prey, companies considered ripe for a takeover.

It led to a gargantuan amount of junk bond issuance, in which more and more companies who couldn’t afford to pay the high interest rates on junk bonds issued them anyway, using Milken and Drexel to handle their deals. Eventually, as it almost always does when a financial instrument becomes too hot, things blew up and it led to huge bankruptcies and lots of worthless bonds. (Sounds kind of like the subprime mess today)

It turned out that Milken and Drexel were not playing by the legal rules. Drexel eventually went out of business and Milken, besides serving a prison sentence, was barred from the securities industry for life.

So imagine my surprise when a story in the New York Post reported that a company no one’s ever heard of, Nobel Learning Communities of West Chester, Pennsylvania, was asked by one of its big hedge fund shareholders, to institute a poison pill (another back to the 1980s takeover prevention method), to ward off an unsolicited takeover.

So who’s behind the possible unfriendly takeover—Michael Milken, through a firm called Blesbok of which Milken and his brother are managing members. Through Blesbok, the former junk bond king, has increased his stake in Nobel to more than 30% of the company’s stock.

Wynnefield Capital, a $400 million New York investment firm which owns a 12.5% stake in the company, asked Nobel to enact the poison pill. “A creeping takeover is what I’m afraid of,” Nelson Obus, a founding partner at Wynnefield, told the Post.

Michael Milken is definitely back.

Lots of smart women do dumb things when they’re in love, and this seems to be especially true when the boyfriend is a loser.

Debra Ryan, the girlfriend of Bayou Group founder Samuel Israel, helped the hedge fund fraudster disappear on June 9, the day he was due to report to federal prison hospital in Massachusetts, to serve a 20-year sentence for the crimes he committed with other people’s money.

That day, his SUV was found abandoned on the Bear Mountain Bridge, with the words “suicide is painless” scrawled on the hood.

Ryan was arrested last week and charged with aiding and abetting Israel’s flight from justice. She could face as much as 10 years in prison if convicted of the crime. Currently, she is free on $75,000 bail.

Israel was sentenced earlier this year to 20 years in prison for his role in defrauding investors in Bayou Group LLC of more than $400m.

Ryan, 45, admitted she helped Israel prepare a recreational vehicle on the days before he fled, and even helped him stow the RV at a rest area 20 miles from the Bear Mountain Bridge where his SUV was found, and then drove him back to their Armonk, NY home.

So they were close enough to share a home. Maybe they can get the feds to let theml share a prison cell.

There’s a nationwide alert out for Israel, who’s believed to be driving a $50,000 2007 white Coachman Freelander motor home. Israel is believed to still be in the area and living in the RV, which may have a blue 2005 Yamaha motor scooter strapped to the back end, according to a story in the New York Post.

Ryan, according to the complain filed against her, admitted she “helped Israel pack the RV with (his) belongings,” And then, on the morning he vanished, Israel “woke (Ryan) up and told her that he needed her help” and then had her follow him in her own care while he drove the motor home to a highway rest area near the junction of Interstate 684 and I-84.

Why did she do it? As I said, lots of smart women do dumb things for love, especially, for some strange reason, when the guy is a loser.

The baseball season is well underway and as any rabid fan will tell you; a baseball game can be very much like the game of life. Several financial executives recently used baseball as a metaphor while discussing what stage we’re at in the credit and distressed debt crisis.

Mary Ann Bartels, chief market analyst at Merrill Lynch, said she thinks we’re in the seventh inning of the credit crunch. “We’ve seen the vast deleveraging of financial assets by financial services companies, and we’re now in the final stages,” she said. “We’re seeing the final wave of capital raising , with common stock sold or direct investments from sovereign wealth funds.”

“Now it’s time to think about how credit issues will ripple through the economy,” she added. However, she said that there is “so much cash on the sidelines waiting to buy cheap assets,” that there should be money for cash-strapped companies that want to avoid bankruptcy.

A very different point of view came from Pamela Lawrence, founder and co-portfolio manager of Restoration Capital. She said “I think we’re only in the second or third inning of the credit crisis.” She added that in the distressed debt market she thinks there is a lot more bad news to come.

“Where is the future in distressed debt—I don’t think all the bad news is out,” she said. She pointed out that the banks are not lending money and that there are still a lot of companies “with little room for error on their balance sheets.” She thinks more companies are going to start defaulting on their debt. “The default rate is starting to creep up,” she said.

The industries that she thinks could have severe problems include autos, retailing and homebuilders. “There are a lot of retailers with a lot of debt and very little room for error on their balance sheets,” she said.

Derek van Eck, principal of Van Eck Associates, which manages commodity funds,
said in terms of the commodity markets “we’re going into extra innings in the ball game.”
He believes that the forces driving commodity prices higher “are very powerful.”

He said that with global growth and with countries such as China willing to pay high prices for commodities, prices should continue rising. He added that while speculators have played a part in driving up prices “it’s impossible to say how much impact they’ve had.”

He’s also bullish on the prospects for coal, which is “the cheapest fuel around and very cheap in relation to natural gas.” In countries such as China and India where there is less attention paid to environment concerns, coal could become a major fuel for their power plants.

That’s how John Mansch, chief of the Union City, Georgia, jail, described Kirk Wright, the convicted hedge fund fraudster, who committed suicide by hanging himself in his jail cell last Saturday morning.

Mansch also told the Atlanta Journal Constitution that Wright, 37 years old, didn’t give any indication that he was under duress. Gee, you mean after being convicted of 47 counts of fraud and facing the possibility of more than 700 years in prison he wasn’t under duress?

Wright knew his game was up. Although he had been friends with some National Football League players who invested their money in his firm, International Management Associates, all they wanted from him now was their money back.

There was scant chance that Wright would ever have been able to pay all his investors back, and a good chance he would spend the rest of his life behind bars. Although there is an old maxim that “suicide is a permanent solution to a temporary problem,” it’s doubtful that Wright’s problems were temporary, at least as he saw them.

A lawyer representing some of Wright’s victims, a group of six former NFL players, said Wright’s death will not affect their lawsuit against the NFL and the players union.
Marlon Kimpson said the lawsuit, which accuses the player’s union of endorsing IMA in spite of liens against Wright, will move forward, and the union hadn’t planned to call Wright as a witness.

According to prosecutors, IMA collected more than $155m, of which Wright returned $70m to clients in a Ponzi scheme, lost $31m in his investments, and used the rest of it to live a luxurious lifestyle.

In Deutsche Bank’s annual Alternative Investment survey, which polled more than 1,000 investors with a whopping $1trn in total hedge fund industry assets, close to 50% of fund managers surveyed were bullish on the Middle East markets, and no firm surveyed said that it was planning to reduce its exposure to the region.

Indeed, 32% are planning to increase their exposure to the reason, while 12% surveyed indicated they plan to maintain current exposure levels.

“The results are a clear indication that global hedge fund investors are extremely bullish on the region,” said Penry Jackson, managing director-global markets at Deutsche Bank. “The Middle East is viewed differently from other emerging markets by investors, largely because it is nascent, holds tremendous potential, with very attractive company valuations. While some emerging markets might have peaked, the Middle East is seen as not having realized its full potential yet. We would expect to see many of the traditional barriers to entry in these markets being lowered in the medium term to enable further growth.”

The Middle East/North Africa is a new listing on the survey for 2008.

There seems to be just one tiny fact that these bullish investors aren’t taking into account. The Middle East is not exactly the most stable region of the world. It is a hot spot for potential wars and terrorist activities.

The study said nothing about hedge funds perhaps putting some kind of risk premium on their investments in that region. Indeed, how can one accurately measure the real risk of investing in that part of the world?

One hedge fund manager recently told me that his fund would not invest in the Middle East because his wife wouldn’t let him travel to that part of the world.

I wonder what the costs of insurance will be for executives traveling to the Middle East to visit potential investments.

Hedge fund managers are known for their propensity for risk. Seeking to invest in the Middle East sure backs that up.

According to Wendy Robinson and Ramier Mogadishu, founders and partners of Peregrine Law LLP, hedge fund managers in the UK are not paying enough attention to the potential for employment law suits brought for age and sex discrimination.

They point to the case of F&C Asset Management in London, which recently lost a sex discrimination case and had a judgment of GBP13.5m (US$26.4m) won against it by its former in-house counsel. It is the largest judgment every won from a hedge fund in the UK and Robinson and Mogadishu (who weren’t involved in the case) think it bodes ill for the future.

“Hedge funds need to be more aware of potential problems,” says Robinson. A primary example is the trading floor, according to Mogadishu. “There’s the culture on the trading floor that people can say whatever they want as long as they make money,” he says. “But the trading floor is not exempt from rules,” he says, pointing to incidents where female traders have been angered by what are perceived to be sexist comments by their male counterparts.

When hedge funds were raking in money hand over fist they tended to simply “throw money at claimants,” to settle the charges, Mogadishu says. Now, many hedge funds have smaller financial resources to pay claims, but the number of lawsuits is growing, he points out, rising by over 100% in the last 10 years.

The UK still has several advantages over the US when it comes to discrimination suits. There are no depositions with cross examination of witnesses done in the discovery stage of a lawsuit before it goes to trial in the UK as there is in the US. Cases tend to move through the system faster as well, because a claim must be filed within three months of leaving the firm, whereas in the US there is a three-year window.

Robinson and Mogadishu say there are things that can prevent suits from every happening, and that’s what their law firm is focused on. Most hedge funds don’t have large human resource departments to handle employee problems. “We offer hedge funds the ability to get advice (on employment issues) on a daily basis,” says Robinson. They now have two clients who have been guaranteed daily access to them, whenever they need it, wherever they are.

But if the retainer helps them avoid million-dollar judgments, it will prove to be a bargain.

Pandit, of course, is now CEO of Citigroup, while the co-founders who came with him—John Havens and Brian Leach—now also hold top positions in the troubled financial services firm.

At the time of the acquisition there was much speculation that Pandit and his partners, who all had management experience at Morgan Stanley, were brought on board to provide more management expertise for Citi.

Obviously, the financial crisis that has enveloped Citigroup had not yet started, and Pandit was expected to get some experience—at least several years—running Citi’s alternatives and investment banking operations before being asked to take the top job.

Only last month did Citi Vice Chairman Lewis Kaden admit that Citi bought the hedge fund to acquire the services of Pandit and the fund’s other co-founders.

Also last month Citi CFO Gary Crittenden said that clients would be permitted to redeem their investments in Old Lane ostensibly because Pandit, Havens and Leach had left the hedge fund for other positions within Citi. In a regulatory filing last Friday, the bank announced that most investors wouild exercise the opportunity to take their money out of the poorly performing hedge fund by July 31.

“In April 2008, substantially all unaffiliated investors had notified Old Lane of their intention to redeem,” Citi said in the filing.

However, Citi is not quite ready to throw in the towel on the fund just yet. In a statement, the troubled financial services giant said, “we are in the process of restructuring Old Lane. Its business and its people continue to be valuable to us. We are confident that we can realize that value over time.”

There have always been people who have prospered from others’ financial misfortunes; what is one person's financial problem, seems to be a great deal to someone else ready to pounce on it.

That’s exactly what’s happening in the debt markets now. Many major financial institutions had to write off billions of dollars in debt that had nosedived in value over the last few months. Some hedge funds have collapsed because of it.

Well, the buyers, known as “vultures” in the industry, have already started to pounce. The Cayman Islands Monetary Authority had a huge increase in the number of hedge funds registering in January 2008. Yolanda McCoy, head of the investments and securities division of CIMA, noted that many of the new funds were the so-called “vulture” funds, which were formed to pick over and buy up the remnants of the distressed debt that has overwhelmed the financial markets.

As one lawyer noted, “the vulture funds serve the same purpose as sharks do in the ocean. They are coming in to clean up the mess from all the bad debt, in the same way sharks eat fish in the ocean. It’s actually a service.”

Knighthead Domestic and Knighthead Offshore, are the US and Cayman Islands-domiciled distressed credit and event driven funds set to be launched on May 1 by Knighthead Capital, New York.

The funds will buy distressed corporate debt and seek to have a voice in the business changes made by companies in financial distress. Tom Wagner, a principal of the firm, says “we think it’s a fantastic opportunity to launch now,” and points to the huge amount of debt the fund will have to choose from. He expects the funds will have a combined $700m to $1bn in assets soon.

Dalton Investments, Los Angeles, which profited big time from the Asian debt crisis ten years ago, is also ready to launch a distressed debt fund which will invest in distressed mortgage-backed securities. Steven Persky, founder and CEO, says there are literally “hundreds of thousands” of mortgage loans that are now sitting in distressed mortgage backed securities. He expects the fund will soon have “hundreds of millions” of dollars to invest.

According to Persky, while the pickings are huge, to get the best will require some serious research, which his firm will do, hiring Todd Sherer, of Countrywide Financial to head their research team. Could there be anyone better than a former Countrywide trader to pick over all those bad mortgages?

Two more distressed debt funds are scheduled to launch in June. Colchis Capital plans to launch the Distresssed Bank Debt Fund, to invest in distressed senior bank debt, and Distressed RMBS Fund, to invest in distressed mortgage backed securities. Dan Nero, CFO of Colchis, declined to comment on the funds.

The key word here is “voluntary,” The PWG has no intention at this time of making any of the proposals mandatory. That has some hedge fund watchdogs very upset.

The best practices for asset managers call on hedge funds to adopt comprehensive best practices in all aspects of their business, including disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. Eric Mindich, CEO of Eton Park Capital Management, chairs the Asset Managers’ Committee.

For investors, the best practices offered include a Fiduciary’s Guide and an Investor’s Guide. The Fiduciary’s Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor’s Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. Russell Read, chief investment officer of the California Public Employees’ Retirement System, the largest pension fund in the US, heads the Investors’ Committee.

After the proposals were announced with great fanfare by Treasury Secretary Henry Paulson, Richard Blumenthal, attorney general of Connecticut, where many hedge funds are based, said “non-binding best practices or voluntary guidelines are an imaginary fence—and virtual farce: They stop nothing.”

Blumenthal says that “The Treasury Department is suggesting faux regulation, creating a dangerous illusion of over sight and engendering a false sense of security. Federal officials are proposing a speed limit, but making compliance voluntary: Some will fail to comply, imperiling all. Instead of voluntary guidelines, the federal government should set specific, common sense rules and provide for federal and state enforcement.”

He points out that “I proposed such measures—to be mandatory—more than a year ago. The subprime meltdown has vividly demonstrated the dangers of deregulation.

“Hedge funds have become too big and too important to remain outside the rules. Suggesting hedge funds do the right thing is not enough. Through risk disclosure and risk control, we must ensure reasonable, rational regulation,” Blumenthal declares.

Bradley Ziff, head of the hedge funds advisory practice at consultant Oliver Wyman, thinks the proposals are excellent and consistent with proposals that were released in February by the Hedge Funds Standards Board in the UK to improve hedge fund oversight.

Ziff, a special advisor to the HFSB and its liason to the PWG, told HFR “this (the PWG’s recommendations) is a significant enhancement in looking at the approaches to risk management, transparency, disclosure and leverage in the hedge fund industry.” Moreover, “there is a symmetry and commonality in the way both groups have examined risk for hedge funds,” said Ziff. “They made significant steps forward. The next step is working toward a harmonization of the two documents.

As an executive who works at one of Iceland’s big banks, told the story, “Upon entering the bar I was approached by one of the hedge fund managers. He informed me that all the people at this party—except for him, of course—were shorting Iceland.” The executive says that the fund manager told him that the potential for profits in Iceland was like “the second coming of Christ.”

“As dinner progressed—some people actually decided not to eat at all but just sit at the bar—and more drinks were downed, the conversation and questions started to get more hostile and short positions openly declared,” says the executive.

The goal of the hedge fund managers was to put pressure on Iceland’s credit default swap market.

The information learned at that alcohol-fueled dinner has now become part of a full scale investigation by Iceland’s Financial Supervisory Authority into an alleged speculative attack by hedge funds on Iceland’s currency, banking system and stock market. Jonas Jonsonn, director general of Iceland’s FSA, says the authorities are “searching whether some parties have systematically been distributing negative and false rumors about the Icelandic banks and financial system in order to profit from it.”

Other reports say that Iceland’s krona has fallen 21% against the euro this year on speculation Icelandic banks may not be able to sustain debt-financed growth, forcing a government bailout. .Kaupthing Bank hf and Glitnir Bank hf, Iceland’s No.1 one and No.3 banks, have Europe’s highest credit default swap spreads, indicating investors think they could go bankrupt.

Why are hedge funds going after Iceland? Because it’s cold? Or maybe because they think that they can get away with it. Only time will tell.

A google search just won’t cut it.

Randy Shain, executive vice president of First Advantage Investigative Services in New York, has to use a lot more online and manual search methods when he investigates hedge funds for his funds of hedge funds clients. Funds of funds managers want to know if there are any skeletons in their closets, such as criminal charges and lawsuits, before they trust hedge fund managers with their money.

Shain begins his investigations with a public records search to verify the fund manager’s credentials—his work history, where he went to school and making sure that the information on his CV is accurate. “I want to make sure what they say on their CVs is true and find any gaps in work history,” says Shain.

He gets regulatory records from the Securities & Exchange Commission and other regulatory agencies to see if there have been any complaints filed against the manager.
Shain also uses for pay news services like Lexis-Nexis, Factiva, Westlaw and Dialog to track down information.

He does a complete search of all court records, from civil, criminal, bankruptcy and estate courts. This requires much more digging than just finding online records which Shain says only “give rudimentary information.”

He does a manual search of court records, retrieving documents that get to the heart of what the case is. “We look through the whole complaint,” he says. “It will say what the charges and all the allegations are against the fund, not just the basic information,” he says.

Shain also conducts interviews with people identified in the public records as business and professional contacts of the manager he’s investigating.

What’s the most satisfying part of the job? “I feel most pride when I discover a gap in someone’s employment exists and I can find out what they did during the gap,” says Shain.

The reasons aren’t always terrible, such as someone having been in jail, Shain explains.
“Sometimes it’s just a woman who had a baby and took a couple of years off from the workforce.”

Shain complains that in today’s resumes, people will often say they worked at a job from, say, 2002-2004, without putting down the month they started and left. “It can make for unaccounted for time,” he explains. A person might really have held a job from December 2002 through January 2004, which leaves a lot of time unaccounted for.
“When they say 2002 to 2004 it’s an easy way to make it seem like a career has not been interrupted and sometimes that’s not true,” he says.

He admits that he’s a bit jaded now, saying “I’ve seen just about everything.” Only one recent discovery really surprised him. Shain was investigating a person who said he was a full-time hedge fund manager seeking capital from a fund of funds. Shain was interviewing someone he thought was a former colleague of the person, who said “what do you mean by former, he’s still here.” and made the discovery that the manager really held down a full time job and was not running the hedge fund full time. “He said he intended to run the fund full time when he got the money,” says Shain.. Needless to say, he didn’t get any from Shain’s client.