Tripoli hotel under investigation for bribery

Tripoli hotel

The U.S. lifted most of its sanctions against Libya after Moammar Kadafi agreed to dismantling the country’s  nuclear-weapons program in  2004.   Americans raced to investment money in the North African nation, which was benefiting from oil sales and recently had opened up to foreign investment. 

Authorities are examining investment deals made around the time of the financial crisis and afterward.  Ozm was an investor in a joint venture to construct a luxury hotel in Tripoli which has come under scrutiny in a probe on the use of placement agents to conduct deals in Libya.  

White House

The White House said that financial service providers would be able to support transactions to buy and invest in Libyan oil and products because it served U.S. interests.  Then when companies do business, and encounter business conditions that the U.S. government no doubt knew it was going to encounter, the company then becomes the subject of a law enforcement inquiry.

Investigators began in 2011 trying to determine whether firms violated the Foreign Corrupt Practices Act which outlaws the payment of bribes by US companies anywhere in the world.   Regulators have been investigating how the Libyan Investment Authority made investment decisions before the toppling of Muammar Qaddafi’s regime in 2011.

Och-Ziff

Och-Ziff felt the investigations were not serious enough to mention until the recent Och-Ziff 10K.  Investigators are examining an investment by the $65 billion Libyan Investment Authority  sovereign wealth fund based in Tripoli, in some of Och-Ziff  funds in 2007 and investments by some Och-Ziff  funds, both directly and indirectly, in a number of companies in Africa.  

Nine reasons for the shift to bigger funds

Alfred Winslow Jones was the first money manager to combine short selling, the use of leverage, shared risk through a partnership with other investors, and a compensation system based on investment performance.  

The Hedge fund management business has evolved offering clear advantages for the big money to move to the largest firms like Ozm.  These are nine concerns of Hedge fund investors that propel this trend.

1. Abrupt closures 

Hedge funds can close because of the loss of large investors, untimely investments or simply bored managers that have more than enough money and are sick of meeting client expectations.

2. Holdback

When a client cashes out, funds can retain 10 percent to 20 percent of assets until its annual audit is completed.  Investors can be forced to sit and wait as the money earns nothing while they make sure the NAV is correct.  The other 10-20% “holdback” doesn’t come back until the hedge fund’s annual audit which could be up to a year later.

3. Gate provisions

Making contributions to hedge funds is easy.  They want your money, so you can usually invest on a monthly basis without much notice.  But try getting your money out.  You usually need at least 90 days’ notice and even then you can only redeem on a quarterly or annual basis.  The purpose of the provision is to prevent a run on the fund, which could cripple its operations, as a large number of withdrawals from the fund would force the manager to sell off a large number of positions.

4. Opportunity cost

One Investor confesses that their institution was invested in a hedge fund that decided to return capital to investors.  They were given the choice of taking a huge write-down up front or getting the money back as the investments were sold off.  They decided to wait, and it ended up taking four years to get the entire investment back.   Each time they sent chunks of money back, the remaining funds got marked down even further.  The risk that  greater “benefits” could have been obtained with another option is the lost opportunity.

5. Lock-up

Many funds have at least a 1 year lock-up with your initial investment but it is possible that the lock-up can be 3-5 years in some cases before you can pull your money out.  The lock-up period helps portfolio managers avoid liquidity problems while capital is put to work in sometimes illiquid investments.

6. Investment period

Private equity also comes with huge opportunity costs.  You don’t simply hand over the amount you commit to the fund on day one and start investing.  With extensions, the investment period could last up to 10 years.

7. Capital call

Plus, you might only get about 2 weeks’ notice before a capital call is due for investment with no idea about the size so you cannot plan your liquidity ahead of time.

8. Commitments

With the majority of funds, you don’t pay management fees on your invested capital.  That would make too much sense.  You pay on your committed capital.  So if you have $30 million committed to a fund but they only call $500,000 in year one, your 2% management fee is over 100% of invested capital.   Committed capital, is usually not invested immediately, it is “drawn down” and invested over time as investments are identified.

9. Redemption suspension

Similar to Gate provisions but doesn’t allow for withdrawals at all.  Depending on the terms of the hedge fund, a manager generally has the ability to implement this at anytime. 

See.. Confessions of an Institutional Investor 

The core business of asset management

Asset management is a systematic process of operating, maintaining, upgrading, and disposing of assets cost-effectively.

Larry Fink talks about the core business of asset management.  The effects of herding on the markets. Index funds, liquidity, risks of leverage, and what Blackrock actually does.

Investment secrets and economic theories ~ Ray Dalio

Bridgewater is the largest hedge fund in the world, so it makes sense to understand how its founder views the mechanics of our economy.   Ray Dalio created this simple but not simplistic and easy to follow 30 minute, animated video that explains, how the economy really works?

To understand demand properly, you must know whether it is funded by the buyers' own money or by credit from others.

Research paper pdf 1. How the Economic Machine Works 

Research paper pdf 2. Debt cycles

Research paper pdf 3. Productivity

Based on Dalio's practical template for understanding the economy, which he developed over the course of his career, the video breaks down economic concepts like credit, deficits and interest rates, allowing viewers to learn the basic driving forces behind the economy, how economic policies work and why economic cycles occur.

Paul A. Volcker, the former Fed chairman, a fan of the cartoon, described it as “unconventional but it casts strong light on how the economy actually works, with its history of repetitive and ultimately destructive excesses in credit creation. The analysis points the way to practical ways central banks and governments can ease the pain of defaults and deleveraging.