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White House sets up hedge fund to deal with toxic assets

Date: Wednesday, April 1, 2009
Author: HedgeFunds Review

London, April 1: In a move which has left Wall Street and Capitol Hill reeling, the US administration has announced the formation of a hedge fund with a $500 billion mandate to oversee disposal of and investment in bank toxic assets as well as some of the remaining trouble asset relief programme funding. The deal could also include the troubled Big Three carmakers.


Details of the new fund, thought to be using the pre-launch name of Tarpox Opportunities Fund, are sketchy. However, people close to the deal have suggested portfolio management will be handled by a consortium of some of the top hedge funds in the US, including those that recently testified before Congress.

US President Barrack Obama, known for his bold moves and innovative thinking, has surprised the rest of the G20 with what some see as an about-face on the role hedge funds have to play in the global economic crisis. "This validates what we have been saying all along. Hedge funds are part of the solution, not the problem," commented one hedge fund manager who did not want to be named.

A variety of strategies is expected to be used by the multi-managed fund. Distressed, special situation and convertible arbitrage as well as the more vanilla long/short equity and equity market neutral are among the strategies the fund will use, said those familiar with the deal.

International law firm Wakmapelby was said to be finalising the fund offering document and is working close with the Cayman Island Monetary Authority (CIMA) in the structuring of the fund.

Although CIMA and others connected with the fund remain tight-lipped, a White House source suggested the fund will use the traditional master/feeder structure popular with Cayman-domiciled funds.

The innovative ‘velcro side pocket' is expected to be used for the first time in the offering memorandum.

"The velcro side pocket is designed to be attached to any part of a fund structure and can be stuck onto a variety of structures, including special purpose vehicles and managed accounts, whenever a fund needs to sideline an illiquid or troublesome asset or collection of assets," said one person familiar with the deal. Velcro comes from the fact the side pocket can be moved around easily and attached and detached as needed.

Although the Cayman Island Monetary Authority was not available for direct comment, it is thought the regulator is pleased with the confidence the US administration is showing in the jurisdiction. "This just goes to show what we've been saying: Cayman has nothing to hide. It is the leading hedge fund jurisdiction and is known for its quality regulation of the industry and transparency," said a source close to CIMA.

Given the recent criticism of the jurisdiction, it is thought unlikely CIMA will consider waiving any of its requirements for Cayman registered funds, including using a local auditor to sign off fund accounts.

As a Cayman domiciled fund, the audit sign off must be done by an auditor present on the island. The Big Four accounting firms are thought to be keen on winning the contract.

CIMA is expected to raise some concerns with the fund about the lack of an independent administrator. It is thought CIMA does not consider the US Treasury to be sufficiently independent or to have the needed expertise to act as fund administrator.

Several large fund administrators, eager to replace lost assets under administration, are thought to be queuing up to bid for the lucrative contract.

One source close to the deal said the use of independent offshore directors was being considered.

Multiple prime brokers and custodians are expected to be used in an effort to mitigate counterparty risk.