Morgan Stanley and Goldman Sachs are linking their lending to hedge funds to the market's assessment of the credit worthiness of the investment banks. Morgan Stanley will reportedly evaluate the amount of leverage it will supply to hedge funds based on the price of its own credit insurance pricing. Goldman is said to be linking its willingness to provide loans to hedge funds based on its bond prices.

The report of both changes ran in the Financial Times. The changes would limit the ability of hedge funds to borrow from either firm if borrowing by Morgan and Goldman became too expensive, indicating a lack of market confidence in the financial health of the firms.

In one sense, this seems a practical response to volatility in the credit markets, reducing exposure to hedge fund leverage as credit markets for financial companies become unsettled. It does, however, create a self-serving dynamic for the investment banks. If hedge funds taking the view that the companies have become unstable push up CDS or bond yields on the firms, they may find themselves unable to borrow from the firms. In other words, it gives the hedge funds an incentive not to bet against Goldman and Morgan.

The FT says the plans to link hedge fund leverage to the broader credit markets has been in the works for sometime. "These arrangements for determining the size of lending commitments to hedge fund clients were being put in place before the collapse of Bear Stearns," Henny Sender writes. "But implementation has gathered pace as investment banks seek ways to guard against the sudden loss of confidence - and resulting withdrawal of market funding - that crippled Bear."

MS and Goldman change approach to lending [Financial Times]

It's no surprise that the quants are a strange bunch. Last year, when their strategies cascaded to recorded losses, they blamed the markets for misbehavior. Now it seems a hedge fund looking for someone with quant skills has placed a particularly strange ad on Craigslist.

Brian Hunter has done a great job of vanishing from the public eye since the collapse of Amaranth. Despite ongoing litigation with regulators, Hunter has more or less managed to keep his name out of the headlines. But this week Fortune's Bethany McLean tracks him down, and he agrees to talk to Fortune to explain that "he doesn't think that what has happened to him is exactly fair."

McLean knows this turf very well, having extensively reported on natural gas trading activities of a little company called Enron. It's easy to understand why Hunter would have looked at her as someone who might understand his trading beyond the standard approach accusing him of losing $6 billion. (Also, she's beautiful and charming, so that probably helped her get Hunter to talk too.) Unfortunately, the story McLean does get is pretty thin, unadorned by many details about what exactly Hunter thinks is unfair about his reputation. (Although she does a great job of describing the "Keystone Kops" at the FERC and the CFTC who are pursuing Hunter on different market manipulation charges.)

We're told by a person familiar with the matter that Hunter despises Nick Maounis, the founder of Amaranth. Hunter privately argues that the collapse of Amaranth was more the fault of Maounis than his own energy trades. As evidence of this, he points to fact that Citadel was able to turn a profit on those trades. Judging from McLean's article, however, Hunter isn't quite ready to go public with these thoughts.

Entertainingly, Fortune didn't manage to get a photograph of Hunter. As far as we can tell, no one in media has his picture. (Our picture is merely an artistic "representation" of Brian Hunter and some guy holding him in both hands.)

The man who lost $6 billion [Fortune]

Two Goldman Sachs funds launched to take advantage of the credit squeeze saw serious losses last month, according to a person familiar with the situation. Goldman's liquidity fund and its credit opportunities fund were meant to capitalize off bad situations, buying distressed assets in the credit and mortgage markets. Both were down in the high double digits for June, the person said.

GS Liquidity Partners was launched when the credit crunch first hit last fall, with $1.8 billion to make investments in distressed credit. The credit opportunity fund is a more recent creature, launched this year to invest in mortgage market dislocations.

Bryan Burrough's Vanity Fair article on the downfall of Bear Stearns took nearly 16 pages to get to what most would regard as the mother of all ledes, wherein he casually mentions it is believed that a bunch of hedge fund managers "wanted [Bear] to go down, and go down hard," naming Citadel and SAC Capital as suspects. Burrough's then goes on to add that after said managers supposedly spread the rumor that ultimately killed BSC, they "celebrated Bear's collapse at a breakfast that following Sunday and planned a similar assault on Lehman the next week." He leaves it that, presumably because a. he's writing a book that will include actual IM conversations between the interested parties, and will place Griffin, Cohen, et al at the scene of the crime, b. he doesn't have any other details because the breakfast, and the events leading up to it, never actually took place. or c. he's a man after our own heart, and likes to pepper his prose with fanciful fabrications, in which case he should've noted "Stevie-boy was distracted from the meaty conversation by the sheer pleasure of his 3-cheese Denver omelette." In any event, with all deference to Burrough, I call bull shit.

Let's just say they did spread the rumors, which I don't believe they did (and, as an aside: if a company can be brought down by the corporate equivalent of 7th grade girls passing notes in class, perhaps it doesn't deserve to be in existence anyway). There is no way in hell this meal took place. Ken Griffin and Steve Cohen are not stupid enough to go chest bump over egg McMuffins with the rotting corpse of Bear Stearns at their table (that kind of genius is-- or was-- reserved for the upper echelons of BSC management).

When you off someone, you go to a safe house, lay low and count your money. You don't run into the nearest bar with blood on your hands, wave the murder weapon around and go, hey everyone, look what I just did! Drinks for the house, put it on Bear Stearns! (Of course, on the very off-chance that this thing did go down, we want the dirt and we want it now. Waiters, sous chefs, people sitting at neighboring tables-- give us a call.) And confidential to Ken and Steve: unlike a shithouse mouse like Vanity Fair, you will get a fair hearing from the reasoned and conscientious phoney reporters at DealBreaker. If you want to get your side of the story out there, do not hesitate to get in touch. 203-890-2000. I'm a good listener.

Bringing Down Bear [Vanity Fair]

New York's City Council is backing a plan to raise a $200 million per year tax on the investment income of hedge fund managers and private equity partners. Such a tax increase would have to be approved by lawmakers in Albany, but the council's support makes it more likely to garner approval there, the New York Sun is reporting.

The new tax is meant to repair holes in the city's budget, created in part by the downturn on Wall Street. As layoffs pile up and bonuses expectations diminish, the city is facing a dramatic fall in revenue. Of course, raising taxes on hedge fund managers and private equity partners is likely to drive them out of the city, according to critics.

The move is part of a broader push by lawmakers from Albany to Washington DC to tax "carried interest" as income rather than capital gains. Currently the city taxes management fees they at the 4% unincorporated business tax but that tax currently does not cover "carried interest."

At least one group can expect to benefit from this tax threat: owners of commercial real estate and their agents in Connecticut.

Council Gets Set To Press a Tax on Hedge Funds [New York Sun]

Years ago we read about a psychologist discussing how almost all suicides off the Golden Gate Bridge jumped off the side facing San Francisco. The psychologist was pondering what the suicides were trying to say and whom they were relating to. Someone in the audience ruined this bout of deep thinking by asking a simple question: "Which side of the Golden Gate Bridge is the sidewalk on?"

In related news, almost no one believed for a minute former hedge fund manager Samuel Israel killed himself by jumping off the Bear Mountain bridge. It's just not a suicidal place. Now that his body has failed to wash up, authorities are certain that he faked his suicide and went on the lam. He's not, of course, the first hedge fund manager to make a run for it. There have been at least three others, including one who eluded authorities for five years.

Hedge fund managers who escaped U.S. police [Reuters]

Alpha Magazine published its annual ranking of the world's largest hedge funds today. Not many shockers (as a group they grew by thirty five percent, JPMorgan is still number one), but here are the takeaways:

SAC Capital founder Steve Cohen wins.

Previously: Area Man Threatens To Out-Toilet Stevie Cohen.
Also: Greenwich's Outrageous Fortunes, Greenwich: The New Newport, Only Tackier & Nerdier.

P&Z rejects Simmons Lane mansion plan [Greenwich Time]

Opponents of hedge fund regulation scored a win yesterday when California backed away from its plans to regulate hedge funds. Since the registration of hedge funds with the Securities and Exchange Commission was over-turned by the federal courts, several states have considered enacting their own regulatory schemes. Such moves have typically been opposed by the hedge fund industry, which has recently become active in federal and state lobbying efforts.

“California withdrew its proposal this month after many hedge fund industry officials suggested the lightly regulated investment funds could move to another state if California started regulating them,” DealBook reported this morning.

California is thought to have the largest concentration of hedge funds outside of New York, Connecticut and the Dallas area. California’s high-concentration of wealth and agreeable climate make the state very attractive to fund managers. But faced with the threat of extensive regulation, many could choose to relocate to states less prone to regulation.

“Yes, and they would take with them all those huge houses, big cars and taxes paid by hedge fund managers,” law professor Larry Ribstein explains. “California is used to having its regulatory way because many firms can’t avoid its market. But hedge funds can operate just fine without California.”

California’s surrender on hedge fund regulation nicely illustrates how federalism forces states to compete with each other, and can check excessive regulation. This is sometimes decried by critics of federalism as a “race to the bottom” but there’s little evidence to suggest that states are forced to lower regulatory levels on investment managers to below optimum levels. If investors desired more hedge fund regulation, hedge funds would have financial incentives to locate in states with greater regulations. Hedge fund investors, however, seem to doubt that they would benefit from new regulations that go beyond traditional legal strictures against things like theft and fraud.

California Drops Hedge Fund Proposal [DealBook]
Hedge funds and jurisdictional competition [Ideoblog]

The investment firm run by chief John Meriwether lost 24 percent in its $1 billion fixed-income hedge fund this year through March 14, two people “with knowledge of the matter” have told Bloomberg. Meriwether, of course, was one of the big men behind Long-Term Capital Management LP, which collapsed in the late 1990s. LTCM lost almost $4 billion. Not even two years ago, Alternative Investment News gave him their Lifetime Achievement Award.

John Meriwether's Bond Fund Loses 24% on Credit-Market Plunge [Bloomberg]

Shares of MF Global Ltd dropped sharply in trading today, reaching a new low. The stock is at $7.26, down $10.09. The stock opened lower and continued to slide for the opening 45 minutes. Trading volume is way up.

Officially, there’s no news with respect to MF Global. Unofficially, rumors are circulating that a major European investment bank is rumored to have shut off MF Global with respect to trades in which MF Global acts as principal. Nothing has been confirmed.

Credit Suisse is getting into the replicant business. “The Swiss bank has teamed up with three of the leading academics in the field, Professors William Fung and Narayan Naik of the London Business School and David Hsieh of Duke University, to create a suite of products designed to replicate mechanically the returns of the major hedge fund strategies,” the Financial Times reports.

Hedge fund cloning tends to make hedge fund managers uncomfortable, as clone funds attempt to replicate strategies of major funds while charging lower fees. Some fund managers insist that replication is impossible because the investment and trading skills of managers cannot be duplicated. But academics and investors in replicant funds believe that skill is overrated. They are convinced that hedge fund performance is mostly a function of the performance of various asset classes rather than investment skill.

But could hedge fund cloning create systemic risk? Replicant funds may be vulnerable to the cascade effect witnessed last summer, where the liquidation of one or more hedge fund portfolios triggered a widespread sell-off that saddled many funds with their worst losses ever. Many market watchers now believe that the losses were exacerbated because so many funds were following very similar strategies. Since then some hedge funds have tried to adopt strategies that differentiate them from other market players. Cloning hedge funds seems to move in the opposite direction.

Credit Suisse to set up hedge fund clones [Financial Times]

Goldman Sachs Asset Management recently fired about twenty people from two teams managing Global Alpha and Global Equity Opportunities and, according to Charlton Heston, the victims were the analysts who "do all the actual work," as opposed to names slightly higher on the roster who, beyond being involved in poor day-to-day decision making, do jack and cost a ton to employ. If you want to be all cynical you could chalk the canning methodology up to the groups (and GS at large and, you know, the entire Street) being boys clubs whose members have each others' backs and who won't let their brohamsters get fired for petty little things like shitty performances, and I guess if you're looking at it like that, then, yeah, it seems kind of bad. But that's because you're looking at it all wrong-- these firings actually cast GSAM in a positive light, because they underscore the division's commitment, above all, and at all times, to lose as much money as possible. Getting rid of co-head Peter Kraus the other day doesn't really seem in line with the aformentioned bottom line, so tut tut there, but we cross our fingers that his replacement will be paid more for less competence. I don't think we need to tell you who's in total agreement on this one:

I don’t know where we were when this groundbreaking news hit the wire but on a conference call yesterday afternoon, the London based hedge fund called Peloton Partners apologized to investors for losing billions of dollars. Apparently this is a big fucking deal in hedge fund land, where being a rich prick means never having to say you’re sorry. Of course, founder Ron Beller didn’t actually use the ‘S’ word, though he did say he and his co-captains, Geoff Grant and some other guy, couldn’t “come up with the words to express our regret adequately,” or the actions either, which would probably be along the lines of magically producing the money they let go astray.

Peloton Sorry For Fiasco [FT]

More than two weeks ago we mentioned that wild swings in the price of natural gas futures were crushing a Houston-based hedge fund. That fund turned out to be Saracen Energy. The fund supposedly took a short position in March 2009 gas futures and long April 2009, and got crushed between the trades as the prices fluctuated wildly.

So how much did Saracen lose? Reuters put the losses at $400 million. Platts had said $700 million. Now Energy Hedge, a hedge fund newsletter, reports that the fund may have lost 41% of its assets in the trade. According to a 2006 report, Saracen had a market value of $1.4 billion. The newsletter notes that Centaurus is also said to have lost money on natural gas trades this winter.

Dillon Panthers’ head coach Eric Taylor declined to comment about whether Saracen would be fit to play in the state finals.

A delightfully whimsical faux hedge fund manager was arrested by the FBI yesterday on allegations that his hedge fund is actually a pyramid scheme. According to an affidavit, Stefan Andre Wilson’s enterprise, known at one time or another as the Christians in Crisis Investment Fund, Opus Capital Holdings, and—our personal favorite—Shake the Nations, raised $9 million on the promise of 24% annual returns. Wilson lost $5.1 million, used $1.1 million for personal expenses (inflatable Virgin Mary dolls). Among the items seized by the FBI thus far are a 2007 Porsche Cayman and a Sea Ray "pleasure boat."

‘Christians In Crisis’ Hedge Fund Manager Arrested For Fraud [FINalternatives]

The LA Times published an extremely moving piece over the weekend about a new crisis in hedge fund land. Managers who, after signing on to finance shit movies you couldn't even pay former Bear Stearns movie blogger Rich Marin to go see and review, are losing money. Like, assloads of it. And they're upset about the losing of the assloads of money, and they don't understand the losing of the assloads of money and they want somebody (other than them) to pay for the losing of the assloads of money. Many studios have agreed to restructure deals so that in the unlikely event that "Dough Boys" doesn't make any dough, everybody, including Hollywood, loses a little instead of just the funds/their investors losing a lot, and less conversations like the following have to take place. (Now would be a good time to tell you that I've got some green in RenTec. Can't really say how I made the minimum, someone was desperate for some smokes one night when I ran into him at Matty T's Roadhouse (Mr. Black Lung also loves mechanical bull riding, topless), I happened to have said smokes, and he owed me one...million dollars. Times five.)

Me: Simons, what the Christ? Can you explain to me why I'm losing MILLIONS of fucking dollars?
James Simons: I could tell you it was the models but really, I made a bad bet on "Dough Boys," a slice of life comedy that serves up the story of Lou and Frank, two Bronx brothers running the family bakery. Faced with Lou's gambling problem-- of which Frank knows nothing-- the shop is about to be taken from them by the neighborhood gangster. The fate of this local landmark hangs like a "pie in the sky." Will it be a sweet dream, or a nightmare? Turned out to be the latter.

Everything's all good now but I'm sure there were similar convos between HF guys and their pissed off clientele over the following picks:

Remember that Houston-based energy fund we told you about yesterday? The one found itself on the wrong side of a natural gas futures trade? This morning the wires have named the fund as Saracen Energy, which matches what DealBreaker was told by readers yesterday.

“The spread between March and April 2009 natural gas futures leaped by more than 50 percent in the week between Feb. 7 and 14,” Reuters reports. For the year, it has almost doubled. Saracen had apparently went short March 2009 gas futures and long April 2009, and got crushed as the spread blew out.

How bad are the losses? Reuters says the fund lost up to $400 million. Platts says it’s more like $700 million to $800 million. Saracen denies rumors that it is selling its book to Goldman Sachs, and tells has sufficient liquidity to continue operations. But a 2006 report detailing the fund’s size before these losses put it at around $1.4 billion, meaning it may have lost half its assets under management in this trade. Amaranth, which suffered serious losses in 2006 after getting on the wrong side of the March-April calendar-spread bet, initially made assurances that it had enough funds to continue operations. Within a matter of days, Amaranth collapsed.

The losses are a major setback for Saracen. Earlier this year, Saracen lost a top trader, Bill Reed, to the Louis Dreyfus Highbridge Energy LLC, an energy trading operation launched by Highbridge Capital Management LLC and Louis Dreyfus Group.

Energy fund Saracen has big natgas trading loss [Reuters]

We’re hearing that a Houston-based an energy fund which took a short position in March 2009 gas futures and long April 2009 gas futures is getting crush. The spread on that trade has been widening all week. Energy traders are abuzz with talk of one fund getting crushed, ironically by taking the exactly opposite of one of Brian Hunter’s infamous trades. He was long March and short April when he dragged Amaranth down.