Variance Capital Newsletter

	Print		Hedge fund blow-ups		The Chinese slowdown		Snapshot of the bank loan market		Amethyst arbitrage fund: thoughts on the Canadian converts and merger arbitrage markets
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	Hedge fund blow-ups
	By Scott Johnston, CIO of Belstar Group. The biggest single impediment I see for investors contemplating an investment into hedge funds is “blow up” risk. How can they think otherwise, with all the hype? The media enjoy little more than the self-immolation of a hedge fund - Rich Guys Get Theirs! Blow-ups score a 10 on the CNBC schadenfreude scale. (Note: for institutional investors, blow up risk translates more specifically into “headline risk,” which is basically the risk of losing one’s job if a hedge fund you invested in ends up in the papers for the wrong reason.) How common are hedge fund blow-ups? How often do they happen? What do they do to returns? These are questions I wanted to get to the bottom of. Fishing around, I found surprisingly little research on the subject, so I thought it might be useful to conduct a survey of our own. Specifically, we will look at hedge fund blow-ups through the years to see what kind of conclusions we can draw. For the sake of argument, we will call anything greater than a 50% loss, a blow-up. Hedge Fund Blow-Ups – A Brief Historical Survey 1994 *Askin Capital Management* David Askin, a star mortgage trader of the day, can lay claim to being the father of the modern hedge fund blow up. Interestingly, the industry had gone from its inception in 1948 to 1994 without a notable hair ball. (Of course, the industry was tiny back then.) Askin ran a mortgage fund that specialized in some of the complex mortgage instruments that had recently come into existence. If this doesn’t sound familiar, perhaps you’ve just returned from a long vacation. The Fed raised rates unexpectedly, crushing the risky “principal only” tranches in which Askin had loaded up, with leverage. Losses: $600 million Cause of death: Excessive leverage, concentration 1997 *Niederhoffer Investments* Famed investor, author, squash champion and philodox Victor Niederhoffer gets squashed himself by a leveraged bet on Thai stocks. Losses: $130 million Cause of Death: Concentration, excessive leverage 1998 *Long Term Capital Management* The ne plus ultra of hedge fund blow-ups. John Merriwether’s LTCM cratered when third world credit problems led to a sudden repricing of risk. Their book, seemingly diversified, was basically long risk and short safety. 40-1 leverage (accounts vary) led to margin calls they couldn’t meet and, subsequently, a Fed-engineered bailout by Wall Street. “When Genius Failed,” an account of the collapse, is recommended reading. Losses: $4.6 billion Cause of death: Excessive leverage 2000 *Manhattan Fund* Run by Michael Berger, a native Austrian, this fund shorted technology stocks from 1996-1999. Oops, a tad little early on that trade. Losses prompted Berger to falsify his track record, which caught up with him by 2000. Arrested, he skipped bail and remained on the lam until he was caught last year in Austria. Losses: $400 million Cause of Death: Fraud *Laser Advisors* Run by former Goldman partner Michael Smirlock, Laser concealed a series of bad bets on options by falsifying position prices on exotic securities. Smirlock spent three years in the Big House and now does charity work. Losses: $70 million Cause of Death: Fraud *Ashbury Capital Partners* This one, at $8 million, is a rounding error but it’s too funny to leave out. Manager Mark Yagalla told investors he had averaged 80% in his personal account for nine years. He was 23 years old. Hmm. He blew most of the money on his girlfriend, a Playboy centerfold by the name of Sandy Bentley. Among other thing he bought her furs and, yes, a Bentley, which she promptly sold for cash. Yagalla bought himself a helicopter. When his assets were seized the centerfold dumped him, news of which was promptly reported to Ripley’s Believe it or Not. Losses: $8 million Cause of Death: Fraud *Marque Partners* Rob Littel, a pal of JFK junior’s, had a magic black box that promised to churn out 20% returns regardless of market direction, only he wouldn’t explain it to anyone. Which makes sense, since all his box did, apparently, was eat money. Shortly thereafter he started lying about returns. Pleading poverty, he paid a paltry fine to the SEC. Immediately after this, he signed a book deal for a nice advance to write about JFK’s secrets, a book called “The Men We Became.” From ripping off investors to selling out a dead friend, Littel is currently not considered a candidate for the Integrity Hall of Fame. Losses: $120 million Cause of Death: Fraud 2001 *Integral Investment Management* The Chicago Art Institute suffered most of the loss here when this relatively unknown fund turned out to be a low-level scam. The term “headline risk” became widely used after this case, as the Institute had egg all over its face. The fund-of-funds industry, with its implicit protection from embarrassment, took off in the aftermath. Losses: $70 million Cause of Death: Fraud *Lancer Group* Lead manager Michael Lauer manipulated the prices of penny stocks to inflate investment performance. Morgan Stanley got taken in by this one, as did former Sotheby’s Chairman Al Taubman. Losses: $200 million Cause of Death: Fraud 2002 *Lipper Convertible Fund* Ken Lipper was a former Deputy Mayor of New York City. He was a former Salomon Brothers partner and Columbia professor. He even wrote the book “Wall Street” that later became the Oliver Stone movie. (Greed is good!) None of this meant, apparently, that he wasn’t a scam artist. His fund got killed in the convertibles market so he started falsifying returns. Julia Roberts got taken in by this one which, I know, is hard to believe. Losses: $350 million Cause of Death: Fraud *Beacon Hill Asset Management* These guys got tripped up by the mortgage market (I sense a developing theme…) and started falsifying returns. Does that ever work out? Just curious. Lots of institutional names got caught up in this one, and it ranks as the biggest fraud to date. Losses: $800 million Cause of Death: Fraud *Eifuku Master Fund* This was a Japanese fund, the name of which, if only slightly mispronounced, must have phonetically captured the sentiments of its founders. (Do not try to figure this out in front of your children, at least not out loud). Losses: $300 million Cause of Death: Concentration, excessive leverage 2004 *Sterling Watters* Angelo Haligiannis, a college drop-out from Queens, raised $27 million, mostly from friends and family, by lying about his returns. Haligiannis skipped on his bail and was arrested two years later in Greece. Losses: $27 million Cause of Death: Fraud 2005 *Portus Group* Set up as a Canadian hedge fund for the little guy, Portus accepted investments for as little as $5000. Money allegedly used to buy stocks was diverted to pay expenses. Losses: $150 million Cause of Death: Fraud *Bayou Group* Your basic Ponzi scheme with returns fabricated to cover losses. Only these guys took it a step further: they actually started their own accounting firm – complete with the waspy, fiduciary-sounding name of “Richmond Fairfield” – to sign off on fraudulent audits. Founder Sam Israel was just sentenced to 20 years. Losses: $450 million Cause of Death: Fraud *Wood River* How’s this for a hedge fund strategy: put 80% of your money in one high tech stock. That’s exactly what Wood River did, investing in a stock called Endwave, which promptly fell from $54 to $10 a share. One problem was that the fund’s marketing materials spoke much about benefits of diversification. Another was that Wood River never bothered to tell the SEC they owned 45% of Endwave. Losses: $200 million Cause of Death: Concentration, fraud *KL Group* This one was fraud from the outset. Perhaps recognizing their own limitations, they never even tried to make money. The proprietors, three Koreans, skimmed $150 million from the Palm Beach society crowd, all the while claiming 125% returns (note to future scammers: don’t overreach, 25% is far more credible, and the Ponzi scheme will last longer). Money was used to live large, however briefly. Losses: $130 million Cause of Death: Fraud 2006 *Matador Fund* Famed investor, squash player…wait, this guy again? Victor Niederhoffer becomes the first hedge fund operator to blow up twice. Blow-up Artist Niederhoffer Losses: $190 million Cause of Death: Excessive leverage *MotherRock L.P.* Big bet on natural gas futures goes the wrong way. Losses: $230 million Cause of Death: Concentration, excessive leverage *Amaranth Advisors* A sophisticated, $9 billion hedge fund in Greenwich gives most of their capital to a 29 year-old energy trader in Canada, who then makes a gigantic spread bet on natural gas futures with 8-1 leverage. Ka-Boom. Losses: $6.4 billion Cause of Death: Concentration, excessive leverage 2007 *Sowood* Caught off guard by a sudden widening in credit spreads (see Long Term Capital), Sowood announced a 57% loss. Founded by ex-Harvard endowment wiz Jeff Larson, the fund counted Harvard as one of their core investors. Harvard took a $350 million hit, which amounted to a 1% hit to their endowment. Losses: $1.5 billion Cause of Death: Excessive leverage *Bear Stearns High Grade Structured Credit Strategies Fund* This mouthful of a fund was the canary in the coal mine of the credit crisis last February. A big bet on subprime mortgages goes horribly wrong. Losses: $1.6 billion Cause of Death: Concentration, excessive leverage 2008 *Carlyle Capital Group* This $230 million fund was founded in 2006 by the eminence grises of the private equity arena, the Carlyle Group. The purpose was to buy mortgages using tons of leverage. Oops. Losses: $220 million Cause of Death: Excessive leverage You should be seeing a theme here: hedge fund blow-ups are almost always caused by fraud or excessive leverage (concentration is also listed, but almost all these examples would have survived with less leverage). Also notice that of the non-frauds, every blow-up was in a fixed income related fund, especially in the mortgage area. A critical point here, though, is that the money lost in the non-fraud cases was not actually lost by the industry as a whole. Invariably, these losses were in instruments like futures (from whence the leverage), where every loser has a winner on the other side of the trade. So Amaranth’s pain was someone else’s gain, and that someone else was more than likely another hedge fund. When Bear’s hedge fund was blowing up because of sub-prime, John Paulson’s fund was on its way to the biggest payday in hedge fund history for exactly the same reason. So you see, most blow-up risk is really fund-specific. It is not an industry risk. Ergo, blow-up risk is really only about fraud. Hunt Taylor was a well-respected hedge industry veteran, known as a real free thinker. I was fortunate enough to have met him casually before his tragic death in a motorcycle crash last year. Hunt was perhaps the first person to put fraud blow-ups in context. Specifically, he added up all the blow-ups to assess the overall impact on the industry. I have taken the liberty to add to his work here: Fraud Losses as a Percentage of Hedge Fund Industry Assets Fraud Loss ($bil) Total Industry Assets ($bil)* % of Total 1994 0 99 0.00 1995 0 76 0.00 1996 0 97 0.00 1997 0 130 0.00 1998 0 210 0.00 1999 0 221 0.00 2000 0.60 324 0.19 2001 0.27 408 0.07 2002 1.15 564 0.20 2003 0 592 0.00 2004 0.27 795 0.00 2005 0.93 1,009 0.09 2006 0 1,223 0.00 2007 0 1,535 0.00 Source: Hennessee Group No doubt I missed a few small ones, but they won’t add up to much. The big point here is that fraud-related blow-ups have been 0.039% annual drag on industry performance since 1994. That’s 4 basis points. If you add up all the losses it comes to $2.9 billion. That’s a big number, right? No, it’s not. A couple of weeks ago, GE dropped 14% in one day. Know how much investors lost? $47 billion! This is worth restating: all the hedge fund fraud losses since the dawn of the industry add up to about 1/20th of what GE cost investors in a single day. And yet institutional investors galore own GE but won’t touch hedge funds because they are terrified of fraud, which they call “headline risk.” There are lots of things in life to worry about, but unless you are someone like a fund-of-funds manager, hedge fund fraud isn’t one of them. * Scott C. Johnston is lead portfolio manager for the Belstar Multi-Advisor Hedge Fund L.P. which has returned 17% net of fees since the fund’s inception in October of 2006. Scott has spent the last 12 years in the hedge fund industry, and has also served as an Adjunct Professor of Finance at Yale. (www.belstargroup.com) * Variance Capital Management does not recommend or distribute any of Belstar Group's products.

	A potential Chinese slowdown?
	“The charm of history and its enigmatic lesson consist in the fact that, from age to age, nothing changes and yet everything is completely different.” Aldous Huxley Every bull market has its leaders. In the late 90s at the height of the last great market, tech, networking and internet names led the way. In the recent bull run that started in March of ’03, leadership came from emerging markets and commodities. If history has taught anything is that markets never go up in a straight line regardless at how compelling the fundamental case for their rise may be and that once they’ve corrected, leadership is usually assumed by another sector which captures investor’s imagination. There has clearly been a high degree of enthusiasm for the Chinese growth story. Even though Chinese A shares have corrected 50% YTD and even more so from their highs of last year, proponents of the decoupling story have mentioned time and time again that internal liquidity would be sufficient to alleviate any impact of a slowdown from developed economies. Not only has this thesis not been reflected in share prices which have fallen in tandem with the equity indices of western markets, but the raw numbers also tell a different story. Looking at components of China’s GDP a case for continued growth in an economy reliant on US consumer demand appears difficult. Trade is over 40% of GDP, with the US being the only partner with whom China has a surplus. It is balanced with every other country or block. Private consumption, on the other hand, comes in lower at 34%. The recent trade data showed that the trade balance with the US was down by 60% for February, making it a mathematical impossibility for consumption alone to overcome this slowdown. As for the argument that other Asian countries can pick up the slack, it is to be noted that most of China’s trading partners in the region are in the same predicament and only carry surpluses with the US. It doesn’t appear as if this trade is abating anytime soon. The 1st quarter GDP numbers received a lot of attention and most investors seemed to have interpreted the 0.6% growth rate as good news. The following chart deconstructs the headline number and gives a much more granular insight into the weakness of the US economy. After stripping out inventory builds, an increase in net exports and government spending growth, demand in the US private sector shrank by 0.8%. The US may very well be in the beginnings of a domestic demand recession. This may explain the miserable consumer confidence numbers. The Conference Board Consumer Confidence Index, which had declined in April, continued its downward trend in May. The Index now stands at 57.2 (1985=100), down from 62.8 in April. The Present Situation Index decreased to 74.4 from 81.9. The Expectations Index declined to 45.7 from 50.0 in April. It now appears that after several quarters of time lag, the Chinese economy has begun to exhibit early but unmistakable signs of a slow down, especially since April. Important indicators of economic activity for which monthly reporting is available started to show possible inflection points: airline passenger and freight traffic, auto sales, and retail sales at certain department stores have suddenly decelerated from strong double digit figures only months ago; property prices have generally trended down in most cities as transaction volume continues to dwindle, and fixed asset investments in certain economically important regions have come down to mid single digit year over year growth rates (and sequential declines), which have not been seen since the early 1990s. While it may be premature to base any conclusion on this data yet, the trend-turning statistics in aggregate clearly raise the spectre of the start of a significant slowdown. Meanwhile corporate profit growth is harder to find. In the past 2 years, a high percentage of corporate earnings were generated from investment gains in the A share market (in certain sectors such as insurance, capital gains accounted for as much as 80% of earnings). Now capital gains have turned into capital losses with the correction of the domestic stock market. At the operating level, Rising raw material and labour costs, coupled with limited or no ability to raise prices, is squeezing earnings. In a rising number of sectors, as government mandated price freezes take effect, profit margins are becoming the first casualty of inflation. The combination of narrowing profit margins and the sudden arrival of a demand slowdown paints an ambiguous picture of profit decline in the quarters ahead. The one sector that continues to show earnings growth is banking. But we all know non-performing loan ratios tend to be a lagging indicator of an economic slowdown. Already, overall banking industry statistics are showing similar trend reversals: in small but important ways, NPL ratios has turned higher after several years of decline. As inflation rises, China’s economic policy is converging backward to the old central planning command system. Rising number of goods is now under direct government price control. Gasoline, diesel, electricity and water, rail transportation, and grain are priced at what the government states it should be. If mankind’s experiment in socialism taught us anything, it is that price controls distort economic decisions and don’t’ work. China’s leadership has learned the importance of instant gratification (from the Fed perhaps) and are sowing the seeds of the economic malaise to come. None of this disputes the fact that China will continue to be a great story in the decades to come. But history shows that all great economic growth stories come invariably with intermittent hiccups. From the end of the civil war to World War II, the United States emerged from an agrarian society to the world’s pre-eminent power. But along the way, there five recessions, one Great Depression, and yes, a sovereign default. The road to greatness is never smooth. This article echoes the views of the managers of the Horizon Asia L/S equity fund for which Variance Capital acts as a placement agent. The fund has been able to capture some of the upside stemming from these Chinese themes whilst protecting capital during each bear market that has affected Chinese equities since its inception. The fund was up 25% (net) last year and is flat YTD. They are net short China and long Japan at present.




	Snapshot of the bank loan market
	As the chart shows, the US and European loan markets staged a meaningful rally in April. Why has the loan market improved? (1) a generally improved overall credit environment sparked by Federal Reserve intervention. (2) a more stable loan market driven by reduced overhang (i.e. successfully placed loans by banks during the second quarter) (3) positive loan "events": change of control, asset sales, and large consent fees paid to amend loan covenants. To the first point, April contained significant (positive) credit market news. Both the Fed and the Bank of England cut their overnight lending rates by 0.25%. By cutting rates, increasing the size of their lending facilities and widening the range of collateral eligible for those lending facilities, the central banks continued their assault on the liquidity in the interbanks market and the weakness in the US and UK economies. The Fed has now cut the rates from 5.25% to 2.00% since the credit crunch began in August of last year. During the same time frame, the bank of England has cut rates from 5.75% to 5.25%. The determined efforts of the central banks seem to have paid off in April. Credit spreads in all corporate credit asset classes tightened, in some cases quite dramatically. Investment grade bonds all traded up during the month. Apart from growing confidence in the fed, this rally was based on reduced technical pressure between buyers and sellers, an earnings season which turned out to be better than many market participants feared and further evidence of the durability of financial institutions as manifest in their ability to raise significant amounts of capital in the face of market turmoil. That being said, some believe the recent rally is vulnerable to further news of economic weakness and investor realization that that the recession could be longer and deeper than is currently anticipated. On the other hand, most commentators express the view that the worst of the corporate credit crunch is over and that the medium to long term horizon for the 1st lien loan market offers more upside than downside. “While we think we have seen the worst of the correction (there has been a substantial market delevering), I remain concerned about loan volatility.” opines David Rich, CIO of Amida Partners, a multi strategy hedge fund based in New York with a strong focus on credit. He goes on to add “although liquidity in loans has certainly improved, don't expect 2006-june 2007 liquidity anytime soon leading us to own a diversified portfolio of our favourite loans in manageable size” “In any event, the loan market remains among the most attractive asset classes especially as many are trading at material discounts to their par claims. Though new structured products are essentially nonexistent and placement overhang remains, we would expect the loan market to gradually improve. Aside from technicals, other real catalysts exist to propel loans to higher levels. Among these catalysts are bankruptcies and asset sales. Both would serve to accelerate loans and those with solid underlying claims should perform well in these circumstances. Therefore, I do not think the biggest threat to the loan market is economic data. Rather I believe that stressed loans would be a positive for the loan market” states David Rich of Amida. “We also found a number of loans that trade at discounts to their unsecured counterpart. These opportunities, which exemplify the severity of market dislocation, are available to be capitalized on as confidence returns to the system. Amida, with its low leverage and reliable funding resources is in a desirable position to capture these mispricings.” “Staying small and nimble is what has helped Amida limit its volatility since the beginning of the year and generate 3% positive performance YTD. Risk management is also a core focus where we estimate that our entire loan portfolio could be sold easily within 48 hours” concludes Rich. After a difficult first year, the Amida Partners master fund has weathered the recent storm in credit very well. YTD performance is up 3%. Variance Capital Management acts as a placement agent for Amida.

Amethyst arbitrage fund: thoughts on the Canadian converts and merger arbitrage markets

	By Mark Amirault, Principal manager of the Amethyst Fund GENERAL REVIEW Central Banks were in disaster avoidance mode in the first quarter as North American economies slid closer to recession and fears of economic collapse weighed heavy on capital markets. The proliferation of rumors and resulting loss of confidence lead to the collapse of the fifth largest US investment dealer in March. The frantic pullout of assets was matched by an equally frantic capital injection and bail out by JP Morgan and the US Federal Reserve Bank. All this after the Fed had lowered its benchmark rate by two full percentage points in the first quarter and three percent since they began easing in September. The implosion of Bear Stearns will surely be the event that defines 2008 and hopefully the low point of this crisis. In Canada, the Central Bank finally made an about face after having increased its target for the overnight rate in July by lowering it a full percent point to 3.50% between the December, January, and March meetings. The implied yield to maturity on two year Canada Government bonds has plunged from a high on June 13, 2007 of 4.77% to a low March 17, 2008 of 2.28%. It ended the quarter at 2.63%. The ten year has dropped from its June 13, 2007 high of 4.76% to a low of 3.38% on March 17, 2008, closing the quarter at 3.44%. Despite this rate plunge, the Canadian stock market total return index lost 2.84%. Leading the loss were the Consumer Discretionary (-14.9%) and Telecom (-12.9%) sub indices; gain-ers were stalwarts Materials (+7.2%) and Energy (+0.4); all other sub-indices were negative. The Amethyst Arbitrage Fund realized a net return after all fees of 1.30% (0.25% offshore) during the same period. This compares to the HFRI converti-ble arbitrage sub-index which booked a 5.20% loss, the merger arbitrage sub-index posting a 0.08 % gain and the event driven sub index losing 2.67%. MARKET EVENTS These conditions created a challenging environment worldwide for investors in general and hedge funds in particular. Market volume and banking activity continued to be slower than normal in the first quarter of 2008. New merger and acquisition deals were fewer and farther between, however existing deals continue to close on schedule. Fresh ideas have been more difficult to come by, however they offer greater opportunity. We have noticed fewer competitors and more motivated counterparties. Both these circumstances stem from liquidity concerns: competitors are closing down or moving on to other strategies, sellers are motivated by the potential to raise cash. Our expected profit margins have increased as a result. Further, anticipation of increased bids (bump-up) has declined in incidence, allowing us to participate in a greater number of deals. Sponsors of takeovers appear motivated by strategic advantage rather than financial engineering, with due diligence process and financial support being more rigorous than what had been the norm in prior years. Also worth taking note, leverage plays a much smaller part of new deals. The result is that our entry risk is much lower now. Monetization has been continuing normally as closings are occurring for deals undertaken post crisis. Situations that were affected by the crisis are mostly worked out or already concluded; most potential losses have already been accrued. Only upside surprises remain. BCE continues to be under the spotlight. The difficulties of Bain Capital and Thomas H. Lee Partners to close the financing of Clear Channel Communications Inc. with some of the same US banks as are in-volved in the BCE deal has been directly correlated to the volatility of the market price for BCE shares. The approval of the purchase by the Canadian Radio-television and Telecommunications Commission (CRTC) flew by as a non event as financing con-cerns are front and center. Conclusion of financing and the bondholders appeal scheduled for May remain the final major hurdles to closing this transaction. The strategy’s expansion in a narrow subset of the US M&A market is slowly picking up speed as new capital is subscribed and assets grow. Since the whole US merger market has been somewhat harrowing oflate, we have been even more cautious while still finding value and opportunity. CONVERTIBLE SECURITIES The first quarter 2008 was similar to the last of 2007, i.e. very volatile. Prices of bonds rose and fell with market sentiment. Some companies' situations went from bad to worse. Other credits caught a bid with any market rally, even though the bid/ask spread often resembles a chasm during times of stress. Despite all of this, the spike in bankruptcies suggested by the number of outstanding high yield debt issues has not occurred. As an example of the previously referred irrationality, Canada Housing Trust, a credit pari-passu with Canada Government bonds, issued a long term bond in March at a spread of 58 basis points over it's comparable. Credit spreads on Canadian BB rated bonds are currently trading 400 basis points off the benchmark, BBB (investment grade) meet them on the long end, and even AA rated bonds (no Canadian Corporation is rated higher) are 100 basis points (a full per-centage) above Canada's. New convertible issuance has restarted at a decent rate under more favorable terms than this time last year and rose in price on issue. Existing warrants and convertibles gyrated in price depending on whether their liquidity situation was improving or worsening. Implied volatility swung to and fro as speculative fervor ebbed and waned. We participated in seven new convertible issues of Canadian companies in the first quarter: two issued out of London, two domestic over-the-counter, and three TSX listed bonds. Whereas in the past we had been better sellers of these instruments, we found the first quarter offered more opportunities increasing several positions and initiating new ones. Their features have been increasingly attractive as demand has waned for these investments. A final note relates to the $CAD 32 billion ABCP (Asset Backed Commercial Paper) restructuring plan, a case not yet entirely resolved. A judge must decide in May if the restructuring is fair to large investors. We sigh with relief often that our research and intuition kept us away from this mess. OUTLOOK While rather tame this quarter, Amethyst’s performance continues to be in line with the Fund’s mandate of providing above risk free returns at minimal risk while offering significant protection during periods of market instability. The absence of any major negative event and a couple of upside surprises made the general decay in spreads, valuations, and margins easier to bear. Furthermore, for the most part, difficult situations were coming to conclusions. With Central Banks and regulators scouring about putting out fires, we feel that few downside surprises remain and the unknown factors are mainly on the upside. Nonetheless, we expect the pace of activity to remain slow in the short term, but pick up by year end. Bids opportunistic to near term market valuations and industry consolidation will rule the day. Conversely, some of the situations in which we have posted unrealized losses may well finish the year with profitable outcomes. As for the convertible strategy, we expect this segment to do very well when credit conditions improve.

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