March Hedge Funds: Best, Worst, Biggest

Will John Paulson rent a billboard on I-95 promoting his $14 billion hedge fund? Is there a George Soros World Cup in the offing? Probably not. But there are a lot of people in the hedge-fund industry who are excited about the fact that hedge funds can now advertise, sponsor sporting events, and generally reach a wider audience of potential investors.

But, as with everything regulatory, it’s not quite that simple.

The industry’s ability to advertise came about when, earlier this month, President Obama signed the Jumpstart Our Business Startups Act, better known as the JOBS Act. Its main goal was to make it easier for small businesses to raise money, with which they would hopefully create more jobs. Tucked into the act was the lifting of a ban on general advertising and solicitation that hedge funds, with varying degrees of fidelity, had adhered to.

Before you assess how meaningful the new law is, you need to understand a few basics. Hedge funds by rights should be regulated by the Investment Company Act of 1940, which oversees mutual funds and most exchange-traded funds. But in order to avoid the restrictions on redemptions, leverage, and incentive compensation laid out in the 40 Act (as it’s known), hedge funds generally use one of two loopholes known as 3(c)(1) and 3(c)(7). Both exempt hedge funds from most 40 Act requirements but limit their investor audience.

Those considered 3(c)(1) funds allow up to 99 “accredited investors,” defined as someone with a net worth (not counting a home) of at least $1 million or an annual salary of $200,000. Section 3(c)(7) funds are permitted more investors, so long as they’re all “qualified purchasers,” having $5 million in investable assets. (There are many other nuances to these definitions, but this will do for now.) One of the two changes the JOBS Act made was to allow an increase in the maximum number of investors in 3(c)(7) funds to 1,999 from 499. If a hedge fund wants more than 99 accredited investors or 1,999 qualified purchasers, it will have to register with the Securities and Exchange Commission.

THE SECOND, AND MORE provocative, change is the lifting of the advertising ban. Because of the restrictions on whom they can take money from, hedge funds generally were only allowed to let people with whom they had a preexisting, substantive relationship invest; they were prevented from advertising to or soliciting the general public. Some funds took this more seriously than others, requiring passwords to access their Websites and never uttering a word about performance, while others interpreted the rules a bit more loosely. “It’s always been a gray area,” says Mike Seery, a director at financial advisory firm Kinetic Partners.

The ability to reach a wider audience will have a much bigger impact on smaller funds, particularly those with less than $250 million in assets that allow accredited investors. (Most household-name hedge funds permit only qualified purchasers.) Because they’re still appealing to a fairly wealthy crowd, though, advertising likely won’t be too mass-market. Some have speculated we’ll see golf or tennis tournaments sponsored by hedge funds, and an increase in advertising in, ahem, publications that speak to a more sophisticated and wealthy audience.

“A fair number of smaller to mid-sized firms are eager to see less onerous restrictions in marketing to investors,” says Ken Heinz, president of Hedge Fund Research, which compiles and analyzes data on hedge funds. “I don’t expect this to have a meaningful impact on larger funds, especially those with more than $5 billion in assets.”

THERE ARE STILL A fair number of kinks to work out, warns Kevin Scanlan, a partner at the law firm Dechert. Funds generally can accept up to 35 nonaccredited investors, but funds that avail themselves of the relaxed advertising and soliciting rules won’t be allowed any nonaccredited investors. “My take is that at the end of the day, the investor base for these funds won’t be any different,” Scanlan says. “Smaller funds are hungrier for new investors, but at the same time have smaller budgets to spend on advertising.” Also, he points out, most funds haven’t contemplated advertising costs in their fund documents. That means they could end up a manager expense rather than a cost that can be passed on to investors.

Then there’s the issue of the additional rules the SEC needs to write. Now, if hedge funds advertise, they’ll need to prove they took “reasonable steps” to verify any new investors are accredited, says Don Babbitt, a consultant at Kinetic Partners and former SEC attorney.

And the SEC isn’t likely to rush its opinion as to what those reasonable steps are. “Congress said the SEC had 90 days,” Scanlan says. “But given all they have on their plate, I think we’re looking at the end of the year.”

E-mail:
beverly.goodman@barrons.com

By JEFF BENNETT

(See Corrections and Amplifications item below.)

More than a year ago, Kaiser Aluminum Corp.

was looking for a spot to build an $80 million office-and-research center that would employ 150 workers.

After considering cities in three different states, the maker of aluminum products settled on Kalamazoo, Mich., a once-prosperous manufacturing city that had lost thousands of jobs in the last decade or so.

One of the draws: The Kalamazoo Promise, a program that provides at least partial college tuition to all graduating seniors who spent their high-school years in the city’s public schools.

Just as Kaiser was gearing up its search, a group of wealthy philanthropists who have remained anonymous unveiled the Promise as a gift to the city. The lure of the program as a benefit for Kaiser employees, and its potential to produce a highly educated work force, proved a big attraction, says Martin Carter, vice president and general manager of common alloy products at Foothill Ranch, Calif.-based Kaiser.

“We are building a sophisticated facility with new technology, and we want well-educated people who will work with us and want to live in Kalamazoo,” Mr. Carter says. “Some of the other sites gave a lot of talk about future education plans, but in the case of Kalamazoo, they already had a commitment to developing a well-educated community.” Kaiser says its Kalamazoo center will be fully operational in the first quarter of 2009.

Introduced in November 2005, the Promise was designed to stimulate Kalamazoo’s economy and lure both business and people back to the city. It covers 65% of tuition costs at public colleges and universities in Michigan for students who spend at least their high school years in the Kalamazoo Public School district. Students who go all the way from kindergarten through 12th grade get a free ride. Bills are paid by the program directly to the college. Roughly 1,200 students have taken advantage of the program so far.

Signs of Rebirth

“What we had here was a traditional inner city that was dying,” says Ron Kitchens, chief executive of Southwest Michigan First, a regional economic-development organization. “We had the traditional institutions like hospitals, schools and museums, but the population was leaving and those that remained were paying more taxes.”

Kalamazoo sits in western Michigan, a state that led the nation last year in unemployment as auto companies cut jobs amid slumping sales. Michigan’s unemployment rate was 7.2%, compared with the national average of 4.6%. The Kalamazoo area has been hard hit by job cuts at one of its largest employers, drug maker Pfizer Inc.

Since July 2005, the company has eliminated 2,000 high-paying research jobs, reducing its staff in the area to less than 3,000.

Over the past 18 months, however, Kalamazoo has shown some signs of a rebirth. Four-hundred families from 88 Michigan communities, 32 states and nine foreign countries have moved into the Kalamazoo school district, boosting school enrollment 12% to 11,530 this year from 10,337 in 2005. Graduation rates have risen, too, jumping 21% to 567 students in 2007 from 467 students in 2005. (The district reports 485 graduates so far for 2008, but the finally tally won’t be known until summer school is over.)

Other companies besides Kaiser have unveiled plans to create jobs in Kalamazoo, with some saying the Promise played a role in their decision. Among them is MPI Research, a privately held preclinical drug-testing company in Mattawan, Mich., which in April announced plans to create 3,300 jobs in southwestern Michigan — including 400 in downtown Kalamazoo — over the next five years as it moves into laboratory and office space once housing Pfizer.

Fabri-Kal Corp., a Kalamazoo producer of custom and food-service plastic products, is expected to create 160 jobs by expanding and relocating its current manufacturing operations to a vacant Mead Paper facility located southeast of downtown Kalamazoo. Other expansions or new business openings include W. Soule & Co., a stainless-steel fabrication business employing 25 people; Tourney Consulting Group, a concrete testing lab employing 12 people; and Polymer Solutions Inc., a plastics recycling company with 50 workers.

“We are experiencing job growth and families are moving back and stabilizing the area,” Mr. Kitchens says.

The Promise also has turned the Kalamazoo School District into a hot spot for real estate.

Home builder Greg DeHaan, co-owner of Allen Edwin Homes, hadn’t built a home in the Kalamazoo School District in the 12 years before the Promise was announced. Now, home sales in the district account for 20% of Allen Edwin’s overall business, with the company building and selling 87 homes last year, compared with 47 the year before. The average home price is $130,000 to $140,000.

“The Promise has just given us this renewed sense of optimism,” says Mr. DeHaan, who grew up in Kalamazoo.

It also has brought educated people into Kalamazoo, sometimes from across the country.

Efeosa Idemudia was working as a personal banker at a J.P. Morgan Chase & Co. bank branch in New York and was preparing to buy an $800,000 home in Brooklyn when he saw an evening newscast about the Promise.

Not sure he could believe the report, he used his TiVo digital video recorder to review the broadcast, spotted a telephone number on a real-estate sign and was out looking for homes in Kalamazoo a few weeks later. “I told my wife we are out of here,” Mr. Idemudia says.

He now lives in the Kalamazoo School District, which means the college tuition for his 7-year-old son, 3-year-old daughter and 1-year-old son will be covered when they graduate from high school.

“When I went to college I had to work a full-time job and go to school,” says Mr. Idemudia, who is now a Kalamazoo-based consultant with Pre-Paid Legal Services Inc., a network of independent law firms providing services at low costs. “I want my kids to focus on their education so they can do a whole lot better than I did.”

Copying the Formula

While the developments bode well for Kalamazoo, it is too early to tell if the Promise will have a major, long-term impact on the area’s economy, says Michelle Miller-Adams, a Grand Valley State University assistant professor and visiting scholar at the not-for-profit W.E. Upjohn Institute for Employment Research in Kalamazoo.

For that to happen, other big companies with high-paying jobs will have to follow Kaiser’s path, says Ms. Miller-Adams, who is writing a book about the Promise.

“I wish I could say the economy is turned around but I can’t say that yet,” she says. “Economic changes take the longest to materialize.”

Still, a growing number of groups throughout the country are betting Kalamazoo has the right formula. Inspired by Kalamazoo, Murphy Oil Corp.

announced in January 2007 that it would put up $5 million a year for the next 10 years to provide college scholarships to public high-school graduates in El Dorado, Ark., where the company is based.

Students who participate in the “El Dorado Promise” can use the scholarship at any Arkansas or out-of-state college. Scholarships are capped at $6,010 and funds are paid directly to the institutions. After a 20-year decline, enrollment rose 3% in the El Dorado school district for the 2007-2008 year.

Groups in Peoria, Ill., Denver, and Pittsburgh are trying to craft similar programs. Last month, the Upjohn Institute sponsored a meeting in Kalamazoo that brought together 200 people representing 75 communities that have established or are interested in establishing programs similar to the Promise.

“I get about 40 to 50 calls a month asking about the Promise,” Mr. Kitchens says. “Right now there are about 24 different communities that have similar programs.”

The increased focus on education also has spilled over into surrounding communities such as Portage, which passed a $119 million bond last year, its largest ever, to build and remodel schools. Portage, which has about 9,000 students in its school district, is located about 10 miles south of Kalamazoo.

The money will be used to build two new elementary schools, one high school and remodel a second high school. In the early 1990s, the district tried to pass a $50 million bond, which at that time was the largest ever to be proposed. It failed.

“We may have not talked about the Promise to get the bond passed, but it was the elephant in the room,” says Tom Vance, community-relations manager for the Portage Public School District.

Growing pains have accompanied the influx of people into Kalamazoo, forcing organizations and volunteers to stretch their already limited resources and time, Ms. Miller-Adams says.

“The Promise is generous in that it pays for tuition, but some families need help to buy college materials such as textbooks,” she says. “There is also no new money to deal with the increase in [school] enrollment, and volunteers also have been needed to run meetings that teach students how to prepare for college.”

As the community grapples with these issues and the initial wave of enthusiasm subsides, Mr. Kitchens says community leaders have a new goal — keeping the educated in Kalamazoo. Among other things, Southwest Michigan First started a program offering internships at local companies.

“We have 40,000 college students right now. If we can keep them here, companies and entrepreneurs will build around them, and then we can become a community of promise,” Mr. Kitchens says.

—Mr. Bennett is a staff reporter for Dow Jones Newswires in Chicago.

Write to Jeff Bennett at jeff.bennett@dowjones.com

Corrections and Amplifications:

Portage, Mich., shares a border with Kalamazoo. This article incorrectly said the two cities are 10 miles apart.

Printed in The Wall Street Journal, page R1

By BETH GARDINER

Business schools are beginning to embrace a practice that has grown popular in the corporate world—teaching and studying mindfulness, the originally Buddhist approach to increasing awareness of oneself and one’s surroundings.

In M.B.A. and executive-education courses, a handful of professors offer techniques to help students calm their minds and increase their focus. Such skills, they argue, are crucial for those hoping to succeed in an increasingly frenetic environment where distractions from an always-buzzing phone to pressure for strong quarterly profit reports constantly impinge on decisions.

While the idea of mindfulness originates in the serious practice of meditation, B-school faculty say it has many applications for executives who aren’t looking for a spiritual fix but simply want to clear their heads and become aware of reflexive, emotional reactions that can lead to bad decisions.

And it isn’t just individuals that can be mindful, they say. Donde Ashmos Plowman, dean of the University of Nebraska-Lincoln College of Business Administration, has examined the mindfulness of organizations, a concept described previously by Karl Weick, at the University of Michigan’s Ross School of Business.

Mindful organizations are those that pay close attention to what is happening within them, are ready to correct mistakes rather than punishing workers who report them and respond quickly to changes or problems, Ms. Plowman said.

She and several colleagues tried to quantify the mindfulness of 180 different business schools, asking deans and other administrators to complete questionnaires. Critics have accused business schools of culpability in the many high-profile lapses of corporate ethics in recent years, and Dean Plowman said studying the schools’ mindfulness could indicate whether they are capable of self-correction.

One thing the researchers noticed, Dean Plowman said, was that deans rated their schools’ mindfulness more highly than did those working for them.

“It’s easy for people at the head of an organization to end up in a bubble,” she said. “That really alerted me to say, ‘What do I need to do as a dean to improve the way we communicate?’”

Others apply mindfulness at a more individual level.

At IMD business school in Lausanne, Switzerland, leadership professor Ben Bryant introduces his executive-education students to techniques for concentrating on their breathing and becoming aware of sounds and sensations, which he says can help them center themselves at the office or in a business meeting.

“Hard-core meditators are horrified that this word is being used in business,” he said. “They think meditation was never meant to be instrumental in making money.”

Nonetheless, Mr. Bryant feels it is worthwhile to help those running companies to slow down and think about how best to direct their attention. Especially for CEOs, “it’s the smallest things that they do that have huge ripple effects,” he said. “Because their lives are so busy and so loaded up with things, they miss too many opportunities to make either themselves or their organizations different.”

Jeremy Hunter, who teaches at the Peter F. Drucker and Masatoshi Ito Graduate School of Management at Claremont Graduate University outside Los Angeles, believes mindfulness should be at the center of business schools’ teaching. That, he argues, is because it is about improving the quality of attention, and in the modern workplace, attention is the key to productivity.

“To me, it’s fundamental to how work gets done these days,” he said. “Basically, that’s what work is, attention.”

In a series of four seven-week executive-education classes, and a separate course for M.B.A. students, Mr. Hunter teaches what he calls self-management, “managing your insides so you can deal with your outsides better.” He often starts class with a brief meditation, and covers topics like managing emotional reactions and dealing with change.

“One of the powers of being at a business school is that you reach an audience that would never show up at a meditation fair” but can recognize the techniques’ usefulness, he said.

After a conversation about multitasking, one student became frustrated with a weekly work meeting where staff were more focused on their cellphones than the discussion, Mr. Hunter said. When he returned to the office and insisted that everyone put their phones in a box before starting, his colleagues initially responded with irritation, but the weekly gathering soon became so much more efficient that it was cut from to an hour from 90 minutes, Mr. Hunter said.

At Harvard Business School, leadership professor William George focuses on helping businesspeople to better understand their emotions. He ran a two-day conference in 2010 on mindful leadership with a Tibetan Buddhist meditation master, and has meditated regularly since 1975.

In his executive-education class on leadership development, he instructs students who include CEOs to open up to others about their toughest experiences.

Such conversations can increase self-awareness, which Professor George sees as central to good leadership. It isn’t a lack of intelligence that causes executives to make poor decisions, but a lack of awareness of the feelings that drive their reactions, he said.

“It’s the inability to admit your own mistakes, or your fear of failure, your fear of rejection, your desire to be seen as Mr. Perfect, or Ms. Perfect in front of groups, that’s what leads to failure,” he said. “It’s amazing to me how executives in their 40s or 50s who are running giant enterprises can get really into this.”

I’m going to go out on a limb and predict that we’ll see the end of the traditional phone company over the course of the next several years.

The reason for that is the pace at which data—e-mails, text messages, Web pages, tweets—is displacing plain old phone calls.

Data usage exceeded voice calls in terms of total cellular network traffic for the first time in December of 2009, according to a report at the time from the wireless equipment maker Ericsson (ticker: ERIC).

That milestone, when sending and receiving data became most of what we do with mobile devices, was the beginning of a transformation with big implications for Verizon Communications (VZ), AT&T (T), Vodafone (VOD), and every other phone company, and with implications for investors.

The transformation happened in conjunction with a general rise in our use of cellphones. As long ago as 2003, some market-research firms suggested that mobile phone calls outstripped wireline phone calls in the U.S. in terms of total minutes of use.

The next step is “4G” wireless. Industry folks know this by the buzz-term LTE. Over the next couple of years, LTE, or long-term evolution, will move cellphone voice calls from traditional cellular networks to the Internet. They will look like just another stream of data packets on the network, along with Web-surfing and tweeting.

Voice is becoming something that is no longer unique, at least from a technical standpoint.

The result is that the phone companies, faced with a reality that calling is a dwindling part of why we use mobile devices, will at some point abandon the practice of charging you by the minute for calls. They’ll sell you a simple data contract.

The 100-year tariff on calls, in other words, will end, as will the phone company as we know it.

The phone companies won’t go away, but they’ll be challenged to make the economics work without the assurance of that monthly tax on your phone calls. Such a state of affairs would probably make the rich even richer: The dominant carriers, Verizon and AT&T in this country, would see their relative positions improve. The smaller ones, such as Sprint-Nextel (S) and Deutsche Telekom‘s (DT) T-Mobile USA, could suffer.

Now, not everyone agrees with me. Craig Mathias, a long-time observer of the telecommunications industry with consulting firm Farpoint Group, tells me it won’t happen.

“I think carriers will be very reluctant to give up that pricing model,” he says, given that it has been a predictable revenue stream, with a predictable set of capital investments for them, based on average minutes of calling.

But Selina Lo, a networking-industry veteran and the CEO of privately held equipment maker Ruckus Wireless, thinks my scenario has some merit.

“At some point, I think one of these operators will eat their young to be a market leader,” she tells me. By that, she means that a phone company will decide to jump to the front of the pack and sacrifice its own voice contract to just sell a data contract.

I’ve been of the opinion it might be Sprint-Nextel in this country, given that the company has struggled to compete with the top two U.S. carriers, AT&T and Verizon, and given that it is the only U.S. carrier with an all-you-can-eat data plan.

Lo opines that it might actually be Verizon. She points to the fact that Verizon is working on intriguing projects with Skype, the Internet-calling outfit that is owned by Microsoft (MSFT).

Here’s the investment angle. There will be lots of money to be made by Ruckus and others helping the carriers to get ready for that eventuality.

As I’ve written in this space before, the cost of carrying increasing amounts of traffic on those new LTE networks is sure to rise, and that means a way must be found to preserve wireless spectrum, which is the carriers’ precious resource.

That has some carriers considering Wi-Fi wireless networking as a way to supplement cellular, a scenario known as Wi-Fi “offload.”

Lo’s company is in the business of selling phone companies Wi-Fi gear meant to work out of doors, on lamp posts and other strategic locations.

In the future, a cellphone user might be walking down the street, talking over Skype, when their handset is shifted from the cellular network to Wi-Fi.

Lo, whose company has done more work of this kind with carriers outside the U.S. that are more aggressive in trying different things, says it’s already happening in some places. In Hong Kong, for instance, at peak hours, upward of 80% of mobile data traffic may travel over Wi-Fi access points.

There are almost two million of these public Wi-Fi hotspots deployed around the world, and that number is expected to roughly triple by 2015, according to a report late last year by the Wireless Broadband Alliance, a trade group that includes Ruckus and other suppliers.

I don’t know when Lo’s company will go public, but in the meantime, it competes with Cisco Systems (CSCO) and Aruba Networks (ARUN) in selling Wi-Fi gear, both of whom are eying the Wi-Fi offload market.

Aruba’s stock, at a price/earnings ratio of 21 times next year’s projected earnings per share, is worth a look.

Other opportunities include service providers. Towerstream (TWER) has for a number of years been selling companies connections between offices using private wireless networks. Towerstream is now adding to its portfolio options for Wi-Fi offload because its technology is applicable.

And Boingo Wireless (WIFI) has made a name for itself selling pay-as-you go Wi-Fi connections in airports and hotels around the world, so it, too, is relevant here.

If all of this seems a bit far-fetched, bear in mind that the most interesting action in the cellular business is not here in the U.S., nor in other developed markets, but in emerging economies. China is the biggest cellular market by number of connections, and India is No. 2, at nearly one billion connections each.

The GSM Association, the international trade body for cellular operators, reports there are three billion cellular connections in Asia Pacific, going to 4.1 billion by 2015, twice the expected rate of growth in Europe and North America.

A lot of what goes on in those markets in coming years won’t come from the standard phone-industry playbook, I’ll bet. But the repercussions will be felt everywhere. 

Tiernan Ray can be reached at tiernan.ray@barrons.com or at blogs.barrons.com/techtraderdaily or www.twitter.com/barronstechblog

By LAURA KUSISTO And JENNIFER SMITH

New York law firm Dewey & LeBoeuf LLP, which is heavily in debt, is planning to put the executive floor of its Manhattan headquarters up for sublease, a move that could bring in a couple of million dollars a year, according to a person familiar with the matter.

The firm plans to sublease the 43rd floor, which measures about 43,000 square feet, this person said. The space is the firm’s top floor in the building, and is fitted out with executive offices. Some spots offer a view of Central Park.

In a statement, a spokesman for the firm said Wednesday that “plans to sublease the 43rd floor were made in January of this year as part of the firm’s efforts to reduce costs.”

Dewey, which has been suffering under a heavy debt load and an exodus of partners, is considering a merger that could involve a prearranged bankruptcy filing, which would allow it to resolve debts and other obligations before being bought.

Dewey & LeBoeuf occupies more than 10 floors at 1301 Sixth Avenue. The building housed the headquarters of Dewey Ballantine LLP, an old-line New York firm that merged with LeBoeuf, Lamb, Greene & MacRae LLP in 2007 to create one of the largest law firms in New York.

Dewey leases about 470,000 square feet, or the largest block of space, in the Paramount Group’s 1.8 million-square-foot building, according to CoStar Group Inc., a commercial real-estate database.

The law firm’s lease runs until 2020, according to the person familiar with the matter. Dewey’s asking annual rent is in the $50 a square foot range, according to that person. In other words, a tenant leasing the entire block of space would pay about $2 million a year.

It isn’t unusual for law firms, companies and other types of businesses to sublease small amounts of space as they grow or shrink, according to real-estate brokers.

Law firms often look for new space during recessions when their leases expire and they can get better deals, said John Maher, a broker at CBRE Group Inc. Usually, law firm space is quite easy to sublease because the offices are well laid out, Mr. Maher said.

But Dewey could face challenges renting its space in a leasing market that is currently saturated by other major companies, including Société Générale SA

and UBS AG,

which are planning to put large blocks of space up for sublease, according to people familiar with the matter.

Dewey, which has drawn some $75 million on a $100 million revolving credit line, is days away from a deadline to renegotiate the terms of the loan with a syndicate of banks. It also owes at least $125 million to insurance companies that purchased a private bond the firm floated in 2010, according to people familiar with the matter.

Write to Laura Kusisto at laura.kusisto@wsj.com and Jennifer Smith at jennifer.smith@dowjones.com

A version of this article appeared April 26, 2012, on page B2 in the U.S. edition of The Wall Street Journal, with the headline: Dewey & LeBoeuf Will Try to Sublet New York Office Space.