Friday, August 31, 2007

A Cold Winter for M&A in August

WSJ DealJournal, August 31, 2007, 8:41 am

Posted by Stephen Grocer
Since June when concerns about the credit market began mounting, industry watchers have been wondering when the buyout boom would go bust.
The data is in and August may well come to mark the end of the “golden era” for M&A.
Through Aug. 30, companies and private-equity firms struck 2,496 deals world-wide valued at $193 billion, according to Dealogic. That’s a far cry from the $544 billion of deals announced in July.
The drop off can’t be blamed on a summer slowdown. Deal volume this month fell 25% from August 2006 (22% in the U.S.). It marked the lowest monthly total since July 2005 and the lowest for the month of August since 2004.
The fall off in M&A activity during the month was due in no small part to the retreat of the private-equity industry. With investors refusing to buy much LBO-backed debt, private-equity deal making slowed to a trickle. Gone were the megadeals of the first half of the year.
Buyout firms scooped up just 152 companies world-wide, valued at $15.6 billion, through Aug. 29. That’s a 35% and 70% drop, respectively, from the same period last year. In the U.S., buyout volume fell 70% to $5.3 billion. Buyout volume as a percentage of total deal volume was just 10% after accounting for more than 20% through the first seven months of the year, according to the data.
And those numbers just begin to tell the story. August saw just three leverage buyouts valued at more than $1 billion announced. The month of May saw 26, according to Dealogic.
Yet 2007 is still on pace to shatter last year’s record total – a sign of just how robust the first seven months of the year were. Volume through Aug. 30 reached $3.65 trillion, up 51% compared to the same period last year. It’s just $264 billion behind 2006’s $3.9 trillion total.

President of Standard & Poor’s Steps Down

Published: August 31, 2007
Kathleen Corbet, president of the credit rating company Standard & Poor’s, resigned after lawmakers and investors criticized the company for failing to judge the risks of securities backed by subprime mortgages.
The McGraw-Hill Companies, the parent of Standard & Poor’s, said in a statement yesterday that Ms. Corbet will be succeeded by Deven Sharma, executive vice president for investment services and global sales.
Ms. Corbet is leaving to spend more time with her family and her exit is not related to the current credit-market turmoil, a McGraw-Hill spokesman, Steven Weiss, said.
S.& P. and Moody’s Investors Service failed to downgrade bonds backed by loans to borrowers with poor credit until July, when some had already lost more than 50 cents on the dollar.
Christopher J. Dodd, the Senate Banking Committee chairman and a Connecticut Democrat who is seeking the presidential nomination, said yesterday that credit rating companies must explain why they assigned “AAA ratings to securities that never deserved them.”

Wednesday, August 15, 2007

Redemption Day: Will Hedge-Fund Investors Bolt?

NYT DealBook, August 15, 2007:

For hedge fund bosses, today could be a nail-biter. August 15 marks the last day for most investors to notify fund managers that they want to withdraw money at the end of the third quarter. Coming so soon after last week's market turbulence, which led to huge losses at some well-known funds, the deadline raises the prospect of a wave of redemptions from rattled investors seeking to pull out their money. Of course, investors may also decide to stay the course, rather than selling out at what might end up being the lowest point.
Go to Article from Reuters via The New York Times»
Go to Article from The Financial Times»
Go to Related Article from MarketWatch»

Dog Days: Looking Further Into the LBO Slowdown

WSJ OnLine Deal Journal, August 14, 2007:

Just how much has the buyout boom slowed? For an idea, try taking a stab at this question: When was the last major buyout?
The answer: Blackstone Group’s $20 billion deal to buy Hilton Hotels on July 3. (Though depending on your definition of megabuyout, Cerberus Capital Management’s $3.7 billion deal for United Rentals on July 23 might take the prize, but then the first half of the year did spoil us.)
That is in stark contrast to just a few months back, when hardly a day — let alone a week — went by without a private-equity firm taking a company private. It just begins to show how slow deal making has gotten for the private-equity industry in recent weeks.
As Deal Journal pointed out in this post earlier today, buyout firms participated in just 13.5% of the $81 billion of deals struck in the U.S. from July 23 to Aug. 8. That is down from 36.1% for the rest of year, according to Thomson Financial. Moreover, through the first 10 days of August, global buyout volume fell to $4.86 billion, while U.S. buyout volume failed to surpass $2 billion, according to Dealogic.
Let us put those numbers in perspective: Buyout volume through the first seven months of this year has averaged $95.6 billion a month. Meanwhile, August buyout volume — almost half way through — is on pace to barely surpass $15 billion world-wide and $6 billion in the U.S. That falls well short of the previous monthly lows of $22.8 billion world-wide (February 2006) and almost $12 billion in the U.S (April 2006) since the beginning of 2006, according to Dealogic. Also, the two-week period ending Aug. 11 was the slowest two week period of this year.
This stall in private-equity deals can’t be pinned on a summer slowdown. In 2006, buyout volume averaged about $60 billion a month, and August buyout volume last year came in just below that average at $59 billion, according to Dealogic.
Yet in a sign of how busy private-equity firms were earlier in the year, private equity’s buying frenzy still is well ahead of last year’s pace. LBO deal volume through Aug. 10 was $705.6 billion world-wide and $435 billion in the U.S. That is up almost 87% and 100%, respectively, from the same period last year.

Tuesday, August 14, 2007

Corporate M&A Ascendance by the Numbers, Deal Journal, August 14, 2007:
For anyone doubting that corporations are taking center stage in M&A, Thomson Financial has a news flash.
Thomson researchers gave a presentation in New York today titled “M&A: At the Crossroads?” According to one slide from the presentation, the contribution of private-equity buyers to U.S. M&A volume has fallen almost two thirds since the pace of declines in the credit and equity markets quickened late last month.
Private-equity firms were the buyers in just 13.5% of the $81 billion of deals struck in the U.S. from July 23 to Aug. 8, down from 36.1% for the year to date before then, according to Thomson. (Using more up-to-date figures, the private-equity share has fallen to less than a tenth, Thomson says.) Corporate acquirers have ratcheted up their participation to 70.4% of the total from 44.5% over the same time frame, according to the data. (Foreign acquirers account for the balance.)
So-called strategic buyers are taking center stage mainly because the high-yield debt markets private-equity firms use to fund their deals are, for all intents, no longer functioning. Corporations, meanwhile, have stock to use as currency, not to mention plenty of cash on their balance sheets. (General Electric, for example, has $62 billion saved up and Microsoft $34 billion, Thomson points out, though GE has made it clear it won’t be spending all that on deals any time soon.) Many of them also have investment-grade ratings, meaning their access to borrowers still is intact. Read more about the resurgence of corporate acquirers in this recent Wall Street Journal article.
In fact, the $57.1 billion of deals that U.S. corporate acquirers have struck since July 23 puts them on a faster pace than they were on this year, with $499.5 billion of deals notched before then.

Monday, August 13, 2007

Mid-Market Deals Feel The Credit Crunch, Too

Monday, August 13, 2007 — LBO Wire
Paul Ziobro
Middle-market buyout deals are experiencing the same problems raising debt as their multi-billion-dollar counterparts, with a number of smaller deals having trouble securing debt at the desired prices and some deals being pulled altogether.
At least 10 outright buyouts, dividend recapitalizations or debt refinancings are having a difficult time finding buyers for their paper, according to several middle-market lenders.
Among the deals having trouble are MidOcean Partners' buyout of Bushnell Outdoor Products Inc., a maker of binoculars, telescopes and other optical equipment; as well as Graham Partners' planned purchase of Schneller Inc., a maker of decorative laminates, these people said.
Dividend recapitalizations of companies like Escort Inc., a maker of radar detectors backed by Falconhead Capital LLC, and Stolle Machinery Co., a maker of parts for canning equipment backed by Littlejohn & Co., have been pulled altogether, several people said.
The buyout firms mentioned either declined to comment or couldn't be reached.
The credit crunch is similar to the problems that some mega-buyout shops are having raising debt to fund multi-billion dollar deals, such as the buyouts of First Data Corp. and Chrysler Corp., as problems in the subprime mortgage markets have essentially frozen the debt markets. "The middle market is not immune to the problems in the large-cap market," said Walter Owens, president of CIT Group Inc.'s corporate finance group.
Traditional mid-market lenders, like collateralized loan obligation funds, or CLOs, are reducing their commitments, while banks and other lenders are demanding more conservative capital structures and better prices. "Leverage is moving down a bit, while cost is moving up," Daniel Duffy, co-president of the corporate finance group at CapitalSource Finance LLC, said.
Lenders say the upper limit for digestable debt ratios is now around 4.75 times earnings before interest, taxes, depreciation and amortization, down from some 6.2 times Ebitda in the second quarter, according to Standard & Poor's Leveraged Commentary & Data. The new level is more in line with multiples seen in 2005 and 2006.
There are also tales of lenders getting cold feet as deals near closure, either pulling out at the last minute or demanding changes to pricing as the overall credit markets remain in flux.
"The markets aren't shutting down, although you are seeing lenders looking for a little more yield and less willing to take on too much leverage," Todd Kumble, a managing partner at investment bank SPP Capital, said. "They have really become much more particular about which companies they'll lend to because their liquidity is more restrained right now."
Buyouts like Bushnell and Schneller are likely to go through eventually, people familiar with the matter say, but at more favorable pricing for the buyers of the debt. That equilibrium will take some time to establish, as will other distinguishing features of the changed credit markets."
It's all too new," said David Yewer, a managing director at lender FirstLight Financial Corp. "So we don't know exactly how things are going to shake out here."
© 2007 Dow Jones & Company, Inc. All rights

Pack Mentality Among Hedge Funds Fuels Market Volatility

By LANDON THOMAS Jr., New York Times, August 13, 2007:

On Wall Street, there is a rage against the machine.
Hedge funds with computer-driven or quantitative investment strategies have been recording significant losses this month.
The managers of these funds are the products of the trading desks of the big investment banks, like Goldman Sachs and Morgan Stanley, both of which have investment operations that use computer models.
The cross-fertilization has raised fears among some analysts that it is not only the hedge funds that are being hit, but the trading desks at the banks as well.
“These guys all know each other, and they all have the same strategies,” said Ernest P. Chan, a quantitative trading consultant who has done computer-driven research at Morgan Stanley and Credit Suisse. “They came from the same schools, and they get together for drinks after work.”
As the quantitative system has come to underpin the investment approaches of some of the largest hedge funds, its use has grown sharply.
Moreover, bankers and investors say, the strategies employed tend to be not only duplicable but broadly followed — the result being a packlike tendency that has helped increase market volatility and, for some hedge funds, has led to losses in the last month.
Wild swings in stock prices have become the norm as fears about the mortgage securities market have expanded into the broader markets. Last week, the Dow Jones industrial average was sharply higher on Monday and Wednesday, only to drop 387 points on Thursday, eventually ending the week about where it began.
A common thread has often been a rise or fall in prices late in the day, a pattern that many analysts attribute to computer models, which are driving a much larger volume of the trading.
Mr. Chan said this predilection for lemming-style buying or selling from investors using similar computer models could turn what would normally be a market setback into a wider contagion.
“If all the models say buy, who is going to say sell? There is just not enough money on the other side,” he said.
The problems of these quantitative funds mirror those of the hedge fund industry as a whole — many funds have seen sharp declines in the last couple of months as the credit markets have dried up. Some quantitative funds could potentially have their worst year on record.
Despite the large sums of money involved, ranging from $250 billion to $500 billion, according to industry estimates, the club of quantitative investors is a small, exclusive one that bridges the trading desks of investment banks and some of the country’s largest hedge funds.
One might call it six degrees of quantitative investing.
Clifford S. Asness, who has a Ph.D. in finance from the University of Chicago, is the founder of AQR Capital Management, a quantitative hedge fund that, according to investors, has had a 13 percent loss so far this month.
Mr. Asness is also a founder of Goldman Sachs’s troubled Global Alpha fund, which controls about $9 billion. The Alpha fund has suffered an 11 percent reversal this month, giving it a decline for the year that is approaching 30 percent, sparking speculation that Goldman would liquidate the fund. Goldman calls the speculation “categorically untrue.”
On a smaller scale, Tykhe Capital, another hedge fund that uses quantitative techniques, was down 19 percent in August. The founders of Tykhe are from D.E. Shaw & Company, the giant hedge fund that manages $35 billion via a broad reliance on quantitative, as well as other, strategies and whose founder, David E. Shaw, who has a Ph.D. from Stanford, originally came from Morgan Stanley.
Hedge funds as a whole have grown exponentially and now manage about $1.7 trillion, more than double the amount five years ago.
In one respect the swoon of these computer-reliant funds is the result of managers, who are faced with a deluge of investor money seeking accelerated returns, using their models to make higher risk market bets by following day-to-day trends. It is an approach that seems to run contrary to the original philosophy underlying a quantitative approach, called statistical arbitrage.
Narrowly defined, statistical arbitrage involves a fairly straightforward investment strategy, like the rapid-fire buying of one stock and the selling short of another so as to use the computer’s speed to identify and make money from even the most minute price discrepancies. Such a strategy will generally provide liquidity to the market by buying stocks on the way down and selling them short on the way up. In so doing, it provides a dose of calming, computerized sang-froid to markets in the grip of panic or euphoria.
But such strategies rarely promise high returns, so quantitative investors have broadened their computer models to include strategies for investing in more risky areas like mortgage-backed securities, derivatives and commodities.
“You can build a computer model for anything that is tradable,” Mr. Chan said. To some extent, that explains the outbreak of losses in these funds.
With many of these new assets being highly illiquid and with the funds themselves having used considerable amounts of borrowed money to enhance their returns, losses have been magnified as worried investors have demanded to pull their money out.
In a letter to investors this week, James H. Simons, the founder of Renaissance Technologies, the most highly regarded of the quantitative funds, gave voice to what he described as “unusual” market conditions. Mr. Simons, who received a Ph.D. in mathematics from the University of California, Berkeley, acknowledged what a difficult month August had been, with his RIEF down close to 9 percent for the month.
For an investor who reportedly earned $1.6 billion last year and whose flagship Medallion fund had an average annual return of over 30 percent since 1988, it was a surprising reversal.
“We cannot predict the duration of the current environment,” Mr. Simons wrote. “But usually such behavior causes first pain and then opportunity. Our basic plan is to stay the course.”

Sorting Through the Buyout Freezeout

By ANDREW ROSS SORKIN, New York Times, Sunday, August 12, 2007:

WELL, so much for the “slow leak” theory.
Now that the buyout boom has officially gone bust and the credit markets are in meltdown, it’s time to assess what went wrong — and what went really wrong. And, of course, to shower a bit of praise on those who got it right.
It is going to be a long August. Here are some talking points to get you through brunch in East Hampton, or if you just happen to run into Jimmy Cayne, the chairman of Bear Stearns, working off some subprime-related stress at the Hollywood Golf Club in New Jersey.

Again, Kohlberg Kravis Roberts has shown a remarkable knack for accelerating into the crash. The buyout giant has more “hung deals” — transactions that have been announced but not yet closed — than any other private equity firm out there, thanks in large part to its frenzied deal-making in the last few months. First Data and TXU are the biggies, and they are likely to cost the banks that lent Kohlberg Kravis the money dearly. (Banks agreed to lend Kohlberg Kravis $24 billion to acquire First Data and $37 billion for TXU). Kohlberg Kravis’s investors will likely be hit, too, as it increasingly looks as if the firm overpaid in these deals.
Just three months ago, at a conference in Halifax, Nova Scotia, Henry R. Kravis said we were in a “golden era” of buyouts. It is the kind of thing that people were saying in 1987 at the Predators’ Ball — Michael Milken’s annual junk-bond sales conference — just before Kohlberg Kravis bought RJR Nabisco, an investment that turned into a decade-long headache.
This time around, Kohlberg Kravis has again leaped headlong into a closing window, taking advantage of its ability to generate enormous fees on supersize deals, even if the returns are not going to be stellar.
Warren E. Buffett said last year at the annual meeting of Berkshire Hathaway that private equity’s long-term success, to the extent it has any, would not come from outsize returns. “They’ll make it on fees, fees, fees,” he said.
Speaking of closing windows, given the current state of the market, don’t hold your breath for Kohlberg Kravis’s planned initial public offering.

Handshake deals are causing some mighty sweaty palms. An idea has been floating around Wall Street, suggesting that private equity firms may try to walk away from deals and that some banks, on the hook for huge, underpriced loans, may try to push them to do it. (The banks would offer to pay the breakup fee, which would be cheaper than financing the deal.) The idea was initially pooh-poohed by private equity professionals because of the damage it would cause to their reputation.
“The next time David Bonderman or Henry Kravis wants to buy a company, the board could say, ‘Aren’t you the same guys who backed out of that other deal?’ ” a private equity executive said.
But look what’s happening now: A group of firms that bought Home Depot’s wholesale supply business for $10.3 billion is trying to renegotiate the price lower, and J. C. Flowers, a private equity firm that agreed to buy Sallie Mae, is threatening to back out of the deal. And those are just two deals where the negotiations are public. There are probably dozens more conversations going on privately. But what about that issue of reputational damage? Come on. Wall Street has a short memory.

How is this for irony? While the credit squeeze has crushed the life out of the buyout boom, guess who has quietly begun talking about buying up deal debt on the cheap? Yes, the buyout firms themselves. While the likes of Kohlberg Kravis are forcing big banks to uphold their commitment to lend money on deals like First Data at rates that will surely cause them losses, Kohlberg Kravis and others are exploring the prospect of buying some of that debt from the banks at discounted rates. The Apollo Group has already played the role of debt vulture, picking up some of the debt on the recent buyout of Thomson Learning that the Royal Bank of Scotland had been unable to offload at the initial rates, people involved in the deal said.

Who’s the biggest bully on Wall Street? For the last year or two, Cerberus Capital Management hasn’t made too many friends by often pushing banks to the brink on loan terms. Two weeks ago, however, Cerberus eased up, permitting JPMorgan Chase and the other banks backing its purchase of Chrysler to renegotiate the deal. The next time Cerberus needs a favor from Wall Street, it is likely to get it. Kohlberg Kravis, which hasn’t let up on its lenders so far, may want to take note.

The board of Alltel, which sold the company for about $27.5 billion in May to TPG Capital and Goldman Sachs, should take a bow. The board and its adviser, Merrill Lynch, were criticized for accepting a pre-emptive bid before hearing offers from other suitors, which were due in June as part of a full-fledged auction. Phew! Had they waited, there is a good possibility there would have been no deal at all.

While we’re handing out kudos, the independent directors of Cablevision look as if they deserve some. The company’s founding family, the Dolans, tried to buy out the company for a song twice, and the directors stopped them until the family ponied up a major premium. Even then, some investors felt shortchanged. Now, with markets in turmoil and Cablevision lowering its 2007 revenue projections, the deal may have been a boon for shareholders.

Speaking of timing, good or otherwise: Shouldn’t the private-equity-controlled Warner Music Group have entertained an offer this year to sell itself to EMI for $31 a share? Warner’s share price briefly dropped below $10 last week. Just asking.

Finally, the big question on Wall Street is this: Which heads will roll when the dust settles? There are a few candidates to consider. John J. Mack, the chief executive of Morgan Stanley, jumped into the buyout game with both feet at the worst possible moment. While some people have been calling for months for the ouster of Chuck Prince, the chairman of Citigroup, they could get their way if he is not able to offload some of the jumbo loans on his books.
And then there is a dark horse: the Goldman Sachs “it” boy, Lloyd C. Blankfein. He bet more on private equity than any of the other banks. The Citigroup analyst Prashant Bhatia says the firm has $20 billion of loan exposure, more than any other firm on the street. On top of that, Goldman’s private equity and hedge fund business has been in a world of hurt. Even its flagship Global Alpha fund is down significantly.
To be sure, each of these guys has experience riding out storms. A lot will depend on whether this is a summer squall or something more serious.

Wednesday, August 08, 2007

August Bust: First Signs of M&A Slowdown

WSJ Deal Journal, August 7, 2007, 5:08 pm:
August may turn out to be the cruelest month for the M&A business.
According to Thomson Financial, this has been the slowest August so far for deals in four years. There have been 170 announced, with a total value of $13.2 billion. That compares with 236 deals with a total value of $19.6 billion a year earlier. The last time deal activity was so slow in this period was 2003, when deal makers struck 146 deals valued at $8.3 billion. (It may not be a coincidence that most bankers date the start of the mergers-and-acquisitions boom that now may be in its death throes to some time in 2003.)
As we pointed out in this post last week, the tremors rippling through the credit and stock markets hadn’t shaken the deal market as of July, when companies and private-equity firms world-wide struck $544 billion of deals. That was more than double the year-earlier total.
Of course, one week does not an M&A slowdown make. Still, few deal watchers think an LBO with an 11-digit headline (at least $10 billion) is a possibility with the financing markets in their current state. So it is hard to imagine the early August returns aren’t a signal of more of the same to come. If nothing else, it is almost certain that deal activity won’t maintain the scorching pace of earlier in the year. With deals like Virgin Media and the $15 billion sale of Cadbury Schweppes’ U.S. drinks business getting sidelined, how could it not?

Tuesday, August 07, 2007


WASHINGTON, D.C., August 7, 2007 – Venture capitalists invested $7.1 billion in 977 deals in the second quarter of 2007 -- the highest level of deals reported in a quarter since Q3 2001 -- according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data by Thomson Financial. The quarterly strength in the number of deals was driven by companies in the Seed and Early stages of development, which increased by 31 percent from the prior quarter.

“The data implies good news all around for the venture capital industry which has been extremely active in doing what we do best -- building companies from the ground up,” said Mark Heesen, president of the National Venture Capital Association. “Not only does the increase in Seed and Early stage deals demonstrate the number of young, promising opportunities available, but the diversity of investment strongly suggests that the prospects for innovation are all around us. The industry is not relying on one particular sector for deals. Even better, dollars invested are holding steady or even declining, suggesting that venture capitalists are being very measured about how much money they invest per company.”
You can get the press release and detailed data here.

Monday, August 06, 2007

High-Yield Goes on Holiday

WSJ Deal Journal, August 6, 2007, 11:34 am
Posted by Dana Cimilluca
For a little perspective on the impact market turmoil is having on borrowers’ ability to raise cash in the high-yield loan and bond markets, consider the following from Thomson Financial.
No U.S. company has raised funds in the high-yield market since July 26th, either to finance a takeover or to trade in existing debt for new paper. That is six trading sessions and counting. The last time there was a drought that long was the holiday period of Dec. 20 of last year to Jan. 8.
New high-yield issuance since the end of June totals just $2.43 billion. That compares with a first-half total of $97 billion. At the current pace, second-half issuance would be roughly one-tenth what it was in the first six months of 2007.
The last U.S. acquisition to exceed $20 billion was Blackstone Group’s $27 billion bid for Hilton Hotels (including debt) on July 3rd.
A little more than a month may not seem like a long time, but given the rapid-fire deal making private-equity firms had gotten us used to, it starts to seem like a long time. No one expects that clock to stop ticking any time soon. The narrow slit of an opening in the funding window raises again the question of how in the world all the pending buyouts (First Data, TXU, Alltel, Harrah’s, SLM to name a few) are going to get funding in the market. Also, how much longer can the default rate stay down with shaky companies forced to stand on their own two feet?

Thursday, August 02, 2007

Venture fundraising down at halftime

A new report from Dow Jones VentureOne reveals that U.S. venture firms have raised less capital during the first half of 2007 than in any other six-month period in almost four years.
Venture funds in the U.S. totaling $6.36 billion were closed between Jan. 1 and June 30, 2007, almost exactly half the dollar amount raised during the same period the previous year. Although fundraising tends to fluctuate from quarter to quarter, the numbers were fairly consistent in early 2007, with funds raising $3.13 billion in the first quarter and $3.22 billion in the second.
The half-year total puts fundraising on a pace well behind last year's, when a total of $24.73 billion was raised over 12 months.
The 32 funds closed thus far in 2007 also represent diminished activity compared to last year. In 2006, a total of 98 funds were raised, including 46 in the first half of the year.

Wednesday, August 01, 2007

SEC looking at sovereign wealth funds

Chairman questions funds' motives during Senate hearing
By Robert Schroeder, MarketWatch
Last Update: 11:49 AM ET Jul 31, 2007
WASHINGTON (MarketWatch) -- Securities regulators are "grappling with" the rising prominence of sovereign wealth funds, the chairman of the Securities and Exchange Commission told a Senate panel Tuesday as he questioned the motives of funds' investment decisions.
SEC Chairman Christopher Cox told a Senate Banking Committee hearing that these funds, which are government investment vehicles funded by foreign-exchange assets, pose challenges to the U.S. regulatory system.
Sovereign wealth funds are "significantly less transparent" than hedge funds, Cox noted.
The SEC chief said the growing governmental and potentially political influence over capital market flows that the sovereign wealth funds portend "presents challenges to a regulatory system premised on free markets, the free flow of information and investor incentives based on profit and loss."
During a question-and-answer session with senators, Cox said motives for investment decisions may "go beyond profit and loss."
The value of the funds could reach $12 trillion by 2015, up from $2.5 trillion now and dwarfing hedge funds' value.
The foreign-exchange assets in such funds are managed separately from the official reserves of a country's monetary authorities, Cox said.

Robert Schroeder is a reporter for MarketWatch in Washington.