Solengo Capital’s Blind Pool: An Indemnification Conundrum

Amidst court orders against websites that leaked a confidential marketing brochure by hedge fund upstart Solengo Capital, the content of the formerly confidential brochure got lost in the brouhaha.

Solengo is the new hedge fund raised by Brian Hunter, who is the trader reportedly responsible for the multi-billion dollar loss suffered last year by hedge fund Amaranth in natural gas futures. He wants to get back into business with a new fund only half a year after Amaranth’s almost-meltdown. Thanks to this short road to redemption, it is no surprise that Brian’s marketing materials have become the object of merciless mockery in the financial blogging community.

The brochure is sparse in words and numbers but rich in intensely-colored background images of the typical stock photo variety. In a perverse way, this powerpointization makes sense, because most investors, including “professional” ones, never make it past the executive summary anyway. Overall, it is no more than an overview of an early stage business plan for a multi-manager fund full of platitudes:

“The pooling of exceptional intellectual capital creates new and innovative ideas.”

“Simply put, we want to hire the best portfolio manager in every market and let them do what they do best – make money.”

This is not much different from what every multi-manager startup sets out to do. Except that most multi-manager funds know which managers and strategies they will allocate to before raising money. Solengo seems to be essentially an expensive blind pool – give us your money now, pay us 2/20, and we’ll see later who will manage it.

And there is more devil in the details. One slide in particular caught our attention. It stands out mostly because it has not even a single picture, but only words. At first sight, Solengo seems to soothe investors’ concerns over leverage and long lockups through generous risk management conditions. A maximum margin-to-capital ratio is calculated, and violations of that ratio will allow investors to withdraw irrespective of lockups. So far, so good.

But a closer read of a sub-bullet on the margin-to-capital ratio makes you wonder whether all these restrictions are really that meaningful:

“Solengo will be indemnified against mistakes in calculation [sic] of this ratio up to three months after a new product is traded by a sub-fund.”

What they don’t tell is is who exactly indemnifies Solengo? The managers? If Solengo loses six billion of your money, will Brian Hunter pay you back from his own pocket?

In the end, it won’t matter. The pedigree of Solengo’s principals will make raising a blind pool an uphill battle. In case their venture fails to get off the ground, the legal circus of restraining orders and defamation lawsuits will allow them to blame it on the bloggers.

Note to Solengo’s lawyers: If you send us one of your cease and desist letters, please include an explanation of the indemnification provision. We don’t lose sleep over threatening letters, but that indemnification conundrum really keeps us up at night.