Hedge Funds Sharpen Blades in Preparation for Annual Conference

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Tomorrow is the Ira Sohn Research Investment Conference at the Time Warner Center, one of the major hedge-fund gatherings of the year. It's a charity event in which attendees pay up to $3,000 a pop to hear top managers argue an investment position. It has always been interesting, and sometimes a great deal more: Last year, David Einhorn of Greenlight Capital famously went after Lehman Brothers, and we all know how that one ended.

This year's lineup is stacked again — Einhorn, Bill Ackman of Pershing Square, James Chanos of Kynikos and Peter Schiff of EuroPacific.

What could possibly happen this year to rival last year? Here's our wild guess — another assault on the financials. Because despite the carnage of the last year, there remains a great deal of enmity toward the banks. Hedge-fund guys don't much care for the way they've gotten to bend the rules to their own advantage, like with that short-selling ban or the easing of mark-to-market. The question is, if an investor is brave enough to restart this war, what's the most suitable target?

At this point, going after a crippled giant like Citigroup or Bank of America is cheap sport. Sure, both stocks have enjoyed an improbable run-up in recent weeks, but seriously — does anyone actually believe in the health of these institutions? Intellectually, it's an easy case to make that they're screwed (and Ackman already has) The big regional banks, perhaps equally screwed, aren't attractive fodder, either. Who can even keep their names straight? Fifth Third? What? Who?

Making a lasting impression would mean going after one of the financial untouchables, of which, as far as we can tell, there are but three: Goldman Sachs, JPMorgan, and Wells Fargo.

You can cross Goldman off the list. With the thinning of the broker-dealer herd, it's hard to imagine there's a significant hedge fund left in the world that doesn't clear at least some of its trades through Goldman. So going after them would amount to the proverbial "shitting where you eat." Plus, it's possible that the firm is actually on solid footing. They say so on CNBC, anyway. Even Chanos, the great Enron slayer and no fan of Goldman, will likely set his sights elsewhere.

The SWYE rule applies for JPMorgan too, with the added disincentive that CEO Jamie Dimon is the Obama-administration–approved prince / genius / all-purpose savior of the financial industry. Smear him and the fun will really start. First an audit from the IRS, then your nanny gets deported, and finally, when you think you've suffered enough, your valedictorian, captain-of-every-team, math-whiz kid gets inexplicably rejected by Harvard, Yale, Princeton, and, yes, Oberlin. Tim Geithner has friends everywhere, you know.

So that leaves Wells. An awfully tough row to hoe, what with Warren Buffett proclaiming that he'd put his entire net worth into the bank, if he could. Taking on Buffett offers about the same odds of success as clambering out of the trench at Verdun. On the other hand, if you win, imagine the glory! And there's plenty to wonder about with Wells. Not only is their home base the woebegone state of California, but they swooped in and bought Wachovia without government assistance. And Wachovia, you'll be forgiven for not remembering, had swallowed up Golden West, which handed out mortgages with about the same level of due diligence that your local Chinese takeout joint does before they slip a menu under your door.

So maybe, just maybe, Warren Buffett is full of baloney on Wells, and some smart hedge-fund guy is rarin' to pop this last bubble.

We sure hope so, if for nothing more than entertainment value. The conference runs from 3-6:30 p.m. tomorrow, and in order to give attendees a chance to make their trades before the world does, the news is embargoed until noon Thursday — at which point we'll immediately report whether we have any idea what we're talking about here.

Hedge-Fund Titans Hear Chanos, Einhorn, Raise Funds for Cancer [Bloomberg]