UBS, Goldman seek entry to China asset management via broking
By Jame DiBiasio | 1 September 2009
UBS Global Asset Management and Goldman Sachs are exploring whether they can participate in ‘collective investment management’ schemes in China.
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UBS Global Asset Management is working on ways to manage assets in China -- but not by setting up a mutual fund joint venture.
It and a few other foreign financial institutions are exploring to what extent they can participate in the young industry for 'collective investment management' schemes, or CIM.
CIM is the up-and-coming industry for local securities companies to manage client assets. The first ones appeared in 2006, and there are now 28 local brokerages operating around 70 CIM platforms, with a total AUM of $16 billion.
The mutual funds industry, by comparison, is 11 years old, involves over 60 players (half of which are Sino-foreign JVs) managing over 500 funds worth around $350 billion.
While mutual funds are both closed- and open-ended, the CIMs launched to date are all closed-end, with a typical maturity of three-to-five years (the CSRC is expected to allow some to be launched with no maturity date). They are designed for wealthier clients able to take risk, with bigger minimum investment sizes (Rmb100,000 for equities or Rmb50,000 for bonds, which is 1,000 times more than a mutual fund's minimum) and no advertising allowed; these are placed privately.
Some people in the mutual funds industry criticise the government's decision to encourage brokers to sell CIMs. The funds industry is the most tightly regulated in China (and profitable), whereas CIMs are more of a free-for-all. Today, CIMs' investment strategies aren't much different from those of funds, but in theory they are more flexible.
More importantly is how they are structured: CIMs can charge performance fees, something that mutual fund houses have long pined for but which the CSRC has refused to grant. The argument goes, therefore, that CIMs' investments are better aligned with client goals. CIMs are meant to provide for a more absolute-return style of investing, although their track record is too short to offer a meaningful comparison to funds.
CIMs also make the playing field for investment products more bumpy, less level, at a time when such differences have been blamed for allowing structured products to be mis-sold. Both mutual funds and CIMs are regulated by the China Securities Regulatory Commission -- but in different departments, with their own agendas.
Beijing, however, seems keen to let brokers manage assets in order to help the industry, which is generally state-owned and unprofitable.
To date, no foreign-invested securities firm has been approved to launch a CIM. However, UBS and Goldman are looking at how they can participate.
Right now, CIMs do not have approval to invest overseas (with one exception), but they are expected to be given rules as qualified domestic institutional investors. Once that occurs, they will be able to provide a broader range of strategies than mutual fund companies, such as real-estate investment trusts, private equity, infrastructure -- even art and wine, if the CSRC allowed it.
The exception is China International Capital Corp, in which Morgan Stanley is a passive minority investor, but its QDII product was launched amid the worst of the financial turmoil, so it's not seen as a bellwether. Morgan Stanley Investment Managers also has a stake in a local funds JV.
UBS Global Asset Management says it is exploring how it can bid to provide advice to a CIM QDII product if UBS Securities China is granted permission to enter the business. Brokers must first be granted approval to set up an asset management division, and, among other requirements, operate it for a year before they can participate in the QDII market.
UBS Securities China began operations in 2006 and is a distinct company separate from UBS Securities, which is a shareholder. UBS already has a minority stake in a mutual-funds JV with State Development Investment Corporation, called UBS SDIC Management Fund Company, which was established in 2005.
Goldman Sachs also says it is exploring ways to participate in this market. It has a relationship -- but no ownership stake -- with Gao Hua Securities. Goldman lent money to its former partner Fang Fenglei to established Gao Hua, and the two have an investment banking JV in China. Gao Hua Securities is considering applying for an asset management license, and if this is granted, and Gao Hua gets into the CIM business, then Goldman Sachs Asset Management could be tapped as an international advisor. GSAM also manages a QFII portfolio.
Credit Suisse has a joint venture with Founder Securities to underwrite securities, and Deutsche Bank has a similar structure with Zhong De Securities. But neither JV is licensed as a brokerage. CS retains a role in a funds joint venture with ICBC, while Deutsche owns 30% of Harvest Fund Management.
© Haymarket Media Limited. All rights reserved.
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Tuesday, September 1, 2009
Thursday, August 27, 2009
Pictet FOFs - Expanding in Asia
Pictet Asset Management markets funds of hedge funds
By Jame DiBiasio | 27 August 2009
The firm is better known in Asia as a traditional fund house but is targeting institutional investors and private banks with a platform for hedge funds.
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Pictet Asset Management has assembled a three-person team based out of Geneva to promote its fund of hedge funds, a marketing effort that has now been extended to Asian and Australian institutional investors.
The move is an expansion for the firm, which in Asia is known as a traditional, long-only provider.
Steve Huguenin-Virchaux, alternative product specialist at Pictet, says the timing is based on the firm's recent track record. Pictet has managed hedge funds since the 1980s and created its fund of hedge funds in 1994. Its business is mid-sized, with about $3.5 billion in funds and another $3 billion or so in segregated mandates or advisory businesses.
Last year Pictet's fund of funds maintained full liquidity, as the underlying strategies allowed this. Pictet did suffer redemptions (at its peak its total hedge-fund invested assets was around $10 billion) and losses (-15% for 2008) but these were in line or slightly better than the industry average, and there was no gating of assets.
Year-to-date for 2009 the fund of hedge funds is up about 10%.
The majority of clients for the alternative business are French and Swiss, and mostly private banks. Pictet is keen to balance the business both by targeting institutional investors as well as promoting funds of funds in Asia.
"We want to be seen as a wealth manager, not a fund manager," says Amy Cho, managing director in Hong Kong. Her business-development team will focus on clients in Australia and Hong Kong first for the alternative product side.
© Haymarket Media Limited. All rights reserved
By Jame DiBiasio | 27 August 2009
The firm is better known in Asia as a traditional fund house but is targeting institutional investors and private banks with a platform for hedge funds.
advertisement
Pictet Asset Management has assembled a three-person team based out of Geneva to promote its fund of hedge funds, a marketing effort that has now been extended to Asian and Australian institutional investors.
The move is an expansion for the firm, which in Asia is known as a traditional, long-only provider.
Steve Huguenin-Virchaux, alternative product specialist at Pictet, says the timing is based on the firm's recent track record. Pictet has managed hedge funds since the 1980s and created its fund of hedge funds in 1994. Its business is mid-sized, with about $3.5 billion in funds and another $3 billion or so in segregated mandates or advisory businesses.
Last year Pictet's fund of funds maintained full liquidity, as the underlying strategies allowed this. Pictet did suffer redemptions (at its peak its total hedge-fund invested assets was around $10 billion) and losses (-15% for 2008) but these were in line or slightly better than the industry average, and there was no gating of assets.
Year-to-date for 2009 the fund of hedge funds is up about 10%.
The majority of clients for the alternative business are French and Swiss, and mostly private banks. Pictet is keen to balance the business both by targeting institutional investors as well as promoting funds of funds in Asia.
"We want to be seen as a wealth manager, not a fund manager," says Amy Cho, managing director in Hong Kong. Her business-development team will focus on clients in Australia and Hong Kong first for the alternative product side.
© Haymarket Media Limited. All rights reserved
Hedge fund of funds' assets fall by $200bn
August 25, 2009
Hedge fund of funds' assets fall by $200bn
By Louise Armitstead, Telegraph.co.uk, August 24, 2009
Investors pulled an estimated $200bn (£122bn) from the hedge fund of funds sector from September 2008 to June this year, representing a 30pc drop in assets.
While many individual hedge funds have seen inflows recover in the first half of this year, a study of the top 50 hedge fund of funds in the world found that all except two players have seen significant falls in assets since September 2008 which had not been recovered by June.
The research, by The Hedge Fund Journal and Newedge Prime Brokerage, found that assets in the sector were $530bn at the end of June, down from a peak of $825bn. The industry magazine said the figures revealed a "transformational crisis" that had "come as a shock" to a sector that had grown at a rate of more than 20pc a year between 2000 and 2008.
While the survey found that "most funds" had lost an average of between 25pc and 30pc of their assets, some had lost far more. Many of the biggest losers were the operations within investment banks. HSBC's Alternative Investments division shrank 51.9pc, from $46.3bn to $22.3bn; UBS's Alternative and Quantitative Investments fell 32.6pc, from $46.6bn to $31.4bn; and Goldman Sachs Hedge fund strategies was down 24.7pc, from $23.9bn to $18bn.
The biggest specialist managers also suffered heavy redemptions: Permal Asset Management dropped 48.9pc, from $36.6bn to $18.7bn, and Man Investments fell 46.4pc, from $42.9bn to $23bn. All of these remain top-10 players in the world.
The only two hedge fund of funds that saw inflows were Blackstone, which grew its operations 25pc, from $20bn to $25bn, and Grovesnor Capital Management, up 1pc from $20bn to $21bn. The hedge fund sector as a whole suffered last year as a combination of the market turmoil and high levels of gearing resulted in its worst performance for a decade. In addition, a sudden aversion to risk and a need for liquidity led to a scramble by investors to withdraw money, causing some funds to collapse.
Hedge fund of funds have been hit twice by redemptions both directly and in the funds they invest in. Chicago-based Hedge Fund Research (HFR) has reported that more than 200 funds of hedge funds liquidated in 2009, nearly twice the number of those that closed in the fourth quarter of 2008. However, in recent months some have reported a steady return of inflows, particularly in funds of funds that have restructured and reduced management fees.
Hedge fund of funds' assets fall by $200bn
By Louise Armitstead, Telegraph.co.uk, August 24, 2009
Investors pulled an estimated $200bn (£122bn) from the hedge fund of funds sector from September 2008 to June this year, representing a 30pc drop in assets.
While many individual hedge funds have seen inflows recover in the first half of this year, a study of the top 50 hedge fund of funds in the world found that all except two players have seen significant falls in assets since September 2008 which had not been recovered by June.
The research, by The Hedge Fund Journal and Newedge Prime Brokerage, found that assets in the sector were $530bn at the end of June, down from a peak of $825bn. The industry magazine said the figures revealed a "transformational crisis" that had "come as a shock" to a sector that had grown at a rate of more than 20pc a year between 2000 and 2008.
While the survey found that "most funds" had lost an average of between 25pc and 30pc of their assets, some had lost far more. Many of the biggest losers were the operations within investment banks. HSBC's Alternative Investments division shrank 51.9pc, from $46.3bn to $22.3bn; UBS's Alternative and Quantitative Investments fell 32.6pc, from $46.6bn to $31.4bn; and Goldman Sachs Hedge fund strategies was down 24.7pc, from $23.9bn to $18bn.
The biggest specialist managers also suffered heavy redemptions: Permal Asset Management dropped 48.9pc, from $36.6bn to $18.7bn, and Man Investments fell 46.4pc, from $42.9bn to $23bn. All of these remain top-10 players in the world.
The only two hedge fund of funds that saw inflows were Blackstone, which grew its operations 25pc, from $20bn to $25bn, and Grovesnor Capital Management, up 1pc from $20bn to $21bn. The hedge fund sector as a whole suffered last year as a combination of the market turmoil and high levels of gearing resulted in its worst performance for a decade. In addition, a sudden aversion to risk and a need for liquidity led to a scramble by investors to withdraw money, causing some funds to collapse.
Hedge fund of funds have been hit twice by redemptions both directly and in the funds they invest in. Chicago-based Hedge Fund Research (HFR) has reported that more than 200 funds of hedge funds liquidated in 2009, nearly twice the number of those that closed in the fourth quarter of 2008. However, in recent months some have reported a steady return of inflows, particularly in funds of funds that have restructured and reduced management fees.
Monday, August 17, 2009
Viability Challenges to Funds of Hedge Funds, Cogency
Viability Challenges to Funds of Hedge Funds
Jeffrey Axelrod, CEO, Cogency
Aug 2009
In the wake of portfolio pressures coming from hedge funds with questionable prime brokers (Lehman, Bear), credit facilities and liquidity, combined with investor pressures arising from the Madoff scandal and the quest for quick cash, funds of hedge funds found themselves at the beginning of 2009 with portfolios spotted with quicksand and landmines, and a capital drain threatening with the force to swallow them.
The sandbags
As a first line of defense, all that a FOHF could do was to mimic what their HF investments were doing to them: dropping gates and suspending redemptions. But if they were going to regain investor trust and stand a chance of getting new money into the fund, they would need to be more creative.
The better dam
What many FOHFs did was to create a protected bucket within the fund, fill it with illiquid and questionable investments and with an equal proportion of investor capital. Within this bucket they could control investor redemptions, charge different fees (often none or reduced), change the high-water mark, and handle forced-redemptions when any money came in from the underlying investments. This allowed the remainder of the fund to continue business as usual – allowing redemptions, reporting good returns as the market improved, and even pulling in new money as the flow of liquid capital changed direction.
Engineering the solution
Words like special purpose vehicle, redemption in kind, side-pocket, and liquidating-trust all began to take on life outside the offering documents. The legal and accounting form of this solution for each firm took on a shape determined by the wording of the fund’s offering documents and the capabilities of their fund administrator’s accounting system.
There were many new transactions and concepts that needed to be tracked and reported on. The rebalancing transactions that create the new entity can take many forms and be quite complex, transferring liquidity terms, fees, high-water marks, and effective dates. There must be ongoing accounting of the illiquid entity. Portfolio redemptions into the illiquid bucket must be monitored, and distributed to investors according to the terms of the new legal structure. And the investor reporting requirements on the balance in their main and illiquid holdings (sometimes separate, sometimes merged) can be complex.
In cases where the fund administrators could not accommodate the structures and reporting that the fund required, they either provided workaround solutions in Excel spreadsheets, or worked with the fund to restructure the solution to fit the available tools.
Long term environmental impact
The FOHF environment is forever impacted by the events of the past 9 months. First off, FOHFs that have been successfully self-administered for years now feel the pressure from investors to have an outside fund administrator. Regardless of the actual value, the perceived value is undisputable.
Even with an administrator, FOHFs now need to show their investors solid accounting controls - tracking valuation direct from the HF managers and cross-checking the administrator numbers with internal shadow accounting systems. And even beyond direct knowledge of HF valuation, FOHFs need to show that they understand the content of the investment portfolio of their HF managers. This is leading toward greater usage of managed accounts which, besides providing transparency into the portfolio, also provide quicker liquidity, albeit at the cost of additional oversight.
Recovery prognosis
By May 2009, the FOHF year-to-date returns were some of the best in their long-term history. With time passing and lessons learned, the industry is adjusting and recovering. FOHFs are showing a stronger interest in manager due-diligence and shadow accounting, with more attention placed on showcasing internal controls to investors. On the investor front, there is cash sitting in the portfolio of pension funds, endowments, family offices, and high-net-worth individuals, soon to be looking for a better home than the mattress.
Jeffrey Axelrod, CEO, Cogency
Aug 2009
In the wake of portfolio pressures coming from hedge funds with questionable prime brokers (Lehman, Bear), credit facilities and liquidity, combined with investor pressures arising from the Madoff scandal and the quest for quick cash, funds of hedge funds found themselves at the beginning of 2009 with portfolios spotted with quicksand and landmines, and a capital drain threatening with the force to swallow them.
The sandbags
As a first line of defense, all that a FOHF could do was to mimic what their HF investments were doing to them: dropping gates and suspending redemptions. But if they were going to regain investor trust and stand a chance of getting new money into the fund, they would need to be more creative.
The better dam
What many FOHFs did was to create a protected bucket within the fund, fill it with illiquid and questionable investments and with an equal proportion of investor capital. Within this bucket they could control investor redemptions, charge different fees (often none or reduced), change the high-water mark, and handle forced-redemptions when any money came in from the underlying investments. This allowed the remainder of the fund to continue business as usual – allowing redemptions, reporting good returns as the market improved, and even pulling in new money as the flow of liquid capital changed direction.
Engineering the solution
Words like special purpose vehicle, redemption in kind, side-pocket, and liquidating-trust all began to take on life outside the offering documents. The legal and accounting form of this solution for each firm took on a shape determined by the wording of the fund’s offering documents and the capabilities of their fund administrator’s accounting system.
There were many new transactions and concepts that needed to be tracked and reported on. The rebalancing transactions that create the new entity can take many forms and be quite complex, transferring liquidity terms, fees, high-water marks, and effective dates. There must be ongoing accounting of the illiquid entity. Portfolio redemptions into the illiquid bucket must be monitored, and distributed to investors according to the terms of the new legal structure. And the investor reporting requirements on the balance in their main and illiquid holdings (sometimes separate, sometimes merged) can be complex.
In cases where the fund administrators could not accommodate the structures and reporting that the fund required, they either provided workaround solutions in Excel spreadsheets, or worked with the fund to restructure the solution to fit the available tools.
Long term environmental impact
The FOHF environment is forever impacted by the events of the past 9 months. First off, FOHFs that have been successfully self-administered for years now feel the pressure from investors to have an outside fund administrator. Regardless of the actual value, the perceived value is undisputable.
Even with an administrator, FOHFs now need to show their investors solid accounting controls - tracking valuation direct from the HF managers and cross-checking the administrator numbers with internal shadow accounting systems. And even beyond direct knowledge of HF valuation, FOHFs need to show that they understand the content of the investment portfolio of their HF managers. This is leading toward greater usage of managed accounts which, besides providing transparency into the portfolio, also provide quicker liquidity, albeit at the cost of additional oversight.
Recovery prognosis
By May 2009, the FOHF year-to-date returns were some of the best in their long-term history. With time passing and lessons learned, the industry is adjusting and recovering. FOHFs are showing a stronger interest in manager due-diligence and shadow accounting, with more attention placed on showcasing internal controls to investors. On the investor front, there is cash sitting in the portfolio of pension funds, endowments, family offices, and high-net-worth individuals, soon to be looking for a better home than the mattress.
Thursday, August 6, 2009
FOFs - Record Inflow in 2Q09
From Citywire: http://www.citywire.co.uk/professional/-/news/fund-news/content.aspx?ID=352626
Fund of funds post record inflows in Q2
By Drazen Jorgic | 14:54:17 | 05 August 2009
Investors poured a net record of £1.2 billion into fund of funds in the second quarter, while ethical funds registered their first outflows since Investment Management Association (IMA) records begun.
The £1.2 billion was a £100 million more than on the corresponding period of the previous year.
Most of the net sales were of funds that invest externally. The most popular sector in Q2 2009 was cautious managed, accounting for net inflows of £347.5 million, followed by Balanced Managed with a net inflow of £337.5 million.
Ethical funds suffered outflows of £18.4 million.
Overall, funds under management in the second quarter of the year, within the fund of funds space, totalled £32.5 billion, up 15% on Q1 but down 3% on the same quarter in 2008.
Tracker funds also saw a surge in popularity with investors looking for beta exposure on the rising markets. Sales of tracker funds had substantially surged, with net inflows of £258.9 million in Q2, in stark contrast to £31.6 million in outflows the previous quarter and £1.8 million outflows in the corresponding period in 2008.
IMA said gaining market exposure through trackers continued to be most popular with the IFA sector, with intermediaries accounting for 61% of all gross retail sales.
Jane Lowe, director of markets at the IMA, said: 'In line with overall net retail sales, funds of funds saw record net retail inflows in the second quarter. Although only a small proportion of total funds under management, ethical funds by contras, saw their first net outflow since records began in 1992.'
Fund of funds post record inflows in Q2
By Drazen Jorgic | 14:54:17 | 05 August 2009
Investors poured a net record of £1.2 billion into fund of funds in the second quarter, while ethical funds registered their first outflows since Investment Management Association (IMA) records begun.
The £1.2 billion was a £100 million more than on the corresponding period of the previous year.
Most of the net sales were of funds that invest externally. The most popular sector in Q2 2009 was cautious managed, accounting for net inflows of £347.5 million, followed by Balanced Managed with a net inflow of £337.5 million.
Ethical funds suffered outflows of £18.4 million.
Overall, funds under management in the second quarter of the year, within the fund of funds space, totalled £32.5 billion, up 15% on Q1 but down 3% on the same quarter in 2008.
Tracker funds also saw a surge in popularity with investors looking for beta exposure on the rising markets. Sales of tracker funds had substantially surged, with net inflows of £258.9 million in Q2, in stark contrast to £31.6 million in outflows the previous quarter and £1.8 million outflows in the corresponding period in 2008.
IMA said gaining market exposure through trackers continued to be most popular with the IFA sector, with intermediaries accounting for 61% of all gross retail sales.
Jane Lowe, director of markets at the IMA, said: 'In line with overall net retail sales, funds of funds saw record net retail inflows in the second quarter. Although only a small proportion of total funds under management, ethical funds by contras, saw their first net outflow since records began in 1992.'
Tuesday, August 4, 2009
Merrill's New Prime Brokerage / Cap Intro Person
Merrill Asia Prime Brokerage Hires CLSA Capital Intro. Expert
July 28, 2009
In recent years, the revolving door at Merrill Lynch’s Asia prime brokerage has been ushering people out. But the firm is replacing some of that lost talent with the hire of CLSA’s Joanne Bryant-Rubio.
Bryant-Rubio has joined Merrill’s capital introduction team in Hong Kong as vice president, Asian Investor reports.
At CLSA, Bryant-Rubio handled capital introduction and fundraising for Asia hedge funds from London. Before joining CLSA, she worked at Atlas Capital, a fund of hedge funds.
July 28, 2009
In recent years, the revolving door at Merrill Lynch’s Asia prime brokerage has been ushering people out. But the firm is replacing some of that lost talent with the hire of CLSA’s Joanne Bryant-Rubio.
Bryant-Rubio has joined Merrill’s capital introduction team in Hong Kong as vice president, Asian Investor reports.
At CLSA, Bryant-Rubio handled capital introduction and fundraising for Asia hedge funds from London. Before joining CLSA, she worked at Atlas Capital, a fund of hedge funds.
Tuesday, July 14, 2009
China to Revive QDII Fund Quotas
Safe expected to revive QDII fund quotas
By Liz Mak | 15 July 2009
China Universal and E-Fund may be the last to launch active QDII strategies, as a host of passive and ETF products line up at Safe's door.
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The QDII scene in China has been at a standstill ever since Schroders' China JV with the Bank of Communications launched its Bocom Schroders Global Selection Fund on August 22 last year. Three weeks later, Lehman Brothers collapsed, AIG was bailed out and Merrill Lynch was forced into a marriage with Bank of America.
Alarmed at the chaos, decision makers at the State Administration of Foreign Exchange (Safe) froze foreign-exchange quota approvals for fund managers, which had hoped to launch products under the qualified domestic institutional investor (QDII) programme.
There are now 20 fund houses in line for such approval. These are the fund houses that have received the blessing of the industry regulator, the China Securities Regulatory Commission, which is the penultimate step before winning Safe's quota.
It is now 10 months since the last QDII fund was given a quota, and the rumour mill about which company will be allowed to return to the market first is at full tilt. The betting in Shanghai is that QDII funds will be approved by September, although some observers reckon the first won't launch until November.
Atop the queue awaiting Safe's approval are Guangzhou's E-fund and Shanghai's China Universal. The two houses have already assembled their in-house investment teams. (E-fund opened its Hong Kong office in January this year. It now operates in IFC.)
E-fund is known to have signed up State Street Global Advisors as its partner to launch an Asian enhanced strategy product, while China Universal is backed by Capital International.
E-fund and China Universal are seen to be the last few players to pursue active global strategies, marking a transition phase from the first generation of QDII. A second generation of QDII is now brewing, as regulators and fund houses exhibit a strong preference for passive, indexed strategies for qualities such as transparency and liquidity.
Other firms also on Safe's waiting list include: Changsheng, China Merchants Fund (JV of ING), Lord Abbett, UBS SDIC, Fullgoal (JV of Bank of Montreal), Da Cheng, Bosera, Guotai, Penghua (JV of Eurizon), Invesco Great Wall, AIG Huatai, Everbright Pramerica, Citic Prudential, Franklin Templeton Sealand, Guangfa, BoC International (JV of BlackRock), and ABN Amro Teda (now a JV of BNP Paribas).
Among these, Changsheng is said to have already mandated Goldman Sachs as an advisor. Calyon is also said to have snatched a mandate from BNP Paribas to execute Guotai's QDII product, a passive offering indexed to Nasdaq 100. Meanwhile, the JVs will most likely develop products with their foreign shareholders.
Industry execs suggest Safe will be more comfortable giving out a new quota when the existing QDII funds recoup their losses and at least see their NAVs return to launch levels. After all, officials are still facing ongoing criticism for opening the floodgate for the first generation of QDII. (On top of which sits CIC's losses in foreign investments, to which the Safe is responsible for funding.) The agency is desperately trying to time the next batch of QDIIs well in order to avoid similar embarrassment.
Only two out of nine existing QDII funds are in positive territory -- Fortis Haitong China Overseas Best Selection Fund and Bocom Schroders Global Selection Fund. As at the end of June, the two were up by 50.09% and 33.80% respectively since launch. The seven other existing products delivered a -29.6% loss on average. These range from China International's -49.6%, Harvest's -41.4%, China Southern's -36.2% to ChinaAMC's - 30.9%, ICBC Credit Suisse's -26.4%, Yinhua's -17.8% and Fortune SGAM's -5.0%.
© Haymarket Media Limited. All rights reserved.
By Liz Mak | 15 July 2009
China Universal and E-Fund may be the last to launch active QDII strategies, as a host of passive and ETF products line up at Safe's door.
advertisement
The QDII scene in China has been at a standstill ever since Schroders' China JV with the Bank of Communications launched its Bocom Schroders Global Selection Fund on August 22 last year. Three weeks later, Lehman Brothers collapsed, AIG was bailed out and Merrill Lynch was forced into a marriage with Bank of America.
Alarmed at the chaos, decision makers at the State Administration of Foreign Exchange (Safe) froze foreign-exchange quota approvals for fund managers, which had hoped to launch products under the qualified domestic institutional investor (QDII) programme.
There are now 20 fund houses in line for such approval. These are the fund houses that have received the blessing of the industry regulator, the China Securities Regulatory Commission, which is the penultimate step before winning Safe's quota.
It is now 10 months since the last QDII fund was given a quota, and the rumour mill about which company will be allowed to return to the market first is at full tilt. The betting in Shanghai is that QDII funds will be approved by September, although some observers reckon the first won't launch until November.
Atop the queue awaiting Safe's approval are Guangzhou's E-fund and Shanghai's China Universal. The two houses have already assembled their in-house investment teams. (E-fund opened its Hong Kong office in January this year. It now operates in IFC.)
E-fund is known to have signed up State Street Global Advisors as its partner to launch an Asian enhanced strategy product, while China Universal is backed by Capital International.
E-fund and China Universal are seen to be the last few players to pursue active global strategies, marking a transition phase from the first generation of QDII. A second generation of QDII is now brewing, as regulators and fund houses exhibit a strong preference for passive, indexed strategies for qualities such as transparency and liquidity.
Other firms also on Safe's waiting list include: Changsheng, China Merchants Fund (JV of ING), Lord Abbett, UBS SDIC, Fullgoal (JV of Bank of Montreal), Da Cheng, Bosera, Guotai, Penghua (JV of Eurizon), Invesco Great Wall, AIG Huatai, Everbright Pramerica, Citic Prudential, Franklin Templeton Sealand, Guangfa, BoC International (JV of BlackRock), and ABN Amro Teda (now a JV of BNP Paribas).
Among these, Changsheng is said to have already mandated Goldman Sachs as an advisor. Calyon is also said to have snatched a mandate from BNP Paribas to execute Guotai's QDII product, a passive offering indexed to Nasdaq 100. Meanwhile, the JVs will most likely develop products with their foreign shareholders.
Industry execs suggest Safe will be more comfortable giving out a new quota when the existing QDII funds recoup their losses and at least see their NAVs return to launch levels. After all, officials are still facing ongoing criticism for opening the floodgate for the first generation of QDII. (On top of which sits CIC's losses in foreign investments, to which the Safe is responsible for funding.) The agency is desperately trying to time the next batch of QDIIs well in order to avoid similar embarrassment.
Only two out of nine existing QDII funds are in positive territory -- Fortis Haitong China Overseas Best Selection Fund and Bocom Schroders Global Selection Fund. As at the end of June, the two were up by 50.09% and 33.80% respectively since launch. The seven other existing products delivered a -29.6% loss on average. These range from China International's -49.6%, Harvest's -41.4%, China Southern's -36.2% to ChinaAMC's - 30.9%, ICBC Credit Suisse's -26.4%, Yinhua's -17.8% and Fortune SGAM's -5.0%.
© Haymarket Media Limited. All rights reserved.
Monday, June 22, 2009
Complete Article on ETFs from IPE
Indexed strategies
Exchange Traded Funds – more markets, greater choiceIPE.com 5 May 2009:
Exchange Traded Funds are experiencing a growth in popularity that looks likely to boost trading volumes across the region’s stock exchanges. Asia’s ETFs market really began in 2000 but and then came to a halt in 2004 once each of the main markets had all launched domestic market focused ETFs. There has been a steady stream of new listings since, but it is only now that momentum is building that will drive ETF issuers to bring more and various new products to market.
Recent study shows that trading volume increased by 85% from year end 2007 to year end 2008, on all exchange products in Asia, ex Japan. Asia will still only represent around 5% of global market (inc Japan maybe 7%). An increase in trading volumes reflects the fact that both institutional and retail investors are getting used to trading ETFs.
So why have ETFs become the flavour of the moment in Asia? As Joseph Ho, Head of ETFs at Lyxor says, “You can clearly see the shift from traditional mutual funds to ETFs that happened in 2008. Every time you have difficult markets, there is a move from active to passive fund management. As an investor, you don’t want to pay high fees and if you can find an investment that provides perhaps better diversification as well as being cheaper, then you will go for that.”
ETFs are traded by fund managers as well as by traditional buy-side investors, because they offer competitive pricing, especially on those products which have an active market and they have a variety of liquidity management uses. ETFs can be purchased on margin and they are lendable. In the US, there is a thriving securities lending business using ETFs. Many of the new ETFs coming to Asia are cross-listings from European or American exchanges. In the case of Europe, the issuers are taking advantage of the mutual recognition afforded UCITS authorized funds in Hong Kong and Singapore.
Although most ETFs in Asia use swaps to replicate the characteristics of a given index, they are not in themselves derivatives. They trade and settle like individual shares. Swap-based ETFs depend on index replication through the use of swap agreements between an ETF issuer and an investment bank. The ETF typically holds a basket of securities prescribed by the swap counterparty. The basket is not a perfect reflection of the relevant index, but is designed to be a representative sample. The swap provides the replication of the index performance. If the value of the basket increases by, say 5%, and the total return of the index via the swap is 7%, the resulting payments between the ETF basket and the swap are netted off, with the ETF enjoying an increased in value of 7%. The swap counterparty is responsible for paying the 2% difference. This is typically generated by investing in securities or derivatives which track the index performance, and by hedging any open positions for the swap.
Although swap based ETFs are the norm outside of the US, the post-Lehman environment has resulted in a degree of caution towards anything involving swaps. However, for funds authorized under UCITS III legislation, the counterparty risk is limited at any time to 10% of the net assets of each ETF in which these instruments are used.
Deutsche Bank is a relatively recent entrant to the global ETF arena, making its debut last year. The bank has ambitious plans for growth in Asia. By the end of 2010, Deutsche estimates Asia could have increased its ETF market volume by around one third, to US$85bn. Global head of db x-trackers at Deutsche, Thorsten Michalik says, “It took seven or eight years for ETFs to become really popular in Europe and the US. It has nothing to do with the sophistication of the investors, since 90% of turnover comes from institutions. You just need to come up with the product palette and give the choice.”
Institutional investors in Europe and the US have a much wider choice of ETFs than is currently the case in Asia, so it is useful to look at how those investors now use ETFs as the building blocks of active portfolios. A pension fund or other institution in the US, for example, will typically use ETFs on broad indices to serve as a diversified core holding, while style, thematic and sector ETFs can be used to implement tactical asset allocation models. The can be used, for example, in rebalancing and bias adjustment, for long/short selling strategies, trading strategies and cash management in an equity portfolio. They also provide an efficient means of gaining international diversification, commodity and fixed income exposure.
The challenge then is to broaden the market. In April 2009 there were 175 ETFs listed in Asia in 12 countries and across 15 exchanges. But Michalik says “The product cannot be successful unless there are two to three hundred ETFs listed on Asian exchanges. The range of different asset classes also needs to expand. Currently there are hardly any bond, commodity or currency ETFs available and that is what the market needs. So we expect the numbers will grow steadily and with 18 months there will probably be 300 ETFs.”
All investors want low management fees and ample liquidity. The argument for using ETFs becomes more compelling when they can be used as an integral part of the portfolio construction process. It has become clear that institutions can use ETFs for asset allocation purposes, where for example, they have to fill an emerging market lag in a portfolio. In Europe, they are also used for cash substitution and for simple trading purposes, for moving in and out of the market quickly. Michalik says, “This will come to Asia too, as soon as we have ETFs available in multiple markets. This will happen within the next few months.”
He also stresses the importance of tradeable market: “Liquidity is a valuable characteristic of ETFs, but more important is the tradability created by a market maker. On Asian stock exchanges trading volume is typically much lower than in Europe. But you have to differentiate between the level of on-exchange trading volume, and the level of potential for trading in ETFs. That’s where a market maker comes into play. For ETFs it’s a more enhanced function compared to say a standard market maker for equities.”
Lyxor’s Joseph Ho says, “A key point for investors thinking of using ETFs is that normally, if you want to implement a core-satellite approach, you need a large amount of money. But with ETFs you can do it relatively cheaply, so you don’t need to be a huge fund to adopt such an approach. At the same time, if a large institution can use ETFs efficiently in an asset allocation framework, I think they will want to do that. It’s an efficient tool for a global investor.”
State Street Global Advisers (SSgA) has been at the forefront of developments in Asia’s ETF market, and not just with the Tracker Fund in Hong Kong. They launched the first ETF in Australia linked to the ASX 200, introduced the first STI ETF to Singapore in 2002 and were also licensed to operate in Japan. Also in 2002, they went into Korea, working with sub-adviser LG Investments (now Woori Asset Management) and worked closely with the local regulators in Korea to help develop the market. In 2003, they did the same in Taiwan, working with Polaris to introduce the Taiwan Top Fifty ETF. In 2005, working with China Asset Management, SSgA introduced the China 50 A Share ETF and soon after that they launched the Pan Asian Bond Fund. Launched originally on the New York Stock Exchange in 2004, the SPDR Gold Trust has subsequently cross-listed in Singapore, Japan and last year in Hong Kong. It is now worth over US$30 billion, making it the second largest ETF by assets in the world
SSgA’s head of ETFs for Asia Pacific, Sammy Yip, says “Globally, the markets have moved away from large cap equity. Fixed income, commodities and foreign exchange generates more interest in the product. If we have all styles of the platform, then investors can really use ETFs as the basis for a diversified portfolio. For a risk-optimised allocation, an ideal approach is to have a core portfolio with low costs but at the same time producing a more stable return. It gives you the scope to run an alpha portfolio as a complement with single managers. Products like the gold ETF can provide that satellite application as well. I think as time goes on we will see a much greater choice allowing investors to use ETFs as part of their asset allocation processes.
“We have seen more passive beta products since 2008. It’s not hard to see why. It’s a bear market but an institution will want to bet back to a fully invested position, and that’s where ETFs become a useful alternative.”
Deutsche’s Michalik says development of the db x-tracker ETF products will happen in Japan, Korea, Hong Kong, Singapore and Taiwan, but he rules out the idea of working with partners in these countries. “Right now, the strategy is to do everything on our own. We have the asset management capability and also the skills in structuring, trading and investment banking.”
The first batch of ETFs is listed on the Singapore Exchange. This batch includes Asia’s first inverse ETF, the S&P 500 Short ETF. Investors who expect the S&P 500 Index to fall can buy this product. “A short ETF, especially in today’s volatile environment, can help investors better manage their investment risk and at the same time making it possible to generate positive returns, without having to use derivatives,” says Michalik.
The other funds are linked to the MSCI Taiwan TRN Index, the FTSE/Xinhua China 25 and the
S&P CNX Nifty 50 Indian index. The newest addition is linked to the FTSE Vietnam Index. Deutsche plans to launch as many as 20 ETFS in Asia by the end of 2009. One such could be the first ETF based on actual hedge funds, linked to a proprietary Deutsche Bank index that captures core hedge fund strategies (equity hedge, market neutral, credit and convertible, systematic macro and event driven) in a liquid and transparent format. Each strategy is reflected by a sub-index which is represented in the main index according to recognised industry asset weightings.
Each sub-index is linked to the performance of its constituent hedge funds sourced from Deutsche Bank’s leading hedge fund managed accounts platform. The platform is a risk controlled, liquid and transparent investment platform representing a broad spectrum of hedge fund strategies. The funds on the platform are run by Deutsche Bank entities with external third party hedge fund managers appointed to manage each underlying portfolio.
SSgA’s Sammy Yip is optimistic for developments in Asia. “When we look at the way the market has developed in the US and Europe, with a lot of new product ideas coming through, Asian is following that trend. We will see more diverse offerings - fixed income ETFs, fund focused on specific sectors, emerging markets. The question is simply, what gaps do you want to fill first?
Lyxor began introducing ETFs to Singapore in 2006 and now has 13 products listed there and a further 12 in Hong Kong. Head of ETFs, Joseph Ho says the plan is to launch a further five in May, with a view to having at least 20 ETF listings in Singapore by the end of the year. Further listings in Hong Kong will follow. The product offerings are slightly different in each place, with MSCI World, MSCI Emerging and Nasdaq ETFs available in Hong Kong and a purely Asian range, plus two commodity funds available in Singapore.
The Lyxor strategy is based on cross-listing its European UCITS compliant funds as the most cost effective way of building a meaningful range of products that will trade in Asia. “The region is fairly fragmented and the natural inclination of investors is to buy local, so this next phase of development for Asia is building out the range of products that will encourage investors to use ETFs as more than just access products.”
Cross listing allows us to bring product that has a certain size, so that as an issuer you are not too concerned about break-even. It’s a low cost option for us as well. Once the market has sufficient breadth, we can encourage local investors to look outside their home market. And eventually we can talk to them about mixing and matching ETFs within an asset allocation framework.
It’s not just about the product, it’s how you support it. Having the market making support for a growing range of products is vitally important.
In the last couple of years trading volumes have increased, but still the pace is much slower than in the US and Europe. At the moment, issuers in Asia have a hard time arguing for ETFs to be used as the building blocks for portfolio construction. But that is what is happening now in the US.
Of course, other groups are too and it is the intensifying competition that is another fascinating aspect of the ETF market development in Asia right now. Barclays have been a dominant and high profile player through the iShares brand. Now that brand has changed hands, it remains to be seen what the new owners CVC will do. Deutsche has signaled its aggressive intentions. Lyxor intends to be a significant player and others of the European banks, such as Credit Agricole, can also be expected to make more of a play for business in Asia.
Hong Kong remains the largest base for ETF assets, with around 60% of the AUM in the region, ex Japan. It also dominates trading volume, so it will remain the key market until perhaps China makes more of a play for listing of ETFs. Singapore is also keen to compete for ETF listings, as does Bursa Malaysia, which is encouraging for the ETF market as a whole. Yip says, “Although we see Asia as a region, it is multiple markets with distinct distribution and regulatory characteristics. We need to be able to develop products that will be able to have multiple listings, and if the local approval process becomes easier, the success of the ETF market becomes more likely.
In Hong Kong, the first local ETF was the Tracker Fund of Hong Kong, launched in 1999. In 2001, Barclays Global Investors launched the iShares MSCI China Tracker. In June 2005, the Securities & Futures Commission authorised the first bond index-tracking ETFs in Asia and the first ETF to offer non-mainland investors access to the China A shares market. It has also authorised a commodity ETF, tracking the CRB Index.
In Singapore, ETFs were introduced in 2001 when the SGX, in partnership with The American Stock Exchange, launched trading in ETFs such as the SPDRs, Diamonds and iShares. DBS Asset Management became the first domestic issuer of a domestic equity ETF in March. The DBS Singapore STI is tied to the benchmark Straits Times 30 stock index. DBS had introduced a fixed income ETF two years prior to this. Now, DBS is working closely with the SGX on other ideas. Director of Equities Chan Kum Kong says DBS want to use their ETF marketing as a platform to move into advising clients more closely on their asset allocation. “The ETF structure allows us to go to an insurance company and offer them the return capability. We are solution based and ETFs provide the building blocks for the development of other products. There are good prospects for this solutions based approach.”
Kong believes the exchange platform offers both transparency and security: “Investors have been exposed to counterparty risk, but the exchange platform has not been challenged in this crisis – so the time is right for us to tap into that market.”
DBS is responding to a trend for investors to choose lower fee options. “So it does become a cookie cutter approach, where you develop low cost, high volume options and respond quickly to short term trends and opportunities, especially in the retirement space in places like Singapore and Hong Kong.”
This January, the Malaysian government launched Asia’s first Shariah-compliant ETF, as part of its bid to establish the country as a regional hub for Islamic funds. Called the MyETF Dow Jones Islamic Market Malaysia Titans 25, the fund is owned by state fund manager Valuecap. It is Malaysia’s first national ETF. Investors in the fund will gain exposure to 25 Shariah-compliant companies listed on the Malaysian stock exchange.
The Korean stock exchange started its ETF listing program in 2002 with four broad-based index trackers. The exchange now offers around 40 different products and the exchange reports daily trading volumes have risen steadily, even after the credit crisis. More than half the activity is from domestic institutions, with 32% made up by foreign investors. Of the total transactions, 88% of ETF trading on the KRX is focused on the KOSPI 200 index.
According to KRX chairman and CEO Lee Jung-Hwan, the weakness of the Won, the ban on short selling and particularly the lifting of trading fees between September and December last year boosted ETF activity. He explains, “There is no security transaction tax on Korean ETFs, so the trading cost is low compared to other investments.” The reclassification of Korea from advanced emerging to developed status for the FTSE Global Equity Index Series, which comes into effect in September this year, is likely to impact this as well. The KRX is also working with Standard & Poor’s to develop a global index comprising companies listed on the Korean and other Asian markets. S&P’s Seiichiro Uchi says, “The deregulation in Korea has made foreign-asset based ETFs possible. We have an active plan with Samsung Asset Management for an ETF launch in the first half of the year.”
In Japan, ETF sponsors continue to launch products this year, despite some delays because of poor sentiment in the market, and a few projects have been cancelled. Seiichrio Uchi, head of marketing at Standard & Poor’s, observes, “The transparency and easy-to-understand is catching investors' attention. As well as the global providers, we are now seeing domestic Japanese providers competing in the ETF space, where they have the in-built advantage of local distribution channels. The activities of the likes of Nomura Asset Management and newer players such as Mitsubishi UFJ Asset Management have made the market more dynamic in Japan.”
In Australia, despite the difficult financial market conditions Exchange Traded Funds are continuing to gain market traction. According to Jonathan Morgan, Business Development Manager for the Australian Stock Exchange, ASX sourced ETF assets have grown more than eight per cent over the last year from $1.4 billion to just over $1.6 billion with total turnover of $5.115 billion over the last 12 months.
“The growth in ETF trading has been particularly impressive given market conditions. The key attractions of SDPR ETFs continue to be their liquidity and transparency, the cost-efficient exposure to a broad range of assets, and tax-efficiency,” he said.
Rob Goodlad, managing director of State Street Global Advisors in Australia, said “During a year of significant equity market volatility SPDR ETF trading volumes have increased substantially as investors show a preference for low-cost diversified equity investments. Over the longer term we expect the ETF growth rate in Australia will continue to mirror that of other developed countries such as the US, where ETFs now make up more than half a trillion US dollars in assets,” Goodlad said.
Author: Richard Newell
Exchange Traded Funds – more markets, greater choiceIPE.com 5 May 2009:
Exchange Traded Funds are experiencing a growth in popularity that looks likely to boost trading volumes across the region’s stock exchanges. Asia’s ETFs market really began in 2000 but and then came to a halt in 2004 once each of the main markets had all launched domestic market focused ETFs. There has been a steady stream of new listings since, but it is only now that momentum is building that will drive ETF issuers to bring more and various new products to market.
Recent study shows that trading volume increased by 85% from year end 2007 to year end 2008, on all exchange products in Asia, ex Japan. Asia will still only represent around 5% of global market (inc Japan maybe 7%). An increase in trading volumes reflects the fact that both institutional and retail investors are getting used to trading ETFs.
So why have ETFs become the flavour of the moment in Asia? As Joseph Ho, Head of ETFs at Lyxor says, “You can clearly see the shift from traditional mutual funds to ETFs that happened in 2008. Every time you have difficult markets, there is a move from active to passive fund management. As an investor, you don’t want to pay high fees and if you can find an investment that provides perhaps better diversification as well as being cheaper, then you will go for that.”
ETFs are traded by fund managers as well as by traditional buy-side investors, because they offer competitive pricing, especially on those products which have an active market and they have a variety of liquidity management uses. ETFs can be purchased on margin and they are lendable. In the US, there is a thriving securities lending business using ETFs. Many of the new ETFs coming to Asia are cross-listings from European or American exchanges. In the case of Europe, the issuers are taking advantage of the mutual recognition afforded UCITS authorized funds in Hong Kong and Singapore.
Although most ETFs in Asia use swaps to replicate the characteristics of a given index, they are not in themselves derivatives. They trade and settle like individual shares. Swap-based ETFs depend on index replication through the use of swap agreements between an ETF issuer and an investment bank. The ETF typically holds a basket of securities prescribed by the swap counterparty. The basket is not a perfect reflection of the relevant index, but is designed to be a representative sample. The swap provides the replication of the index performance. If the value of the basket increases by, say 5%, and the total return of the index via the swap is 7%, the resulting payments between the ETF basket and the swap are netted off, with the ETF enjoying an increased in value of 7%. The swap counterparty is responsible for paying the 2% difference. This is typically generated by investing in securities or derivatives which track the index performance, and by hedging any open positions for the swap.
Although swap based ETFs are the norm outside of the US, the post-Lehman environment has resulted in a degree of caution towards anything involving swaps. However, for funds authorized under UCITS III legislation, the counterparty risk is limited at any time to 10% of the net assets of each ETF in which these instruments are used.
Deutsche Bank is a relatively recent entrant to the global ETF arena, making its debut last year. The bank has ambitious plans for growth in Asia. By the end of 2010, Deutsche estimates Asia could have increased its ETF market volume by around one third, to US$85bn. Global head of db x-trackers at Deutsche, Thorsten Michalik says, “It took seven or eight years for ETFs to become really popular in Europe and the US. It has nothing to do with the sophistication of the investors, since 90% of turnover comes from institutions. You just need to come up with the product palette and give the choice.”
Institutional investors in Europe and the US have a much wider choice of ETFs than is currently the case in Asia, so it is useful to look at how those investors now use ETFs as the building blocks of active portfolios. A pension fund or other institution in the US, for example, will typically use ETFs on broad indices to serve as a diversified core holding, while style, thematic and sector ETFs can be used to implement tactical asset allocation models. The can be used, for example, in rebalancing and bias adjustment, for long/short selling strategies, trading strategies and cash management in an equity portfolio. They also provide an efficient means of gaining international diversification, commodity and fixed income exposure.
The challenge then is to broaden the market. In April 2009 there were 175 ETFs listed in Asia in 12 countries and across 15 exchanges. But Michalik says “The product cannot be successful unless there are two to three hundred ETFs listed on Asian exchanges. The range of different asset classes also needs to expand. Currently there are hardly any bond, commodity or currency ETFs available and that is what the market needs. So we expect the numbers will grow steadily and with 18 months there will probably be 300 ETFs.”
All investors want low management fees and ample liquidity. The argument for using ETFs becomes more compelling when they can be used as an integral part of the portfolio construction process. It has become clear that institutions can use ETFs for asset allocation purposes, where for example, they have to fill an emerging market lag in a portfolio. In Europe, they are also used for cash substitution and for simple trading purposes, for moving in and out of the market quickly. Michalik says, “This will come to Asia too, as soon as we have ETFs available in multiple markets. This will happen within the next few months.”
He also stresses the importance of tradeable market: “Liquidity is a valuable characteristic of ETFs, but more important is the tradability created by a market maker. On Asian stock exchanges trading volume is typically much lower than in Europe. But you have to differentiate between the level of on-exchange trading volume, and the level of potential for trading in ETFs. That’s where a market maker comes into play. For ETFs it’s a more enhanced function compared to say a standard market maker for equities.”
Lyxor’s Joseph Ho says, “A key point for investors thinking of using ETFs is that normally, if you want to implement a core-satellite approach, you need a large amount of money. But with ETFs you can do it relatively cheaply, so you don’t need to be a huge fund to adopt such an approach. At the same time, if a large institution can use ETFs efficiently in an asset allocation framework, I think they will want to do that. It’s an efficient tool for a global investor.”
State Street Global Advisers (SSgA) has been at the forefront of developments in Asia’s ETF market, and not just with the Tracker Fund in Hong Kong. They launched the first ETF in Australia linked to the ASX 200, introduced the first STI ETF to Singapore in 2002 and were also licensed to operate in Japan. Also in 2002, they went into Korea, working with sub-adviser LG Investments (now Woori Asset Management) and worked closely with the local regulators in Korea to help develop the market. In 2003, they did the same in Taiwan, working with Polaris to introduce the Taiwan Top Fifty ETF. In 2005, working with China Asset Management, SSgA introduced the China 50 A Share ETF and soon after that they launched the Pan Asian Bond Fund. Launched originally on the New York Stock Exchange in 2004, the SPDR Gold Trust has subsequently cross-listed in Singapore, Japan and last year in Hong Kong. It is now worth over US$30 billion, making it the second largest ETF by assets in the world
SSgA’s head of ETFs for Asia Pacific, Sammy Yip, says “Globally, the markets have moved away from large cap equity. Fixed income, commodities and foreign exchange generates more interest in the product. If we have all styles of the platform, then investors can really use ETFs as the basis for a diversified portfolio. For a risk-optimised allocation, an ideal approach is to have a core portfolio with low costs but at the same time producing a more stable return. It gives you the scope to run an alpha portfolio as a complement with single managers. Products like the gold ETF can provide that satellite application as well. I think as time goes on we will see a much greater choice allowing investors to use ETFs as part of their asset allocation processes.
“We have seen more passive beta products since 2008. It’s not hard to see why. It’s a bear market but an institution will want to bet back to a fully invested position, and that’s where ETFs become a useful alternative.”
Deutsche’s Michalik says development of the db x-tracker ETF products will happen in Japan, Korea, Hong Kong, Singapore and Taiwan, but he rules out the idea of working with partners in these countries. “Right now, the strategy is to do everything on our own. We have the asset management capability and also the skills in structuring, trading and investment banking.”
The first batch of ETFs is listed on the Singapore Exchange. This batch includes Asia’s first inverse ETF, the S&P 500 Short ETF. Investors who expect the S&P 500 Index to fall can buy this product. “A short ETF, especially in today’s volatile environment, can help investors better manage their investment risk and at the same time making it possible to generate positive returns, without having to use derivatives,” says Michalik.
The other funds are linked to the MSCI Taiwan TRN Index, the FTSE/Xinhua China 25 and the
S&P CNX Nifty 50 Indian index. The newest addition is linked to the FTSE Vietnam Index. Deutsche plans to launch as many as 20 ETFS in Asia by the end of 2009. One such could be the first ETF based on actual hedge funds, linked to a proprietary Deutsche Bank index that captures core hedge fund strategies (equity hedge, market neutral, credit and convertible, systematic macro and event driven) in a liquid and transparent format. Each strategy is reflected by a sub-index which is represented in the main index according to recognised industry asset weightings.
Each sub-index is linked to the performance of its constituent hedge funds sourced from Deutsche Bank’s leading hedge fund managed accounts platform. The platform is a risk controlled, liquid and transparent investment platform representing a broad spectrum of hedge fund strategies. The funds on the platform are run by Deutsche Bank entities with external third party hedge fund managers appointed to manage each underlying portfolio.
SSgA’s Sammy Yip is optimistic for developments in Asia. “When we look at the way the market has developed in the US and Europe, with a lot of new product ideas coming through, Asian is following that trend. We will see more diverse offerings - fixed income ETFs, fund focused on specific sectors, emerging markets. The question is simply, what gaps do you want to fill first?
Lyxor began introducing ETFs to Singapore in 2006 and now has 13 products listed there and a further 12 in Hong Kong. Head of ETFs, Joseph Ho says the plan is to launch a further five in May, with a view to having at least 20 ETF listings in Singapore by the end of the year. Further listings in Hong Kong will follow. The product offerings are slightly different in each place, with MSCI World, MSCI Emerging and Nasdaq ETFs available in Hong Kong and a purely Asian range, plus two commodity funds available in Singapore.
The Lyxor strategy is based on cross-listing its European UCITS compliant funds as the most cost effective way of building a meaningful range of products that will trade in Asia. “The region is fairly fragmented and the natural inclination of investors is to buy local, so this next phase of development for Asia is building out the range of products that will encourage investors to use ETFs as more than just access products.”
Cross listing allows us to bring product that has a certain size, so that as an issuer you are not too concerned about break-even. It’s a low cost option for us as well. Once the market has sufficient breadth, we can encourage local investors to look outside their home market. And eventually we can talk to them about mixing and matching ETFs within an asset allocation framework.
It’s not just about the product, it’s how you support it. Having the market making support for a growing range of products is vitally important.
In the last couple of years trading volumes have increased, but still the pace is much slower than in the US and Europe. At the moment, issuers in Asia have a hard time arguing for ETFs to be used as the building blocks for portfolio construction. But that is what is happening now in the US.
Of course, other groups are too and it is the intensifying competition that is another fascinating aspect of the ETF market development in Asia right now. Barclays have been a dominant and high profile player through the iShares brand. Now that brand has changed hands, it remains to be seen what the new owners CVC will do. Deutsche has signaled its aggressive intentions. Lyxor intends to be a significant player and others of the European banks, such as Credit Agricole, can also be expected to make more of a play for business in Asia.
Hong Kong remains the largest base for ETF assets, with around 60% of the AUM in the region, ex Japan. It also dominates trading volume, so it will remain the key market until perhaps China makes more of a play for listing of ETFs. Singapore is also keen to compete for ETF listings, as does Bursa Malaysia, which is encouraging for the ETF market as a whole. Yip says, “Although we see Asia as a region, it is multiple markets with distinct distribution and regulatory characteristics. We need to be able to develop products that will be able to have multiple listings, and if the local approval process becomes easier, the success of the ETF market becomes more likely.
In Hong Kong, the first local ETF was the Tracker Fund of Hong Kong, launched in 1999. In 2001, Barclays Global Investors launched the iShares MSCI China Tracker. In June 2005, the Securities & Futures Commission authorised the first bond index-tracking ETFs in Asia and the first ETF to offer non-mainland investors access to the China A shares market. It has also authorised a commodity ETF, tracking the CRB Index.
In Singapore, ETFs were introduced in 2001 when the SGX, in partnership with The American Stock Exchange, launched trading in ETFs such as the SPDRs, Diamonds and iShares. DBS Asset Management became the first domestic issuer of a domestic equity ETF in March. The DBS Singapore STI is tied to the benchmark Straits Times 30 stock index. DBS had introduced a fixed income ETF two years prior to this. Now, DBS is working closely with the SGX on other ideas. Director of Equities Chan Kum Kong says DBS want to use their ETF marketing as a platform to move into advising clients more closely on their asset allocation. “The ETF structure allows us to go to an insurance company and offer them the return capability. We are solution based and ETFs provide the building blocks for the development of other products. There are good prospects for this solutions based approach.”
Kong believes the exchange platform offers both transparency and security: “Investors have been exposed to counterparty risk, but the exchange platform has not been challenged in this crisis – so the time is right for us to tap into that market.”
DBS is responding to a trend for investors to choose lower fee options. “So it does become a cookie cutter approach, where you develop low cost, high volume options and respond quickly to short term trends and opportunities, especially in the retirement space in places like Singapore and Hong Kong.”
This January, the Malaysian government launched Asia’s first Shariah-compliant ETF, as part of its bid to establish the country as a regional hub for Islamic funds. Called the MyETF Dow Jones Islamic Market Malaysia Titans 25, the fund is owned by state fund manager Valuecap. It is Malaysia’s first national ETF. Investors in the fund will gain exposure to 25 Shariah-compliant companies listed on the Malaysian stock exchange.
The Korean stock exchange started its ETF listing program in 2002 with four broad-based index trackers. The exchange now offers around 40 different products and the exchange reports daily trading volumes have risen steadily, even after the credit crisis. More than half the activity is from domestic institutions, with 32% made up by foreign investors. Of the total transactions, 88% of ETF trading on the KRX is focused on the KOSPI 200 index.
According to KRX chairman and CEO Lee Jung-Hwan, the weakness of the Won, the ban on short selling and particularly the lifting of trading fees between September and December last year boosted ETF activity. He explains, “There is no security transaction tax on Korean ETFs, so the trading cost is low compared to other investments.” The reclassification of Korea from advanced emerging to developed status for the FTSE Global Equity Index Series, which comes into effect in September this year, is likely to impact this as well. The KRX is also working with Standard & Poor’s to develop a global index comprising companies listed on the Korean and other Asian markets. S&P’s Seiichiro Uchi says, “The deregulation in Korea has made foreign-asset based ETFs possible. We have an active plan with Samsung Asset Management for an ETF launch in the first half of the year.”
In Japan, ETF sponsors continue to launch products this year, despite some delays because of poor sentiment in the market, and a few projects have been cancelled. Seiichrio Uchi, head of marketing at Standard & Poor’s, observes, “The transparency and easy-to-understand is catching investors' attention. As well as the global providers, we are now seeing domestic Japanese providers competing in the ETF space, where they have the in-built advantage of local distribution channels. The activities of the likes of Nomura Asset Management and newer players such as Mitsubishi UFJ Asset Management have made the market more dynamic in Japan.”
In Australia, despite the difficult financial market conditions Exchange Traded Funds are continuing to gain market traction. According to Jonathan Morgan, Business Development Manager for the Australian Stock Exchange, ASX sourced ETF assets have grown more than eight per cent over the last year from $1.4 billion to just over $1.6 billion with total turnover of $5.115 billion over the last 12 months.
“The growth in ETF trading has been particularly impressive given market conditions. The key attractions of SDPR ETFs continue to be their liquidity and transparency, the cost-efficient exposure to a broad range of assets, and tax-efficiency,” he said.
Rob Goodlad, managing director of State Street Global Advisors in Australia, said “During a year of significant equity market volatility SPDR ETF trading volumes have increased substantially as investors show a preference for low-cost diversified equity investments. Over the longer term we expect the ETF growth rate in Australia will continue to mirror that of other developed countries such as the US, where ETFs now make up more than half a trillion US dollars in assets,” Goodlad said.
Author: Richard Newell
Friday, June 12, 2009
Marketing in Japan: A Reality Check for Visiting Hedge Fund Managers
Japan: A Reality Check for Visiting Hedge Fund Managers
posted by worldwidesekar on Wednesday 10 Jun 2009 17:41 BST (from Albourne daily)
Tokyo, June 10 2009 -- Opalesque has published the 2009 Opalesque Japan Roundtable, whose findings will surprise many financial professionals. In this 33-page Roundtable script, Japan-based investment veterans share how the financial crisis has changed investing in and asset raising from Japanese institutions. The new Japan Roundtable can be downloaded here for free: http://www.opalesque.com/RT/RoundtableJapan2009.html
Reality Check
In their quest to raise assets, considerable numbers of overseas managers are visiting Japanese institutions each month, looking for funding and assuming that the Japanese must be ready to invest money merely because they have it, whereas it is not there some other places. However, many allocators in Japan are very much in shell shock - Chris Wells from White and Case, who lives and works in Tokyo since 1983 says that it will "take time for allocators to realize how much they really have lost. A lot of investment staff aren't even telling their bosses how bad it is."
Paradigm Change: Brand does not allure Japanese investors any more
However, more than has been true for a long time, the ability to compete for Japanese assets is much more equal today than before, because with the recent events, the shine has come off of the big name hedge fund managers. According to Wells, "Japanese allocators, who traditionally tend to be pretty picky consumers concerned with name value, have lost this type of fixation on brands and perceived reputation. While before they may have been blinded by the light of the big famous asset managers or hedge fund names, now it matters less, all names are more equal. The question for managers will be, how did you do last quarter? Where are you going? How good are you at communicating where you are going? Do we fully understand your strategy?"
Starting investments from ground zero
Wells further explains in this Opalesque Roundtable that some large allocators and hedge fund investors in Japan are starting completely from ground zero and "every single fund investment is undergoing a review, evaluation and benchmarking in a way that wasn't done previously."
Japanese assets not more "sticky"
Rory Kennedy from UMJ add that historically, "you have to put more effort into getting Japanese institutional money. But in return, the consensus was that that Japanese money would therefore be ”sticky” and would stay longer in your funds. However, following poor performance across hedge fund strategies over the last two years, it seems that from now on, you will have to put as much effort or more into raising Japanese money, but it will be no more loyal than any other money in the world. In fact, it may be less loyal because they usually insist on liquidity as well."
The Opalesque Japan 2009 Roundtable was sponsored by AIMA Japan and took place on April 16thj at the Tokyo office of Nikko Citi. Opalesque thanks Ed Rogers from Rogers Investment Advisors and Koichi Shijima from Nikko Citi for helping to put the following Roundtable together:
1. Shinichiro Shiraki, Founding Member, Monex Alternative Investments 2. Chris Wells, Partner, White & Case 3. Koichi Shijima, Director, Nikko Citi 4. Rory Kennedy, COO, United Managers Japan (UMJ) 5. Ed Rogers, CEO, Rogers Investment Advisors 6. Yhu Kuni, Portfolio Manager, Stats Investment Management 7. Shin Matsui, Chief Portfolio Manager, Nissay Asset Management
In addition, the Roundtable discussion highlights the following important developments:
● The evolution of Japanese hedge fund industry - who are the new managers achieving positive returns? ● Information inefficiencies in the Japanese markets ● What impact does the ailing Japanese real estate market have on the economy? ● Regulatory update ● Why each investor in Asian funds should do significant due diligence on the fund's ability to manage their foreign exchange exposures ● What is the number one mistake for Western firms when hiring Japanese staff?
The Opalesque Japan Roundtable can be downloaded here: http://www.opalesque.com/RT/RoundtableJapan2009.html. All other previously published Opalesque Roundtable Scripts can be accessed in the Roundtable archive: http://www.opalesque.com/index.php?act=archiveRT
About Opalesque: Matthias Knab, Director of Opalesque Ltd, moderates the Opalesque Roundtables. Matthias Knab is an internationally recognized expert on hedge funds and alternatives.
In 2003, with the publication of its daily Alternative Market Briefing, Opalesque successfully launched an information revolution in the hedge fund media space: "Opalesque changed the world by bringing transparency where there was opacity and by delivering an accurate professional reporting service." - Nigel Blanchard, Culross. This hybrid Financial News service, which combines proprietary industry news stories and filtered third party reports, has been credited by many industry insiders with delivering precise, accurate, and vital information to a notoriously guarded audience.
Each week, Opalesque publications are read by more than 600,000 industry professionals in over 130 countries. Opalesque is the only daily hedge fund publisher which is actually read by the elite managers themselves (http://www.opalesque.com/op_testimonials.html).
posted by worldwidesekar on Wednesday 10 Jun 2009 17:41 BST (from Albourne daily)
Tokyo, June 10 2009 -- Opalesque has published the 2009 Opalesque Japan Roundtable, whose findings will surprise many financial professionals. In this 33-page Roundtable script, Japan-based investment veterans share how the financial crisis has changed investing in and asset raising from Japanese institutions. The new Japan Roundtable can be downloaded here for free: http://www.opalesque.com/RT/RoundtableJapan2009.html
Reality Check
In their quest to raise assets, considerable numbers of overseas managers are visiting Japanese institutions each month, looking for funding and assuming that the Japanese must be ready to invest money merely because they have it, whereas it is not there some other places. However, many allocators in Japan are very much in shell shock - Chris Wells from White and Case, who lives and works in Tokyo since 1983 says that it will "take time for allocators to realize how much they really have lost. A lot of investment staff aren't even telling their bosses how bad it is."
Paradigm Change: Brand does not allure Japanese investors any more
However, more than has been true for a long time, the ability to compete for Japanese assets is much more equal today than before, because with the recent events, the shine has come off of the big name hedge fund managers. According to Wells, "Japanese allocators, who traditionally tend to be pretty picky consumers concerned with name value, have lost this type of fixation on brands and perceived reputation. While before they may have been blinded by the light of the big famous asset managers or hedge fund names, now it matters less, all names are more equal. The question for managers will be, how did you do last quarter? Where are you going? How good are you at communicating where you are going? Do we fully understand your strategy?"
Starting investments from ground zero
Wells further explains in this Opalesque Roundtable that some large allocators and hedge fund investors in Japan are starting completely from ground zero and "every single fund investment is undergoing a review, evaluation and benchmarking in a way that wasn't done previously."
Japanese assets not more "sticky"
Rory Kennedy from UMJ add that historically, "you have to put more effort into getting Japanese institutional money. But in return, the consensus was that that Japanese money would therefore be ”sticky” and would stay longer in your funds. However, following poor performance across hedge fund strategies over the last two years, it seems that from now on, you will have to put as much effort or more into raising Japanese money, but it will be no more loyal than any other money in the world. In fact, it may be less loyal because they usually insist on liquidity as well."
The Opalesque Japan 2009 Roundtable was sponsored by AIMA Japan and took place on April 16thj at the Tokyo office of Nikko Citi. Opalesque thanks Ed Rogers from Rogers Investment Advisors and Koichi Shijima from Nikko Citi for helping to put the following Roundtable together:
1. Shinichiro Shiraki, Founding Member, Monex Alternative Investments 2. Chris Wells, Partner, White & Case 3. Koichi Shijima, Director, Nikko Citi 4. Rory Kennedy, COO, United Managers Japan (UMJ) 5. Ed Rogers, CEO, Rogers Investment Advisors 6. Yhu Kuni, Portfolio Manager, Stats Investment Management 7. Shin Matsui, Chief Portfolio Manager, Nissay Asset Management
In addition, the Roundtable discussion highlights the following important developments:
● The evolution of Japanese hedge fund industry - who are the new managers achieving positive returns? ● Information inefficiencies in the Japanese markets ● What impact does the ailing Japanese real estate market have on the economy? ● Regulatory update ● Why each investor in Asian funds should do significant due diligence on the fund's ability to manage their foreign exchange exposures ● What is the number one mistake for Western firms when hiring Japanese staff?
The Opalesque Japan Roundtable can be downloaded here: http://www.opalesque.com/RT/RoundtableJapan2009.html. All other previously published Opalesque Roundtable Scripts can be accessed in the Roundtable archive: http://www.opalesque.com/index.php?act=archiveRT
About Opalesque: Matthias Knab, Director of Opalesque Ltd, moderates the Opalesque Roundtables. Matthias Knab is an internationally recognized expert on hedge funds and alternatives.
In 2003, with the publication of its daily Alternative Market Briefing, Opalesque successfully launched an information revolution in the hedge fund media space: "Opalesque changed the world by bringing transparency where there was opacity and by delivering an accurate professional reporting service." - Nigel Blanchard, Culross. This hybrid Financial News service, which combines proprietary industry news stories and filtered third party reports, has been credited by many industry insiders with delivering precise, accurate, and vital information to a notoriously guarded audience.
Each week, Opalesque publications are read by more than 600,000 industry professionals in over 130 countries. Opalesque is the only daily hedge fund publisher which is actually read by the elite managers themselves (http://www.opalesque.com/op_testimonials.html).
Wednesday, June 10, 2009
Flood of ETFs promising hedge fund-style returns
Flood of ETFs promising hedge fund-style returns
Tue Jun 9, 2009 4:27pm EDT
By Joseph A. Giannone
NEW YORK, June 9 (Reuters) - Money managers are flooding the market with exchange-traded funds (ETF) and mutual funds designed to give even the smallest of investors access to hedge fund returns without all the usual restrictions or hefty fees.
IndexIQ Advisors, a start-up firm that seeks to replicate hedge fund performance, on Tuesday launched the index-based IQ Hedge Macro Strategy Tracker ETF (MCRO.P), about 75 percent focused on emerging markets and 25 percent on global trends. The offering joins the IQ Hedge Multi-Strategy Tracker ETF (QAI.P), which began trading in March and is up 17 percent.
Both ETFs charge a fee of 0.75 percent and invest in a range of ETFs, with the exact mix determined by computers looking to mimic hedge fund returns.
And there's a lot more to come. IndexIQ in April told the Securities and Exchange Commission that it plans to launch as many as 15 exchange-traded funds emphasizing different hedge fund strategies. The next offerings to come include a natural resources ETF, which will invest in stocks, and an inflation- hedged product buying a mix of commodity and equity ETFs.
"We intend to own the alternative investments space," said Tony Davidow, head of distribution at IndexIQ and former leader of Morgan Stanley's institutional consulting services. "We'd like to be the Vanguard of the hedge fund business."
The tiny firm, managing $100 million across a mutual fund, separate accounts and now two ETFs, is a long way away from catching up with the pioneer of the index mutual fund movement and its $1 trillion of assets.
And there is a growing number of competitors in this corner of the market.
Davidow says index funds offering hedge fund strategies can be beneficial to all investors, muting ups and downs and generating returns not tied to the overall market.
Since its launch nearly one year ago, the IQ Alpha Hedge Strategy IQHIX.O mutual fund has been flat, which is good compared with a 22 percent decline in comparable hedge funds and a 25 percent fall in the broader U.S. equity markets.
Disappointing hedge fund performance last year and redemption blocks have angered big investors and created a rare opening for new offerings. Firms such as IndexIQ, WisdomTree Investments and Grail Advisors intend to take advantage of the popularity of ETFs while offering strategies that used to be exclusive to the super rich.
San Francisco-based Grail Advisors LLC on Tuesday said it plans to launch four actively managed exchange-traded funds. RiverPark Advisors LLC will serve as lead sub-adviser for the RP Growth, RP Focused Large Cap Growth, RP Technology and RP Financial funds. Trading of these ETFs is expected to begin Sept. 1.
WisdomTree Investments, a money manager that has launched dozens of fundamental-weighted index ETFs, on Monday filed papers for three actively managed hedge fund-style ETFs: WisdomTree Real Return Fund, WisdomTree Managed Futures Fund and WisdomTree Long-Short Fund.
The lines dividing hedge funds and mutual funds have been fading over the past year.
AQR Capital Management LLC, a hedge fund firm with $20 billion under management, in January expanded into the mutual-fund business with the AQR Diversified Arbitrage Fund ADAIX.O. That was followed by its AQR Global Equity Fund AQGNX.O in February.
Highbridge Capital Management LLC, a unit of JPMorgan Chase & Co (JPM.N), has managed the JPMorgan Highbridge Statistical HSKAX.O Market Neutral mutual fund since 2005. (Editing by Steve Orlofsky)
Tue Jun 9, 2009 4:27pm EDT
By Joseph A. Giannone
NEW YORK, June 9 (Reuters) - Money managers are flooding the market with exchange-traded funds (ETF) and mutual funds designed to give even the smallest of investors access to hedge fund returns without all the usual restrictions or hefty fees.
IndexIQ Advisors, a start-up firm that seeks to replicate hedge fund performance, on Tuesday launched the index-based IQ Hedge Macro Strategy Tracker ETF (MCRO.P), about 75 percent focused on emerging markets and 25 percent on global trends. The offering joins the IQ Hedge Multi-Strategy Tracker ETF (QAI.P), which began trading in March and is up 17 percent.
Both ETFs charge a fee of 0.75 percent and invest in a range of ETFs, with the exact mix determined by computers looking to mimic hedge fund returns.
And there's a lot more to come. IndexIQ in April told the Securities and Exchange Commission that it plans to launch as many as 15 exchange-traded funds emphasizing different hedge fund strategies. The next offerings to come include a natural resources ETF, which will invest in stocks, and an inflation- hedged product buying a mix of commodity and equity ETFs.
"We intend to own the alternative investments space," said Tony Davidow, head of distribution at IndexIQ and former leader of Morgan Stanley's institutional consulting services. "We'd like to be the Vanguard of the hedge fund business."
The tiny firm, managing $100 million across a mutual fund, separate accounts and now two ETFs, is a long way away from catching up with the pioneer of the index mutual fund movement and its $1 trillion of assets.
And there is a growing number of competitors in this corner of the market.
Davidow says index funds offering hedge fund strategies can be beneficial to all investors, muting ups and downs and generating returns not tied to the overall market.
Since its launch nearly one year ago, the IQ Alpha Hedge Strategy IQHIX.O mutual fund has been flat, which is good compared with a 22 percent decline in comparable hedge funds and a 25 percent fall in the broader U.S. equity markets.
Disappointing hedge fund performance last year and redemption blocks have angered big investors and created a rare opening for new offerings. Firms such as IndexIQ, WisdomTree Investments and Grail Advisors intend to take advantage of the popularity of ETFs while offering strategies that used to be exclusive to the super rich.
San Francisco-based Grail Advisors LLC on Tuesday said it plans to launch four actively managed exchange-traded funds. RiverPark Advisors LLC will serve as lead sub-adviser for the RP Growth, RP Focused Large Cap Growth, RP Technology and RP Financial funds. Trading of these ETFs is expected to begin Sept. 1.
WisdomTree Investments, a money manager that has launched dozens of fundamental-weighted index ETFs, on Monday filed papers for three actively managed hedge fund-style ETFs: WisdomTree Real Return Fund, WisdomTree Managed Futures Fund and WisdomTree Long-Short Fund.
The lines dividing hedge funds and mutual funds have been fading over the past year.
AQR Capital Management LLC, a hedge fund firm with $20 billion under management, in January expanded into the mutual-fund business with the AQR Diversified Arbitrage Fund ADAIX.O. That was followed by its AQR Global Equity Fund AQGNX.O in February.
Highbridge Capital Management LLC, a unit of JPMorgan Chase & Co (JPM.N), has managed the JPMorgan Highbridge Statistical HSKAX.O Market Neutral mutual fund since 2005. (Editing by Steve Orlofsky)
Sunday, June 7, 2009
Julian Roberston's Inflation Hedge
From Seeking Alpha Blog: early June 2009
Simply put, Julian Robertson is the definition of a hedge fund legend. And, his success is noted by the fortune he has amassed as he now graces the Forbes' billionaire list. He has pioneered a successful investment methodology, he has generated outstanding returns at his famous hedge fund Tiger Management, and his influence has sprouted some of the most successful modern day hedge funds in the form of the 'Tiger Cubs.' And, most importantly, he predicted the financial crisis two and a half years ago in an interview with Value Investor Insight. When he talks, you listen.
For those unfamiliar with Robertson, we'd highly recommend checking out the profile/biography we just wrote on him. In that piece, we have outlined exactly why you should follow him (and the Tiger Cubs for that matter too). As we detailed in his profile, Robertson has a unique investment methodology. He takes a macro approach, finds a smart idea, researches it exhaustively, and places a big bet. And, when he feels he is more than correct, he will 'bet the farm.' And, it looks like we have identified Robertson's next play where he has and will continue to 'bet the farm.'
Julian's Big Bet
While this is not a new position for Robertson, his constant confidence behind the play has inspired us to look at it more closely. Today, we are going to highlight Julian Robertson's steepener swap play. In layman's terms, he is betting on inflation. Taken from eFinancialNews, "Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate, which is derived from the difference between long and short term rates. Many of these products also use high leverage, where the difference between the two rates is multiplied by up to 50 times to produce a higher return."
He thinks rates could hit 7% easily and could go as high as 18%. We agree with him on this play and we first published our very basic rationale behind shorting US Treasuries back in October of last year. The main point we're focused on is the wager that inflation is in our future. If such an outcome came to fruition, yields on long-term Treasuries would rise. When the yields increase, bond prices will drop, thus benefiting the short position. While the vehicles noted in this article are all slightly different in construction and purpose, they all broadly wager on the same outcome: inflation. Julian's talked about this play in numerous forms, and we actually first heard about his 'curve steepener' play in January 2008 in Forbes. That piece highlighted how Robertson was "long the price of two-year Treasuries and short the price of the ten-year Treasury - betting that the difference, or curve, in the yield between the two will increase." Such a play is negative on the US economy and Robertson executed it because he felt the Federal Reserve would continue to flood the economy with money. And, he has been right.
What's fascinating here is that retail traders and investors could put on essentially the same play using the marvels of exchange traded funds. If you wanted to put a curve steepener play on by going long the 2 year Treasuries and shorting the 10 year Treasuries, you could simply buy SHY (iShares Barclays 1-3 year Treasury etf) and then short IEF (iShares Barclays 7-10 year Treasury etf). This is an easy way to put on the same trade Julian played at the beginning of 2008.
Robertson ultimately feels that the US dollar will become so weak that it causes the central banks of China and Japan to stop purchasing Treasuries. As such, 10-year bond prices would move down and that's exactly what we've seen play out. Back in January of 2008, Robertson told Fortune, "I've made a big bet on it. I really think I'm going to make 20 or 30 times on my money." Moving on from his curve steepener play, we then heard Julian talk about a 'steepener swap' play at a Tiger Cub hedge fund panel. At the panel, Robertson joked that last Christmas his family would have “a steepener in every stocking." This is definitely one of Robertson's token 'bet the farm' plays if there ever was one.
In his recent interview with Value Investor Insight, Robertson lays out further rationale for his play. He says, "I'm amazed at the amount of money the government is throwing at this thing. You don't even react anymore unless somebody's talking about $1 trillion. I genuinely admire the administration's courage in doing what it's doing, but not the wisdom of it. I look at the TALF (Term Asset-Backed Securities Loan Facility) program, for example, and it's almost a bribe to get people to put on more leverage ... I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved. I think what we're doing now will either fail, or it will result in unbelievably high inflation - and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening."
While it may be frightening, it seems to be the scenario that Robertson is wagering on. After all, his steepener swap play will shower him with profits if rampant inflation rears its ugly head. He thinks that the US has not solved the current problems and things could go from bad to really bad. He likened the U.S.'s current situation to that of Japan in 1989, but thinks we are in far worse shape.
Notable Investors Bearish on US Treasuries
Robertson is most certainly not alone in his views. Numerous other prominent investors and hedge fund legends share his distaste for treasuries. We just recently noted that Michael Steinhardt says treasuries are a foolish play over the long term. He categorizes them as risky, noting that the yields are low and the danger is high. Steinhardt of course ran one of the first truly successful hedge funds (Steinhardt Management), garnering a 23% return each year for almost thirty years.
Additionally, acclaimed investor Jim Rogers also wants to short government bonds. Rogers is well-known for his stellar returns while managing the Quantum Fund (now defunct) with then partner George Soros. Rogers expects the government to buy Treasuries in an effort to stem borrowing costs. Rogers says that since Governments around the world are printing a ton of money and borrowing insane amounts, he almost has no choice but to short them. Rogers had previously been short the Treasuries, but covered them for the near-term in favor of waiting for another opportunity to short, as we noted when reviewing Rogers' portfolio. We could add even more talented investing names to this list, but suffice it to say that there is a confluence of smart minds all marching to the same beat.
When such a confluence of smart minds all wager on essentially the same thing (inflation), you should probably turn your head at the very least.
How To Play It
Now that we've seen so many smart minds interested in this wager, how do we play it? There are essentially a few different ways to place a bet on inflation similar to that which Robertson has made. The vehicles referenced earlier are not typically available to retail investors and traders. As such, we'll focus on ways that non-institutional players can protect themselves from inflation. Additionally, we'll take a quick look at the complex vehicles for those working at institutions with access to such products.
Exchange Traded Funds (ETFs) / Mutual Funds
The simplest way for retail investors and traders to bet on inflation is to bet against US treasuries by shorting them. Currently, there are a few ways you can do this. There are two exchange traded funds (ETFs) currently offered which index long-term treasury bonds. Ticker TLT is the iShares Barclays 20+ year treasury fund. Its performance corresponds to the price and yield of the long-term treasury market. As such, investors and traders who wish to bet on inflation (and against treasuries) can simply short TLT. Also, those who wish to play the 7-10 year Treasuries can do so via iShares Barclays Treasury index etf (IEF). That vehicle corresponds to the price and yield performance of the intermediate term sector of Treasuries.
Additionally, you could also buy put options (LEAPs) on this index if you were so inclined. Buying puts on TLT is essentially the same bet as shorting TLT outright. We are not necessarily recommending using options to execute this play because of the leverage they employ, the time decay that moves against you, and the fact that we're not big fans of LEAPs to begin with. And, let's face it, such a large bet on inflation could take years to play out. As such, you're pretty much forced to use LEAPs if you wish to execute this play via options.
There is also another exchange traded fund currently out that 'ultrashorts' the treasury market. Its ticker is TBT and it is 2x the inverse of the TLT vehicle we just mentioned. However, there is one huge caveat with this play. Ultrashort ETFs reset on a daily basis and suffer compounding errors over time and noticeably more volatility. So, the longer you hold them, the more your results skew from the index they are supposed to be tracking. And, that is not something you want to experience when placing a longer-term bet on treasuries. Consider that over the past 1 year timeframe, TLT is up 1.43%. Theoretically, since TBT is 2x the inverse of TLT, TBT should be -2.86% over the same timeframe, right? Wrong. As you can see from the chart below, over the same time frame, TBT is actually -24.37% and has not tracked its index accurately over time at all whatsoever.
(click to enlarge)
This is why you should avoid using TBT for anything besides daily trades. There have been numerous articles published on this subject, and we recommend avoiding ultrashort ETFs. Additionally, since TBT employs leverage, it carries more risk. For the retail investor or trader, simply shorting TLT seems to be the best and easiest option at this point in time.
Last, investors also have the option of using the Rydex Inverse Government Bond Strategy mutual fund (RYJUX). This mutual fund has an expense ratio of 1.4% and essentially is the same as shorting TLT outright without leverage. RYJUX is a 1x short of 30-year Treasuries and is another option for investors who don't mind slightly less liquid mutual funds.
Steepener Swaps / Constant Maturity Swap (CMS) Rate Cap
Now we'll turn our focus to the specific investment vehicle Julian has referenced. The vehicle is called a steepener swap and it is typically reserved for institutional investors.
In his recent interview with Value Investing Insight for May/June 2009, Julian Robertson says, "The insurance policy I would buy is called a CMS [Constant Maturity Swap] Rate Cap, which is the equivalent of buying puts on long-term Treasuries. If inflation happens the way it could, long-term Treasuries are just going to explode. Less than 30 years ago, long-term interest rates got to 20%. I can envision that seeming like a very low interest rate compared to what might occur in the future."
Option ARMageddon has also posted up a nice explanation of the vehicle courtesy of Tiger trader Pat O'Meara. They note that these are options to bet on interest rates rising for 10-year or 30-year treasuries. O'Meara provides a current example, in which one could buy for $50,000 a five-year option, betting that the yield on $10 million worth of 10-year Treasuries rises above 4.2% between now and expiration in 2014. Including the 0.5% cost of the option, the break-even yield level is 4.7%." So, the vehicle is slightly more complex and definitely an institutional type of wager.
Other Inflationary Wagers
While Julian certainly thinks inflation is in our future, he is hesitant to buy gold. In the Value Investor Insight interview, he goes on to say that, "I've never been particularly comfortable with gold as an investment. Once it's discovered none of it is used up, to the point where they take it out of cadavers' mouths. It's less a supply/demand situation and more a psychological one - better a psychiatrist to invest in gold than me." While his argument makes sense, we found it intriguing seeing that we have tracked numerous prominent hedge fund managers moving into gold here on the blog.
Robertson's former colleague Stephen Mandel of Lone Pine Capital has a large call position on the Gold etf GLD. Additionally, respected hedge fund managers such as David Einhorn of Greenlight Capital, Eric Mindich of Eton Park Capital, and John Paulson of Paulson & Co all have sizable gold (and gold miner) positions. While Robertson doesn't like gold as an inflation play, he does have a few other recommendations. He likes natural resource stocks and then also says, "Zinc would also seem to me to be a very good inflation hedge."
Precautionary Note
While we have finally gotten around to writing a follow-up to our initial treasuries post, we do want to insert a note of caution. Year to date for 2009, treasuries are already down over 23%.
(click to enlarge)
The sudden and rapid decline is most likely due for a correction and we do not feel that the current time is ideal to initiate a position in shorting Treasuries. We would look for any sign of a rebound before putting on a new short position. That said, we still feel the move in treasuries will take many years to fully play out and this is a very long-term inflationary bet. While short-term moves like the one we've seen this year are nice, the full extent of the move could take years to come to fruition. We consider the publication of our post on this topic to be a contrarian indicator. After all, when there are headlines saying for you to get into something after a big move has already taken place, it's time to at least take some profits. So, place your bets with caution, as you'll have plenty of time before inflation truly rears its ugly head.
If you believe inflation is in our future, then 'bet the farm' with Robertson by buying steepener swaps, shorting US Treasuries, or buying puts on long-term Treasuries (whichever you have access to). As infomercials for rotisserie cookers like to enthusiastically exclaim, just 'set it and forget it.'
Simply put, Julian Robertson is the definition of a hedge fund legend. And, his success is noted by the fortune he has amassed as he now graces the Forbes' billionaire list. He has pioneered a successful investment methodology, he has generated outstanding returns at his famous hedge fund Tiger Management, and his influence has sprouted some of the most successful modern day hedge funds in the form of the 'Tiger Cubs.' And, most importantly, he predicted the financial crisis two and a half years ago in an interview with Value Investor Insight. When he talks, you listen.
For those unfamiliar with Robertson, we'd highly recommend checking out the profile/biography we just wrote on him. In that piece, we have outlined exactly why you should follow him (and the Tiger Cubs for that matter too). As we detailed in his profile, Robertson has a unique investment methodology. He takes a macro approach, finds a smart idea, researches it exhaustively, and places a big bet. And, when he feels he is more than correct, he will 'bet the farm.' And, it looks like we have identified Robertson's next play where he has and will continue to 'bet the farm.'
Julian's Big Bet
While this is not a new position for Robertson, his constant confidence behind the play has inspired us to look at it more closely. Today, we are going to highlight Julian Robertson's steepener swap play. In layman's terms, he is betting on inflation. Taken from eFinancialNews, "Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate, which is derived from the difference between long and short term rates. Many of these products also use high leverage, where the difference between the two rates is multiplied by up to 50 times to produce a higher return."
He thinks rates could hit 7% easily and could go as high as 18%. We agree with him on this play and we first published our very basic rationale behind shorting US Treasuries back in October of last year. The main point we're focused on is the wager that inflation is in our future. If such an outcome came to fruition, yields on long-term Treasuries would rise. When the yields increase, bond prices will drop, thus benefiting the short position. While the vehicles noted in this article are all slightly different in construction and purpose, they all broadly wager on the same outcome: inflation. Julian's talked about this play in numerous forms, and we actually first heard about his 'curve steepener' play in January 2008 in Forbes. That piece highlighted how Robertson was "long the price of two-year Treasuries and short the price of the ten-year Treasury - betting that the difference, or curve, in the yield between the two will increase." Such a play is negative on the US economy and Robertson executed it because he felt the Federal Reserve would continue to flood the economy with money. And, he has been right.
What's fascinating here is that retail traders and investors could put on essentially the same play using the marvels of exchange traded funds. If you wanted to put a curve steepener play on by going long the 2 year Treasuries and shorting the 10 year Treasuries, you could simply buy SHY (iShares Barclays 1-3 year Treasury etf) and then short IEF (iShares Barclays 7-10 year Treasury etf). This is an easy way to put on the same trade Julian played at the beginning of 2008.
Robertson ultimately feels that the US dollar will become so weak that it causes the central banks of China and Japan to stop purchasing Treasuries. As such, 10-year bond prices would move down and that's exactly what we've seen play out. Back in January of 2008, Robertson told Fortune, "I've made a big bet on it. I really think I'm going to make 20 or 30 times on my money." Moving on from his curve steepener play, we then heard Julian talk about a 'steepener swap' play at a Tiger Cub hedge fund panel. At the panel, Robertson joked that last Christmas his family would have “a steepener in every stocking." This is definitely one of Robertson's token 'bet the farm' plays if there ever was one.
In his recent interview with Value Investor Insight, Robertson lays out further rationale for his play. He says, "I'm amazed at the amount of money the government is throwing at this thing. You don't even react anymore unless somebody's talking about $1 trillion. I genuinely admire the administration's courage in doing what it's doing, but not the wisdom of it. I look at the TALF (Term Asset-Backed Securities Loan Facility) program, for example, and it's almost a bribe to get people to put on more leverage ... I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved. I think what we're doing now will either fail, or it will result in unbelievably high inflation - and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening."
While it may be frightening, it seems to be the scenario that Robertson is wagering on. After all, his steepener swap play will shower him with profits if rampant inflation rears its ugly head. He thinks that the US has not solved the current problems and things could go from bad to really bad. He likened the U.S.'s current situation to that of Japan in 1989, but thinks we are in far worse shape.
Notable Investors Bearish on US Treasuries
Robertson is most certainly not alone in his views. Numerous other prominent investors and hedge fund legends share his distaste for treasuries. We just recently noted that Michael Steinhardt says treasuries are a foolish play over the long term. He categorizes them as risky, noting that the yields are low and the danger is high. Steinhardt of course ran one of the first truly successful hedge funds (Steinhardt Management), garnering a 23% return each year for almost thirty years.
Additionally, acclaimed investor Jim Rogers also wants to short government bonds. Rogers is well-known for his stellar returns while managing the Quantum Fund (now defunct) with then partner George Soros. Rogers expects the government to buy Treasuries in an effort to stem borrowing costs. Rogers says that since Governments around the world are printing a ton of money and borrowing insane amounts, he almost has no choice but to short them. Rogers had previously been short the Treasuries, but covered them for the near-term in favor of waiting for another opportunity to short, as we noted when reviewing Rogers' portfolio. We could add even more talented investing names to this list, but suffice it to say that there is a confluence of smart minds all marching to the same beat.
When such a confluence of smart minds all wager on essentially the same thing (inflation), you should probably turn your head at the very least.
How To Play It
Now that we've seen so many smart minds interested in this wager, how do we play it? There are essentially a few different ways to place a bet on inflation similar to that which Robertson has made. The vehicles referenced earlier are not typically available to retail investors and traders. As such, we'll focus on ways that non-institutional players can protect themselves from inflation. Additionally, we'll take a quick look at the complex vehicles for those working at institutions with access to such products.
Exchange Traded Funds (ETFs) / Mutual Funds
The simplest way for retail investors and traders to bet on inflation is to bet against US treasuries by shorting them. Currently, there are a few ways you can do this. There are two exchange traded funds (ETFs) currently offered which index long-term treasury bonds. Ticker TLT is the iShares Barclays 20+ year treasury fund. Its performance corresponds to the price and yield of the long-term treasury market. As such, investors and traders who wish to bet on inflation (and against treasuries) can simply short TLT. Also, those who wish to play the 7-10 year Treasuries can do so via iShares Barclays Treasury index etf (IEF). That vehicle corresponds to the price and yield performance of the intermediate term sector of Treasuries.
Additionally, you could also buy put options (LEAPs) on this index if you were so inclined. Buying puts on TLT is essentially the same bet as shorting TLT outright. We are not necessarily recommending using options to execute this play because of the leverage they employ, the time decay that moves against you, and the fact that we're not big fans of LEAPs to begin with. And, let's face it, such a large bet on inflation could take years to play out. As such, you're pretty much forced to use LEAPs if you wish to execute this play via options.
There is also another exchange traded fund currently out that 'ultrashorts' the treasury market. Its ticker is TBT and it is 2x the inverse of the TLT vehicle we just mentioned. However, there is one huge caveat with this play. Ultrashort ETFs reset on a daily basis and suffer compounding errors over time and noticeably more volatility. So, the longer you hold them, the more your results skew from the index they are supposed to be tracking. And, that is not something you want to experience when placing a longer-term bet on treasuries. Consider that over the past 1 year timeframe, TLT is up 1.43%. Theoretically, since TBT is 2x the inverse of TLT, TBT should be -2.86% over the same timeframe, right? Wrong. As you can see from the chart below, over the same time frame, TBT is actually -24.37% and has not tracked its index accurately over time at all whatsoever.
(click to enlarge)
This is why you should avoid using TBT for anything besides daily trades. There have been numerous articles published on this subject, and we recommend avoiding ultrashort ETFs. Additionally, since TBT employs leverage, it carries more risk. For the retail investor or trader, simply shorting TLT seems to be the best and easiest option at this point in time.
Last, investors also have the option of using the Rydex Inverse Government Bond Strategy mutual fund (RYJUX). This mutual fund has an expense ratio of 1.4% and essentially is the same as shorting TLT outright without leverage. RYJUX is a 1x short of 30-year Treasuries and is another option for investors who don't mind slightly less liquid mutual funds.
Steepener Swaps / Constant Maturity Swap (CMS) Rate Cap
Now we'll turn our focus to the specific investment vehicle Julian has referenced. The vehicle is called a steepener swap and it is typically reserved for institutional investors.
In his recent interview with Value Investing Insight for May/June 2009, Julian Robertson says, "The insurance policy I would buy is called a CMS [Constant Maturity Swap] Rate Cap, which is the equivalent of buying puts on long-term Treasuries. If inflation happens the way it could, long-term Treasuries are just going to explode. Less than 30 years ago, long-term interest rates got to 20%. I can envision that seeming like a very low interest rate compared to what might occur in the future."
Option ARMageddon has also posted up a nice explanation of the vehicle courtesy of Tiger trader Pat O'Meara. They note that these are options to bet on interest rates rising for 10-year or 30-year treasuries. O'Meara provides a current example, in which one could buy for $50,000 a five-year option, betting that the yield on $10 million worth of 10-year Treasuries rises above 4.2% between now and expiration in 2014. Including the 0.5% cost of the option, the break-even yield level is 4.7%." So, the vehicle is slightly more complex and definitely an institutional type of wager.
Other Inflationary Wagers
While Julian certainly thinks inflation is in our future, he is hesitant to buy gold. In the Value Investor Insight interview, he goes on to say that, "I've never been particularly comfortable with gold as an investment. Once it's discovered none of it is used up, to the point where they take it out of cadavers' mouths. It's less a supply/demand situation and more a psychological one - better a psychiatrist to invest in gold than me." While his argument makes sense, we found it intriguing seeing that we have tracked numerous prominent hedge fund managers moving into gold here on the blog.
Robertson's former colleague Stephen Mandel of Lone Pine Capital has a large call position on the Gold etf GLD. Additionally, respected hedge fund managers such as David Einhorn of Greenlight Capital, Eric Mindich of Eton Park Capital, and John Paulson of Paulson & Co all have sizable gold (and gold miner) positions. While Robertson doesn't like gold as an inflation play, he does have a few other recommendations. He likes natural resource stocks and then also says, "Zinc would also seem to me to be a very good inflation hedge."
Precautionary Note
While we have finally gotten around to writing a follow-up to our initial treasuries post, we do want to insert a note of caution. Year to date for 2009, treasuries are already down over 23%.
(click to enlarge)
The sudden and rapid decline is most likely due for a correction and we do not feel that the current time is ideal to initiate a position in shorting Treasuries. We would look for any sign of a rebound before putting on a new short position. That said, we still feel the move in treasuries will take many years to fully play out and this is a very long-term inflationary bet. While short-term moves like the one we've seen this year are nice, the full extent of the move could take years to come to fruition. We consider the publication of our post on this topic to be a contrarian indicator. After all, when there are headlines saying for you to get into something after a big move has already taken place, it's time to at least take some profits. So, place your bets with caution, as you'll have plenty of time before inflation truly rears its ugly head.
If you believe inflation is in our future, then 'bet the farm' with Robertson by buying steepener swaps, shorting US Treasuries, or buying puts on long-term Treasuries (whichever you have access to). As infomercials for rotisserie cookers like to enthusiastically exclaim, just 'set it and forget it.'
Wednesday, June 3, 2009
Larger funds outperform small funds
Larger funds outperform small funds
Latest Stories
Dow Jones launches regional Euro-Asian indices
People moves
AUM to rebound by end of year says BarCap study
Samena Capital continues Asian expansion
US state closes in on hedge funds
Weavering investigation now multi-jurisdictional
CDS payments system goes live
Emerging markets hedge funds lead industry recovery
People moves
Larger funds outperform small funds
2009-06-01
(http://www.hedgefundsreview.com/public/showPage.html?page=859828)
News
Larger funds outperformed smaller funds in 2008, according to a study by PerTrac Financial Solutions. This was the first time this has happened since the study began
Small funds averaged a loss of 17.03% in 2008 while medium-sized had average losses of 16.04%. Large funds were down 14.10% for the year.
Over the full history of the indexes from 1996 through 2008, small funds performed best, with an annualised return of 13.05% compared with 9.99% for medium-sized funds and 9.28% for large funds.
The small fund index also showed greater volatility over the 13-year period with an annualised standard deviation of 6.96% compared with 5.92% for medium-sized and 6.05% for the large fund indexes.
Hedge funds with the shortest track record continued their trend of superior performance in 2008 as the young fund index lost 11.31% for the year compared to much larger losses of 19.46% by the mid-age and -17.85% by older fund indexes.
Over the full history of the indexes from 1996 through 2008, young funds have generated an annualised return of 15.74% while mid-age returned 11.48% and older funds trailed with 10.12%.
Young funds have also fared best from a risk perspective over the long term with the young fund index producing an annualised standard deviation of 6.47% over the 13-year period. The mid-age and older indexes proved more volatile with annualised standard deviations with the 7.11% for the mid-age and 6.72% by the older fund indexes.
Meredith Jones, managing director at PerTrac, said there are several possible reasons why small funds underperformed their larger peers for the first time ever in 2008. "Larger funds generally have more cash on hand and greater access to lines of credit than small funds, better enabling them to handle redemption requests without compromising their portfolios' performance," noted Jones.
She also said the recent market crash appeared to have prompted a flight to quality among investors. Hedge fund investors had become more interested in larger, more institutional funds.
Other possible reasons included infrastructure considerations, greater reliance on beleaguered prime brokers, and larger redemptions from poor performers pushing more managers into lower asset bands, said Jones.
"However, one year does not make a trend. It will be interesting to see whether the small funds' underperformance in 2008 proves to be a short-term exception to the rule or the start of an official trend," concluded Jones.
The study examined hedge fund returns, volatility and risk based on a fund's age and size. In each analysis, funds were categorised into one of three assets under management (AUM) size groups. These were up to $100 million, $100 million to $500 million and over $500 million
The funds were also categorised into one of three age groups: up to two years; 2-4 years; and over four years. The mean fund return was calculated for each group in each month, creating three size-based monthly indexes and three age-based monthly indexes.
Various risk and return statistics were calculated on the returns of each index to evaluate historical performance, and Monte Carlo simulations were run on each index to indicate probable ranges of future returns and drawdowns.
Hedge Funds Review is the market-leading publication for the alternative investment industry. Register for one month’s free trial – including a copy of the magazine and access to the website – worth £54.
Latest Stories
Dow Jones launches regional Euro-Asian indices
People moves
AUM to rebound by end of year says BarCap study
Samena Capital continues Asian expansion
US state closes in on hedge funds
Weavering investigation now multi-jurisdictional
CDS payments system goes live
Emerging markets hedge funds lead industry recovery
People moves
Larger funds outperform small funds
2009-06-01
(http://www.hedgefundsreview.com/public/showPage.html?page=859828)
News
Larger funds outperformed smaller funds in 2008, according to a study by PerTrac Financial Solutions. This was the first time this has happened since the study began
Small funds averaged a loss of 17.03% in 2008 while medium-sized had average losses of 16.04%. Large funds were down 14.10% for the year.
Over the full history of the indexes from 1996 through 2008, small funds performed best, with an annualised return of 13.05% compared with 9.99% for medium-sized funds and 9.28% for large funds.
The small fund index also showed greater volatility over the 13-year period with an annualised standard deviation of 6.96% compared with 5.92% for medium-sized and 6.05% for the large fund indexes.
Hedge funds with the shortest track record continued their trend of superior performance in 2008 as the young fund index lost 11.31% for the year compared to much larger losses of 19.46% by the mid-age and -17.85% by older fund indexes.
Over the full history of the indexes from 1996 through 2008, young funds have generated an annualised return of 15.74% while mid-age returned 11.48% and older funds trailed with 10.12%.
Young funds have also fared best from a risk perspective over the long term with the young fund index producing an annualised standard deviation of 6.47% over the 13-year period. The mid-age and older indexes proved more volatile with annualised standard deviations with the 7.11% for the mid-age and 6.72% by the older fund indexes.
Meredith Jones, managing director at PerTrac, said there are several possible reasons why small funds underperformed their larger peers for the first time ever in 2008. "Larger funds generally have more cash on hand and greater access to lines of credit than small funds, better enabling them to handle redemption requests without compromising their portfolios' performance," noted Jones.
She also said the recent market crash appeared to have prompted a flight to quality among investors. Hedge fund investors had become more interested in larger, more institutional funds.
Other possible reasons included infrastructure considerations, greater reliance on beleaguered prime brokers, and larger redemptions from poor performers pushing more managers into lower asset bands, said Jones.
"However, one year does not make a trend. It will be interesting to see whether the small funds' underperformance in 2008 proves to be a short-term exception to the rule or the start of an official trend," concluded Jones.
The study examined hedge fund returns, volatility and risk based on a fund's age and size. In each analysis, funds were categorised into one of three assets under management (AUM) size groups. These were up to $100 million, $100 million to $500 million and over $500 million
The funds were also categorised into one of three age groups: up to two years; 2-4 years; and over four years. The mean fund return was calculated for each group in each month, creating three size-based monthly indexes and three age-based monthly indexes.
Various risk and return statistics were calculated on the returns of each index to evaluate historical performance, and Monte Carlo simulations were run on each index to indicate probable ranges of future returns and drawdowns.
Hedge Funds Review is the market-leading publication for the alternative investment industry. Register for one month’s free trial – including a copy of the magazine and access to the website – worth £54.
Sunday, May 31, 2009
Asian Pensions / SWFs - FOFs not attractive
http://globalpensions.com/showPage.html?page=gp_display_feature&tempPageId=859643
top
Asia after the global storm
by Huichen Chou 29 May 2009
Huichen Chou looks at how Asian investors have been impacted by the economic crisis and what they are doing to lessen its impact
The tempestuous storm of global financial turmoil sweeping the world has definitely not left Asia unharmed. Exposure to international and domestic equities has resulted in detriments to Asian institutional investors as a whole, including government pension reserve funds.
According to FTSE World Indices in 2008, the Pacific countries excluding Japan, China and Hong Kong suffered from 50.4% equity losses in dollar terms, while Japan and Hong Kong posted 42.0% and 50.1% equity drop respectively within the same period.
Against the backdrop of bleak equity capital market data, Fidelity International's managing director Asia Chris Ryan states that the region's national pension funds have been relatively less impaired by the global financial crisis compared with their Western counterparts. This is due to their substantial allocations in fixed income and the region's favourable credit environment in the past 18 months.
The Citigroup World Government Bond Indices in 2008 recorded 27.8% gains in dollar terms for the government bond returns in Japan. Meanwhile, Dealogic data illustrated that US Treasuries excluding municipal bonds posted 102% on-year volume gains in 2008. In Asia, the domestic bonds of Japan, South Korea and China priced within the year surged 11%, 38.5% and 123% in volume compared to 2007.
To shore up recessive domestic economies, governments in countries like Korea, Japan, China, Taiwan and Australia are tasked to implement economic stimulus plans, part of which being infrastructure expenditures to kick-start development projects and create jobs. Relatively aggressive government pension schemes like National Pension Service (NPS) in Korea, the world's fifth largest pension plan and National Social Security Fund (NSSF) in China both have their roles to play in these government-driven initiatives through allocating assets to facilitate infrastructure developments.
NSSF reached a Y5bn (US$73m) agreement with China Development Bank in December on supporting infrastructure construction and livelihood improvement projects.
Meanwhile, NPS reached agreements during 2008 with private equity firms Blackstone, Oaktree Capital and MBK Partners to set aside an aggregate of US$9bn in alternative investments, such as infrastructure, real estate and other domestic investment projects.
To mitigate its vulnerability in equity exposure, NPS trims domestic and overseas equity investments in 2009 to 20.6% from the targeted 29.7%, with 17.0% and 3.6% being allocated in domestic and offshore equities respectively.
GPIF under review
Japan's Government Pension Investment Fund (GPIF), the world's largest pension system, currently allocates 73.01% and 10.47% of assets in domestic bonds and equities respectively with remaining assets roughly divided equally by offshore equities and bonds, leaving its portfolio unchanged as the world's second largest economy suffers from its worst economic performance in 35 years.
Under policies of reviewing investment performance every four years and implementing a new round of asset allocation decisions every five years, the fund will undergo a fresh portfolio restructuring in April 2010.
Topics pertaining to the new investment strategy currently under evaluation include an assessment of its very first venture into alternatives, such as real estate, according to JP Morgan Asset Management Japan's head of strategic investment advisory group Hidenori Suzuki.
"GPIF is very conservative in changing its portfolio. Regardless the outcome of investment decisions, allocation weight in any new classes will be limited, given the huge size of GPIF's assets under management," he said.
Despite any temporary portfolio restructuring in national pension plans following the crisis, mandate managers believe investing internationally will remain the trend.
"The financial turmoil has driven some national pension reserve funds in Asia to review their investment policies and reassess earlier decisions to allocate funds internationally. At the least we expect previous decision to appoint managers will be reviewed in context of the fluctuating circumstances in the financial markets and the reaction by some fund managers to restructure or reduce resources," said Mark Konyn, chief executive officer for RCM Asia Pacific.
"As a result appointments of fund managers for international equity mandates have been deferred for the time being. Nevertheless, we believe and anticipate that the fundamental long-term commitment to invest internationally will remain - it has become a question of timing," he added.
As a general direction, some government pension funds have gradually increased their equity allocation in the past two years compared with the low equity exposure 10 years ago, Ryan of Fidelity International observed.
Fixed income
In the fixed income arena, mandate managers deem US Treasuries to have been and will be a substantial portion in the portfolios of these large funds.
"US Treasuries continue to be a large class in the fixed income portfolios, which makes sense for a number of reasons. A large bulk of Asian revenues is denominated in US dollar because the US is the largest export destination for many Asian economies and exports are chiefly denominated in the US currency. Crucial commodities, be they crude oil or iron ore, are also traded in dollar as well," Ryan illustrated.
"Having said that, many funds are also invested in Euro-denominated sovereign bonds and high-yield Euro credits and this is the case with many institutions such as South Korea's National Pension Service which is arguably one of the more sophisticated investors in the region. They have successfully shifted their offshore fixed income portfolios beyond US Treasuries, resulting mainly from Korea increasing its exports to Europe in the past five years," he added.
A trend worth noting in Asia is a gradual increase of intraregional trade, which money managers argued would affect these pension schemes' fixed income allocation to a certain extent.
Chris Ryan of Fidelity International said: "Intraregional trade has grown strongly in the last two decades and now represents around 20% of total trade for most countries in the region. The other 80% of the trade picture is still with the developed economies of the US and Europe. We see a stronger commitment to regional equity and bond investments forming as a result of these increasing flows around the region and, as a result, better Asian support for local equity markets and deepening Asian local and hard currency bond markets. This should in turn reduce the proportion of ‘hot money' in Asian markets, leading to great stability in the long run."
The crisis also triggered Asian pension funds to address the transparency issue and scrutinise their investments in alternatives.
"One consequence of the problems with alternatives is that pension fund governance will require greater transparency from the managers selected. In conversation with various pension sponsors this will likely see the role of fund of funds reduce and for those plans that can support the governance, single strategy funds will replace," Konyn of RCM argued.
Other investments
On the private equity front, Watson Wyatt's head of investment consulting for Asia Pacific Naomi Denning pointed out that these investments are subject to limits on money they will take on to invest and finding viable investment targets. The larger government pension schemes with investment teams are scouring viable opportunities themselves as well as funding PE firms as funds of funds, she added.
In terms of socially responsible investments, Asia pensions at present are still going through the process of getting portfolios globally invested, which is prioritised over any such investments, albeit that they are deemed by some as offering attractive opportunities."
The demographic trends and future liabilities Asian economies face will determine the direction and asset management approaches of their respective national pension schemes in the long run said Konyn of RCM.
"Japan is an aged society and its retirement investors lack sufficient risk budget to achieve higher returns-return objectives that have been set in easier and more supportive times. The low interest rate and deflation at home oblige the Japanese approaching retirement to save more and spend less. This is reducing economic activity at a time when the economy is in recession and therefore investments continue to disappoint," he said.
"Many pension funds had turned to alternative managers offering absolute return strategies. However many have been disappointed and as a result fund of fund strategies may feature less going forward."
Konyn also point out that Korea is in the process of accumulating savings to fulfill long term requirements although the demographic challenges continue to build.
"In the case of China, this emerging market is different to others in that rather than getting rich and than getting old, China has got old before it has got rich. China has high savings rates and the key will be to mobilise these savings and apply them productively and thereby reduce the burden to meet pension liabilities on the state," Konyn elaborated.
Denning of Watson Wyatt said: "The challenge facing Asia pension funds is how to react to the extreme markets, with one issue being whether to rebalance their equity allocation. Another issue that defined contribution funds need to address is the provision of lifecycle defined contribution options, similar to the target-date retirement funds in the US or the lifecycle funds in the UK which gradually decrease risk as they approach the retirement date. These are not widely available in Asia despite talks in some markets."
Denning also pointed out that national government-run pension funds are not prominent in the West in the way they are in Asia. Sovereign wealth funds (SWFs) like national pension reserve funds throughout Asia are huge and still relatively new to the global investment arena. With their sheer size, getting money to work is a challenge.
Meanwhile, external managers often have limited capacity to take on assets without detracting from their ability to add value. The SWFs are increasingly aware of this challenge and therefore will invest some assets internally or passively. They also have to seek layers of approval to get decisions made and operate under high scrutiny which can make outsourcing quite a slow process, Denning said.
Asset allocation
During 2009, Fidelity's Ryan argued that several forces would drive the asset allocation strategies of government pension funds in Asia.
"The economic stimulus plans already announced by Asian countries will trigger higher inflation which will persist for years and this will drive a move to investing in more real assets such as shares, real estate and private equity. But it will take time to get the right exposures to these asset classes so this will be a long-term process," he said.
Across Asia excess savings have been a consequence of the region's dependency on exports and a reduced risk appetite following the Asian financial crisis. As a result, it is expected that currencies will depreciate as the savings pools will shrink in dollar terms, Konyn of RCM argued.
"This trend will extend to Japan where the reversal of the carry-trade has helped the yen to stay strong despite clear signs of economic weakness. More recently the yen has weakened and we expect the trend to continue for 2009, and across the region. This will impact the attitude to invest internationally."
top
Asia after the global storm
by Huichen Chou 29 May 2009
Huichen Chou looks at how Asian investors have been impacted by the economic crisis and what they are doing to lessen its impact
The tempestuous storm of global financial turmoil sweeping the world has definitely not left Asia unharmed. Exposure to international and domestic equities has resulted in detriments to Asian institutional investors as a whole, including government pension reserve funds.
According to FTSE World Indices in 2008, the Pacific countries excluding Japan, China and Hong Kong suffered from 50.4% equity losses in dollar terms, while Japan and Hong Kong posted 42.0% and 50.1% equity drop respectively within the same period.
Against the backdrop of bleak equity capital market data, Fidelity International's managing director Asia Chris Ryan states that the region's national pension funds have been relatively less impaired by the global financial crisis compared with their Western counterparts. This is due to their substantial allocations in fixed income and the region's favourable credit environment in the past 18 months.
The Citigroup World Government Bond Indices in 2008 recorded 27.8% gains in dollar terms for the government bond returns in Japan. Meanwhile, Dealogic data illustrated that US Treasuries excluding municipal bonds posted 102% on-year volume gains in 2008. In Asia, the domestic bonds of Japan, South Korea and China priced within the year surged 11%, 38.5% and 123% in volume compared to 2007.
To shore up recessive domestic economies, governments in countries like Korea, Japan, China, Taiwan and Australia are tasked to implement economic stimulus plans, part of which being infrastructure expenditures to kick-start development projects and create jobs. Relatively aggressive government pension schemes like National Pension Service (NPS) in Korea, the world's fifth largest pension plan and National Social Security Fund (NSSF) in China both have their roles to play in these government-driven initiatives through allocating assets to facilitate infrastructure developments.
NSSF reached a Y5bn (US$73m) agreement with China Development Bank in December on supporting infrastructure construction and livelihood improvement projects.
Meanwhile, NPS reached agreements during 2008 with private equity firms Blackstone, Oaktree Capital and MBK Partners to set aside an aggregate of US$9bn in alternative investments, such as infrastructure, real estate and other domestic investment projects.
To mitigate its vulnerability in equity exposure, NPS trims domestic and overseas equity investments in 2009 to 20.6% from the targeted 29.7%, with 17.0% and 3.6% being allocated in domestic and offshore equities respectively.
GPIF under review
Japan's Government Pension Investment Fund (GPIF), the world's largest pension system, currently allocates 73.01% and 10.47% of assets in domestic bonds and equities respectively with remaining assets roughly divided equally by offshore equities and bonds, leaving its portfolio unchanged as the world's second largest economy suffers from its worst economic performance in 35 years.
Under policies of reviewing investment performance every four years and implementing a new round of asset allocation decisions every five years, the fund will undergo a fresh portfolio restructuring in April 2010.
Topics pertaining to the new investment strategy currently under evaluation include an assessment of its very first venture into alternatives, such as real estate, according to JP Morgan Asset Management Japan's head of strategic investment advisory group Hidenori Suzuki.
"GPIF is very conservative in changing its portfolio. Regardless the outcome of investment decisions, allocation weight in any new classes will be limited, given the huge size of GPIF's assets under management," he said.
Despite any temporary portfolio restructuring in national pension plans following the crisis, mandate managers believe investing internationally will remain the trend.
"The financial turmoil has driven some national pension reserve funds in Asia to review their investment policies and reassess earlier decisions to allocate funds internationally. At the least we expect previous decision to appoint managers will be reviewed in context of the fluctuating circumstances in the financial markets and the reaction by some fund managers to restructure or reduce resources," said Mark Konyn, chief executive officer for RCM Asia Pacific.
"As a result appointments of fund managers for international equity mandates have been deferred for the time being. Nevertheless, we believe and anticipate that the fundamental long-term commitment to invest internationally will remain - it has become a question of timing," he added.
As a general direction, some government pension funds have gradually increased their equity allocation in the past two years compared with the low equity exposure 10 years ago, Ryan of Fidelity International observed.
Fixed income
In the fixed income arena, mandate managers deem US Treasuries to have been and will be a substantial portion in the portfolios of these large funds.
"US Treasuries continue to be a large class in the fixed income portfolios, which makes sense for a number of reasons. A large bulk of Asian revenues is denominated in US dollar because the US is the largest export destination for many Asian economies and exports are chiefly denominated in the US currency. Crucial commodities, be they crude oil or iron ore, are also traded in dollar as well," Ryan illustrated.
"Having said that, many funds are also invested in Euro-denominated sovereign bonds and high-yield Euro credits and this is the case with many institutions such as South Korea's National Pension Service which is arguably one of the more sophisticated investors in the region. They have successfully shifted their offshore fixed income portfolios beyond US Treasuries, resulting mainly from Korea increasing its exports to Europe in the past five years," he added.
A trend worth noting in Asia is a gradual increase of intraregional trade, which money managers argued would affect these pension schemes' fixed income allocation to a certain extent.
Chris Ryan of Fidelity International said: "Intraregional trade has grown strongly in the last two decades and now represents around 20% of total trade for most countries in the region. The other 80% of the trade picture is still with the developed economies of the US and Europe. We see a stronger commitment to regional equity and bond investments forming as a result of these increasing flows around the region and, as a result, better Asian support for local equity markets and deepening Asian local and hard currency bond markets. This should in turn reduce the proportion of ‘hot money' in Asian markets, leading to great stability in the long run."
The crisis also triggered Asian pension funds to address the transparency issue and scrutinise their investments in alternatives.
"One consequence of the problems with alternatives is that pension fund governance will require greater transparency from the managers selected. In conversation with various pension sponsors this will likely see the role of fund of funds reduce and for those plans that can support the governance, single strategy funds will replace," Konyn of RCM argued.
Other investments
On the private equity front, Watson Wyatt's head of investment consulting for Asia Pacific Naomi Denning pointed out that these investments are subject to limits on money they will take on to invest and finding viable investment targets. The larger government pension schemes with investment teams are scouring viable opportunities themselves as well as funding PE firms as funds of funds, she added.
In terms of socially responsible investments, Asia pensions at present are still going through the process of getting portfolios globally invested, which is prioritised over any such investments, albeit that they are deemed by some as offering attractive opportunities."
The demographic trends and future liabilities Asian economies face will determine the direction and asset management approaches of their respective national pension schemes in the long run said Konyn of RCM.
"Japan is an aged society and its retirement investors lack sufficient risk budget to achieve higher returns-return objectives that have been set in easier and more supportive times. The low interest rate and deflation at home oblige the Japanese approaching retirement to save more and spend less. This is reducing economic activity at a time when the economy is in recession and therefore investments continue to disappoint," he said.
"Many pension funds had turned to alternative managers offering absolute return strategies. However many have been disappointed and as a result fund of fund strategies may feature less going forward."
Konyn also point out that Korea is in the process of accumulating savings to fulfill long term requirements although the demographic challenges continue to build.
"In the case of China, this emerging market is different to others in that rather than getting rich and than getting old, China has got old before it has got rich. China has high savings rates and the key will be to mobilise these savings and apply them productively and thereby reduce the burden to meet pension liabilities on the state," Konyn elaborated.
Denning of Watson Wyatt said: "The challenge facing Asia pension funds is how to react to the extreme markets, with one issue being whether to rebalance their equity allocation. Another issue that defined contribution funds need to address is the provision of lifecycle defined contribution options, similar to the target-date retirement funds in the US or the lifecycle funds in the UK which gradually decrease risk as they approach the retirement date. These are not widely available in Asia despite talks in some markets."
Denning also pointed out that national government-run pension funds are not prominent in the West in the way they are in Asia. Sovereign wealth funds (SWFs) like national pension reserve funds throughout Asia are huge and still relatively new to the global investment arena. With their sheer size, getting money to work is a challenge.
Meanwhile, external managers often have limited capacity to take on assets without detracting from their ability to add value. The SWFs are increasingly aware of this challenge and therefore will invest some assets internally or passively. They also have to seek layers of approval to get decisions made and operate under high scrutiny which can make outsourcing quite a slow process, Denning said.
Asset allocation
During 2009, Fidelity's Ryan argued that several forces would drive the asset allocation strategies of government pension funds in Asia.
"The economic stimulus plans already announced by Asian countries will trigger higher inflation which will persist for years and this will drive a move to investing in more real assets such as shares, real estate and private equity. But it will take time to get the right exposures to these asset classes so this will be a long-term process," he said.
Across Asia excess savings have been a consequence of the region's dependency on exports and a reduced risk appetite following the Asian financial crisis. As a result, it is expected that currencies will depreciate as the savings pools will shrink in dollar terms, Konyn of RCM argued.
"This trend will extend to Japan where the reversal of the carry-trade has helped the yen to stay strong despite clear signs of economic weakness. More recently the yen has weakened and we expect the trend to continue for 2009, and across the region. This will impact the attitude to invest internationally."
Comment: Funds of hedge funds defy predictions of extinction
Fri, 29 May 2009, 06:00
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(source: http://www.hedgeweek.com/articles/detail.jsp?content_id=333227)
Funds of hedge funds were widely predicted to become one of the principal casualties of last year's annus horribilis for the hedge fund industry. While most hedge fund indices reported average declines in 2008 of up to 20 per cent, fund of funds benchmarks did even worse.
That double layer of fees, it turned out, did not buy sufficient diversification to shield investors from hedge fund managers' miserable performance; investors found themselves deprived of liquidity because fund of fund managers' were unable to redeem underlying investments; funds of funds that had leveraged up to boost returns found it was losses that had been turbo-charged; and to cap it all some managers had placed significant slugs of their investors' money with Bernard Madoff.
The demise of funds of hedge funds has been forecast for years, prompted by the lower fees and supposedly superior performance of multistrategy funds as an alternative as well as the increasing sophistication of institutional investors who, it was predicted, would shift their capital from funds of funds to single-manager vehicles as they became more comfortable and knowledgeable about alternative investments. Surely last year's slump would deliver the coup de grâce?
It remains early days, but it seems that the death of funds of hedge funds may have been greatly exaggerated. Many funds of funds ran into trouble last year, of course, but anecdotal evidence suggests that investors are often willing to go along with restructuring proposals rather than settle for grabbing what they can from the wreckage. Last year's outflows of capital have slowed to a trickle, and there are even reports of the odd new fund of funds being launched.
Why should this be? A lot of the lustre came off multistrategy funds last year. By some reckonings they underperformed both funds of hedge funds and single-manager funds; certainly there was little evidence of consistent ability to reallocate capital successfully in response to market conditions. At the same time, the events of 2008 did little to reassure smaller institutions in particular about their ability to make their own choices of strategy and manager.
So there still seems to be a place for funds that offer somewhat diversified exposure to the hedge fund universe, although investors will be demanding greater evidence of due diligence on underlying managers and may well require fund of funds managers to get by on a lower level of fees.
Put together, these trends point to consolidation in the sector, as only managers with a substantial asset base will have the resources to research and investigate underlying funds with the thoroughness that will be required. Many members of Switzerland's substantial fund of funds industry, much of which consists of vehicles with less than USD100m in assets under management, will need to seek merger partners to survive, according to Peter Meier, head of the centre for alternative investments and risk management at the Zurich University of Applied Science.
Swiss fund of funds do face problems that are not universal in the industry; some of them have extremely low minimum investment thresholds, which bring them within the ambit of more onerous and constrictive retail investment regulation. Fund of funds managers as a whole are facing up to significant changes to their business models as they seek to regain investors' trust and also to start earning the level of fees required for their firms to thrive. Still, it's better than the alternative.
Fri, 29 May 2009, 06:00
Email Article Print Article PDF Article
(source: http://www.hedgeweek.com/articles/detail.jsp?content_id=333227)
Funds of hedge funds were widely predicted to become one of the principal casualties of last year's annus horribilis for the hedge fund industry. While most hedge fund indices reported average declines in 2008 of up to 20 per cent, fund of funds benchmarks did even worse.
That double layer of fees, it turned out, did not buy sufficient diversification to shield investors from hedge fund managers' miserable performance; investors found themselves deprived of liquidity because fund of fund managers' were unable to redeem underlying investments; funds of funds that had leveraged up to boost returns found it was losses that had been turbo-charged; and to cap it all some managers had placed significant slugs of their investors' money with Bernard Madoff.
The demise of funds of hedge funds has been forecast for years, prompted by the lower fees and supposedly superior performance of multistrategy funds as an alternative as well as the increasing sophistication of institutional investors who, it was predicted, would shift their capital from funds of funds to single-manager vehicles as they became more comfortable and knowledgeable about alternative investments. Surely last year's slump would deliver the coup de grâce?
It remains early days, but it seems that the death of funds of hedge funds may have been greatly exaggerated. Many funds of funds ran into trouble last year, of course, but anecdotal evidence suggests that investors are often willing to go along with restructuring proposals rather than settle for grabbing what they can from the wreckage. Last year's outflows of capital have slowed to a trickle, and there are even reports of the odd new fund of funds being launched.
Why should this be? A lot of the lustre came off multistrategy funds last year. By some reckonings they underperformed both funds of hedge funds and single-manager funds; certainly there was little evidence of consistent ability to reallocate capital successfully in response to market conditions. At the same time, the events of 2008 did little to reassure smaller institutions in particular about their ability to make their own choices of strategy and manager.
So there still seems to be a place for funds that offer somewhat diversified exposure to the hedge fund universe, although investors will be demanding greater evidence of due diligence on underlying managers and may well require fund of funds managers to get by on a lower level of fees.
Put together, these trends point to consolidation in the sector, as only managers with a substantial asset base will have the resources to research and investigate underlying funds with the thoroughness that will be required. Many members of Switzerland's substantial fund of funds industry, much of which consists of vehicles with less than USD100m in assets under management, will need to seek merger partners to survive, according to Peter Meier, head of the centre for alternative investments and risk management at the Zurich University of Applied Science.
Swiss fund of funds do face problems that are not universal in the industry; some of them have extremely low minimum investment thresholds, which bring them within the ambit of more onerous and constrictive retail investment regulation. Fund of funds managers as a whole are facing up to significant changes to their business models as they seek to regain investors' trust and also to start earning the level of fees required for their firms to thrive. Still, it's better than the alternative.
Friday, May 29, 2009
New Mexico Eyes FOFs
Bob Jacksha The $7 billion New Mexico Educational Retirement Board is considering seeking managers for bank loans and funds of hedge funds, as first reported by iisearches. The exact mandate sizes have not been determined. NEPC, the fund's consultant, has been advising clients to tap into a variety of credit strategies, including bank loans, to take advantage of the market dislocation.
In the funds of funds space, New Mexico terminated Austin Capital Management from a $113 million strategy due to its exposure to Bernard Madoff. The firm is now closing due to steep redemptions (MML, 5/4). The fund is also getting out of its $44 million commitment to Topiary Fund Management, DB Advisors' funds of funds unit, ...
from moneymanagementletter.com
In the funds of funds space, New Mexico terminated Austin Capital Management from a $113 million strategy due to its exposure to Bernard Madoff. The firm is now closing due to steep redemptions (MML, 5/4). The fund is also getting out of its $44 million commitment to Topiary Fund Management, DB Advisors' funds of funds unit, ...
from moneymanagementletter.com
Fund of Closed-End Funds
An Income Stream That Spreads the Risk (From Smart Money)
Since I highlighted some of my favorite ideas for income last week, yields on government bonds have soared, pushing prices on many traditional bond and bond equivalents sharply lower. Thankfully, the floating rate, foreign currency and muni funds we mentioned have generally held up.
Even given the uncertainty over interest rates, the economy and continued government intervention in the economy, I’ll add one more idea to the list. Cohen & Steers Closed-End Opportunity Fund (FOF: 9.78, +0.10, +1.03%), a unique closed-end “fund-of-funds” that holds stakes in no fewer than 95 different closed-end income-oriented funds, all of which pay regular dividends. To that end, the investor in FOF achieves two levels of diversification, owning one fund that owns literally dozens of funds, each with its own portfolio of investments.
Cohen & Steers Closed-End Opportunity Fund (FOF)
Source: Cohen & Steers
Covered-call funds, which sell options on a portfolio of stocks, account for its biggest allocation at approximately 15%, along with tax-advantaged equity funds, meaning the FOF tends to generally correlate with the broad stock market. The difference is the income – an investment in the S&P 500 will yield less than 2.5% while at current levels FOF yields more than 11%, thanks to the fund’s investment in high yield, convertible and preferred funds. Real estate, senior loan, utility and master-limited partnerships are a few of the other asset classes represented. It truly has a little bit of everything that throws off income.
Moreover, FOF itself trades at a 7% discount to its NAV – a chasm likely to narrow should liquidity and market confidence stabilize.
Income investors are essentially bankers and thus should look to build bulletproof portfolios based around a range of various types of securities and risks. FOF offers a highly diversified portfolio consisting of a wide range of income-oriented ideas. This is by no means a bond equivalent and carries plenty of market risk. But for a total-return investor hunting for yield, this is certainly one to consider
Since I highlighted some of my favorite ideas for income last week, yields on government bonds have soared, pushing prices on many traditional bond and bond equivalents sharply lower. Thankfully, the floating rate, foreign currency and muni funds we mentioned have generally held up.
Even given the uncertainty over interest rates, the economy and continued government intervention in the economy, I’ll add one more idea to the list. Cohen & Steers Closed-End Opportunity Fund (FOF: 9.78, +0.10, +1.03%), a unique closed-end “fund-of-funds” that holds stakes in no fewer than 95 different closed-end income-oriented funds, all of which pay regular dividends. To that end, the investor in FOF achieves two levels of diversification, owning one fund that owns literally dozens of funds, each with its own portfolio of investments.
Cohen & Steers Closed-End Opportunity Fund (FOF)
Source: Cohen & Steers
Covered-call funds, which sell options on a portfolio of stocks, account for its biggest allocation at approximately 15%, along with tax-advantaged equity funds, meaning the FOF tends to generally correlate with the broad stock market. The difference is the income – an investment in the S&P 500 will yield less than 2.5% while at current levels FOF yields more than 11%, thanks to the fund’s investment in high yield, convertible and preferred funds. Real estate, senior loan, utility and master-limited partnerships are a few of the other asset classes represented. It truly has a little bit of everything that throws off income.
Moreover, FOF itself trades at a 7% discount to its NAV – a chasm likely to narrow should liquidity and market confidence stabilize.
Income investors are essentially bankers and thus should look to build bulletproof portfolios based around a range of various types of securities and risks. FOF offers a highly diversified portfolio consisting of a wide range of income-oriented ideas. This is by no means a bond equivalent and carries plenty of market risk. But for a total-return investor hunting for yield, this is certainly one to consider
More money going into FOFs
Over the past two months, fund-of-funds managers have closed on roughly $5.1 billion in fresh capital to invest in private equity, venture capital and real estate vehicles. Additionally, three firms have reportedly begun raising around $2 billion for the sector in recent weeks.
The largest closings were made by Siguler Guff Co. LLC, Horsley Bridge Partners, Morgan Stanley Investment Management and Abbott Capital Management, which all wrapped up $1 billion or more.
Siguler Guff wrapped up $2.4 billion to back private equity firms investing in distressed securities. (The Deal Pipeline subscribers can read more here.) San Francisco's Horsley Bridge secured $1.54 billion for venture capital and small LBO shops in Asia and Europe, according to VentureWire. The firm is reportedly a limited partner for U.S. venture capital heavyweights, including Kleiner Perkins Caufield and Byers and Foundation Capital, and the new vehicle follows a $1.76 billion U.S.-focused fund that closed in June 2008, according to Venturebeat.
Morgan Stanley Private Markets Fund IV closed 15% higher than its 2006 predecessor fund and will bankroll LBO, venture capital and special situations managers primarily in the U.S., Western Europe and emerging private equity markets.
Likewise, the $1 billion Abbott Capital Private Equity Fund VI will be contributing to buyout, special situations, venture capital and growth equity funds in the U.S. and other developed markets. Abbott now has around $6.6 billion invested in 200 funds, according to AltAssets.
There are also a number of firms out marketing new vehicles.
With the completion of a breakaway from Lehman Brothers Holdings Inc., Neuberger Berman began marketing a new Crossroads fund-of-funds with a $1.25 billion target. The firm told Reuters that early indications are that investors are already prepared to ante up $500 million for the fund.
Infrastructure Development Finance Co. is also launching a private equity fund-of-funds unit out of its Singapore office. The vehicle is targeting $500 million to bankroll LBO shops, focused on Asian emerging markets, particularly China and India, Dow Jones Newswires reported.
Rounding things out is Henderson Global Investors, which is reportedly in the early stages of launching a North American commercial real estate fund-of-funds business, according to Real Estate Finance and Investment.
The largest closings were made by Siguler Guff Co. LLC, Horsley Bridge Partners, Morgan Stanley Investment Management and Abbott Capital Management, which all wrapped up $1 billion or more.
Siguler Guff wrapped up $2.4 billion to back private equity firms investing in distressed securities. (The Deal Pipeline subscribers can read more here.) San Francisco's Horsley Bridge secured $1.54 billion for venture capital and small LBO shops in Asia and Europe, according to VentureWire. The firm is reportedly a limited partner for U.S. venture capital heavyweights, including Kleiner Perkins Caufield and Byers and Foundation Capital, and the new vehicle follows a $1.76 billion U.S.-focused fund that closed in June 2008, according to Venturebeat.
Morgan Stanley Private Markets Fund IV closed 15% higher than its 2006 predecessor fund and will bankroll LBO, venture capital and special situations managers primarily in the U.S., Western Europe and emerging private equity markets.
Likewise, the $1 billion Abbott Capital Private Equity Fund VI will be contributing to buyout, special situations, venture capital and growth equity funds in the U.S. and other developed markets. Abbott now has around $6.6 billion invested in 200 funds, according to AltAssets.
There are also a number of firms out marketing new vehicles.
With the completion of a breakaway from Lehman Brothers Holdings Inc., Neuberger Berman began marketing a new Crossroads fund-of-funds with a $1.25 billion target. The firm told Reuters that early indications are that investors are already prepared to ante up $500 million for the fund.
Infrastructure Development Finance Co. is also launching a private equity fund-of-funds unit out of its Singapore office. The vehicle is targeting $500 million to bankroll LBO shops, focused on Asian emerging markets, particularly China and India, Dow Jones Newswires reported.
Rounding things out is Henderson Global Investors, which is reportedly in the early stages of launching a North American commercial real estate fund-of-funds business, according to Real Estate Finance and Investment.
Thursday, May 28, 2009
Reuters Screens Can Help You Make Money
from: http://www.winninginvesting.com/multex_screens.htm
Please Note: Reuters no longer offers the features described in this article.
“Many of the stocks on that list you recommended are teetering on bankruptcy. What were you thinking?” That was the gist of many emails I received after I described Reuters’ Contrarian Opportunities stock selection screen in this space just about a year ago.
Contrarian Opportunities is one of 19 stock selection screens designed by Reuters’ director of investment research, Marc Gerstein. Reuters (investor.reuters.com) runs the 19 screens, which it calls Reuters Select, daily, and lists the stocks turned up by each screen on its site. You have to register, but there is no charge to see the lists.
Reuters tracks the performance of each screen and makes the results available, both in summary form, and month-by-month since inception.
What got everyone’s attention was that, as of August 27, 2004, the stocks picked by Gerstein’s contrarian screen had racked up an eye-popping 729% cumulative gain since its inception in January 2000. By contrast, the overall market as gauged by the S&P 500 index, had lost 17% during the same period.
While Contrarian Opportunities did the best, several other screens had produced impressive results. In fact, every one of the 19 screens had beaten the market from January 2000 through August 2004.
Time For An UpdateWith reader’s comments still on my mind, last week, I checked to see how Contrarian Opportunities and Gerstein’s other screens had fared over the past year.
As of September 9, Contrarian Opportunities still led the field, but this time with an astonishing 1349% cumulative return. By the way, Reuters computes the returns assuming that each portfolio is rebalanced monthly, meaning that a new portfolio is selected every month.
Screen Categories Gerstein divides his screens into four categories, Growth, Value, Quality, and Sentiment. The Growth and Value categories each contain five screens emulating different variations of these relatively well-known selection strategies. Contrarian Opportunities is in the value category.
The Quality category includes four screens that look for stocks with strong fundamental characteristics. The Sentiment category includes five screens that look for stocks that are “in favor” based on factors such as insider buying or analysts’ ratings.
Lesser-Known Stocks from the Sentiment category was the second best performing screen with a 337% cumulative return. A value screen, Favored Value Plays, was a close third with a 330% return.
As was the case last year, each of Gerstein’s screens has not only been profitable since inception, every screen has soundly trounced both the S&P 500 and the Nasdaq.
Lower Risk Screens Despite its off-the-chart historical returns, in my view, the Contrarian Opportunities screen is too risky for serious money. While most of Gerstein’s screens produce lists of 30 to 50 stocks, the contrarian screen turns up far fewer. In fact, when I checked last Tuesday, it only listed only two stocks. Obviously, with only a few stocks, one clunker could sink the entire portfolio.
However, Gerstein’s remaining 18 screens produce consistent market-beating results, and to me, look relatively low-risk.
Find Reuters Select screens from Reuters Investing homepage by selecting Ideas & Screening and then Reuters Select. Click on Daily Results to see the current picks for each screen.
Check Performance The best way to evaluate a screen’s suitability for your needs is to check its monthly performance under different market conditions. You can do that by selecting Performance, and then click on Performance Details for a particular screen category to download a spreadsheet showing the cumulative returns by month for each screen since inception. Scroll past the cumulative returns to see the actual monthly returns.
By the way, Reuter’s cumulative returns are index values, not percentage returns. The index values are referenced to the January 28, 2000 starting value of 100. Subtract 100 from these values to get the actual percentage returns. You don’t have to make that adjustment when you look at the individual monthly returns.
Buying equal dollar amounts of the 30 to 50 stocks typically turned up by Gerstein’s screens may not be practical for many investors.
Even if you don’t buy all the stocks, the screens are a good source for investing ideas. Also, check out Gerstein’s screen descriptions. He explains his rationale for the screen and also describes the screening criteria in detail. Reading each one is like taking an investing course.
Gerstein’s screens have produced remarkable results over the years. It’s amazing that Reuters is still giving the lists away for free.published 9/18/05
from: http://www.winninginvesting.com/multex_screens.htm
Please Note: Reuters no longer offers the features described in this article.
“Many of the stocks on that list you recommended are teetering on bankruptcy. What were you thinking?” That was the gist of many emails I received after I described Reuters’ Contrarian Opportunities stock selection screen in this space just about a year ago.
Contrarian Opportunities is one of 19 stock selection screens designed by Reuters’ director of investment research, Marc Gerstein. Reuters (investor.reuters.com) runs the 19 screens, which it calls Reuters Select, daily, and lists the stocks turned up by each screen on its site. You have to register, but there is no charge to see the lists.
Reuters tracks the performance of each screen and makes the results available, both in summary form, and month-by-month since inception.
What got everyone’s attention was that, as of August 27, 2004, the stocks picked by Gerstein’s contrarian screen had racked up an eye-popping 729% cumulative gain since its inception in January 2000. By contrast, the overall market as gauged by the S&P 500 index, had lost 17% during the same period.
While Contrarian Opportunities did the best, several other screens had produced impressive results. In fact, every one of the 19 screens had beaten the market from January 2000 through August 2004.
Time For An UpdateWith reader’s comments still on my mind, last week, I checked to see how Contrarian Opportunities and Gerstein’s other screens had fared over the past year.
As of September 9, Contrarian Opportunities still led the field, but this time with an astonishing 1349% cumulative return. By the way, Reuters computes the returns assuming that each portfolio is rebalanced monthly, meaning that a new portfolio is selected every month.
Screen Categories Gerstein divides his screens into four categories, Growth, Value, Quality, and Sentiment. The Growth and Value categories each contain five screens emulating different variations of these relatively well-known selection strategies. Contrarian Opportunities is in the value category.
The Quality category includes four screens that look for stocks with strong fundamental characteristics. The Sentiment category includes five screens that look for stocks that are “in favor” based on factors such as insider buying or analysts’ ratings.
Lesser-Known Stocks from the Sentiment category was the second best performing screen with a 337% cumulative return. A value screen, Favored Value Plays, was a close third with a 330% return.
As was the case last year, each of Gerstein’s screens has not only been profitable since inception, every screen has soundly trounced both the S&P 500 and the Nasdaq.
Lower Risk Screens Despite its off-the-chart historical returns, in my view, the Contrarian Opportunities screen is too risky for serious money. While most of Gerstein’s screens produce lists of 30 to 50 stocks, the contrarian screen turns up far fewer. In fact, when I checked last Tuesday, it only listed only two stocks. Obviously, with only a few stocks, one clunker could sink the entire portfolio.
However, Gerstein’s remaining 18 screens produce consistent market-beating results, and to me, look relatively low-risk.
Find Reuters Select screens from Reuters Investing homepage by selecting Ideas & Screening and then Reuters Select. Click on Daily Results to see the current picks for each screen.
Check Performance The best way to evaluate a screen’s suitability for your needs is to check its monthly performance under different market conditions. You can do that by selecting Performance, and then click on Performance Details for a particular screen category to download a spreadsheet showing the cumulative returns by month for each screen since inception. Scroll past the cumulative returns to see the actual monthly returns.
By the way, Reuter’s cumulative returns are index values, not percentage returns. The index values are referenced to the January 28, 2000 starting value of 100. Subtract 100 from these values to get the actual percentage returns. You don’t have to make that adjustment when you look at the individual monthly returns.
Buying equal dollar amounts of the 30 to 50 stocks typically turned up by Gerstein’s screens may not be practical for many investors.
Even if you don’t buy all the stocks, the screens are a good source for investing ideas. Also, check out Gerstein’s screen descriptions. He explains his rationale for the screen and also describes the screening criteria in detail. Reading each one is like taking an investing course.
Gerstein’s screens have produced remarkable results over the years. It’s amazing that Reuters is still giving the lists away for free.published 9/18/05
Finnish Medical Foundation Enters Alternative Investments
Finnish Medical Foundation Enters Alternative Investments
posted by lexxe on Tuesday 26 May 2009 14:49 BST From Mandatewire - see full story (subscription required)
MandateWire reports: The EUR45.6m (GBP40m) Finnish Medical Foundation has made its first foray into alternative investments by making a 3.8% allocation to the asset class.
According to mandate-tracking service MandateWire, the foundation still mainly focuses on spreading its equity investments across different countries, but it has now taken up alternative investments as a new asset class with an initial EUR2m (GBP1.8m) investment.
“Diversification makes it possible to achieve the long-term target return,” said the foundation about its decision, but did not specify which particular alternative asset class it had invested in.
posted by lexxe on Tuesday 26 May 2009 14:49 BST From Mandatewire - see full story (subscription required)
MandateWire reports: The EUR45.6m (GBP40m) Finnish Medical Foundation has made its first foray into alternative investments by making a 3.8% allocation to the asset class.
According to mandate-tracking service MandateWire, the foundation still mainly focuses on spreading its equity investments across different countries, but it has now taken up alternative investments as a new asset class with an initial EUR2m (GBP1.8m) investment.
“Diversification makes it possible to achieve the long-term target return,” said the foundation about its decision, but did not specify which particular alternative asset class it had invested in.
27 May 2009 - James Rutter
(http://www.wealth-bulletin.com/home/content/1054286666/)
Renaissance for funds of funds exposed by crisis
Some investors might feel Banque Privée Edmond de Rothschild has a lot to answer for. The Swiss-based private bank, part of the Rothschild family empire, launched the world’s first fund of hedge funds 40 years ago to pool investments from its wealthy clients in a portfolio of hedge funds.
In recent years, funds of hedge funds became a cornerstone of many wealthy individuals’ portfolios. While credit was easy and hedge funds delivered the absolute returns they promised, it was a highly profitable business for fund providers and a decent enough bet for investors.
But last year the promised absolute returns became a distant dream for most investors. Moreover, the diversification across different funds that was meant to reduce risk instead exposed fault lines in due diligence as funds of hedge funds were revealed as investors in Bernard Madoff ’s fictional portfolios.
Others were caught out by fund blow-ups and failures. Investors who rushed to withdraw their money found some fund of funds managers putting up gates to prevent them exiting, claiming they didn’t have the cash to pay redemptions and would be forced to sell positions at huge discounts.
In the aftermath of last year’s carnage, it is unsurprising to find Alexandre Col, head of investment funds at Edmond de Rothschild, extolling the virtues of funds of hedge funds. He says: “Returns over the last 40 years show that it has always been useful to have an allocation to funds of hedge funds in a portfolio.”
Banque Privée Edmond de Rothschild, which has €8.4bn ($6.5bn) in its LCF Prifund range, has for many years regarded a 30% allocation to the sector as sensible which, concedes Col, is “at the high end”.
Last year, its flagship uncorrelated fund returned –15.7%, less than half the loss of most equity markets and better than the performance of the average single manager hedge fund but still a long way from positive territory.
Col says: “The biggest mistake today would be to allocate your portfolio based on what happened in September, October and November last year. That was a very specific time.”
Nevertheless, he accepts many investors who suffered large losses last year will not be returning any time soon. A recent study by Bank of New York Mellon and research firm Casey Quirk estimated that high net worth individuals accounted for 80% of hedge fund redemptions last year.
Col expects institutions to be bigger sellers this year. “A lot of private clients arrived too late and have lost money recently. They generally acted more quickly than pension funds and have already redeemed whereas institutions were slower to sell because of the committee decision-making process.”
While Edmond de Rothschild suffered redemptions last year, it had enough liquidity to pay investors on demand, avoiding side pockets (arrangements struck with individual investors outside the terms offered to others), suspensions and gates.
CHANGE
The crisis has, however, prompted a change in Col’s approach. Previously, he believed in having between 40 and 50 funds in a portfolio – quite a lot by some standards. The spread provided liquidity, mitigated risk and enabled investments in numerous niche strategies that could deliver good performance but only for smaller amounts.
“Currently I think the opposite and we are much more concentrated, because the world has changed,” he says. He has half the number of managers because niche strategies are illiquid and he regards smaller funds as more risky.
He also expects some of the most lucrative investment opportunities, particularly relating to distressed assets, to only be available to larger funds.
There is also a good chance the next year or two will be lucrative ones for the hedge funds that survived the credit crunch.
Research from Citi Private Bank shows hedge fund returns tend to be strong in the two years following a quarter of severe market stress.
The average annual return for the Hedge Fund Research composite in the two years following the third quarter of 1998, when Russia defaulted on its debts, was 24%, according to Citi.
Fewer funds, and less competition from the proprietary trading desks of investment banks, should help boost returns.
Of the strategies run by Banque Privée Edmond de Rothschild, Col expects the uncorrelated and long-short equity funds to perform best this year. “The trends aren’t there for the macro funds and commodities trading advisers.
Most of the big moves in interest rates and currencies have already happened. This year we are back to a stock-picking, trading approach, with short-term, sector views being rewarded.”
(http://www.wealth-bulletin.com/home/content/1054286666/)
Renaissance for funds of funds exposed by crisis
Some investors might feel Banque Privée Edmond de Rothschild has a lot to answer for. The Swiss-based private bank, part of the Rothschild family empire, launched the world’s first fund of hedge funds 40 years ago to pool investments from its wealthy clients in a portfolio of hedge funds.
In recent years, funds of hedge funds became a cornerstone of many wealthy individuals’ portfolios. While credit was easy and hedge funds delivered the absolute returns they promised, it was a highly profitable business for fund providers and a decent enough bet for investors.
But last year the promised absolute returns became a distant dream for most investors. Moreover, the diversification across different funds that was meant to reduce risk instead exposed fault lines in due diligence as funds of hedge funds were revealed as investors in Bernard Madoff ’s fictional portfolios.
Others were caught out by fund blow-ups and failures. Investors who rushed to withdraw their money found some fund of funds managers putting up gates to prevent them exiting, claiming they didn’t have the cash to pay redemptions and would be forced to sell positions at huge discounts.
In the aftermath of last year’s carnage, it is unsurprising to find Alexandre Col, head of investment funds at Edmond de Rothschild, extolling the virtues of funds of hedge funds. He says: “Returns over the last 40 years show that it has always been useful to have an allocation to funds of hedge funds in a portfolio.”
Banque Privée Edmond de Rothschild, which has €8.4bn ($6.5bn) in its LCF Prifund range, has for many years regarded a 30% allocation to the sector as sensible which, concedes Col, is “at the high end”.
Last year, its flagship uncorrelated fund returned –15.7%, less than half the loss of most equity markets and better than the performance of the average single manager hedge fund but still a long way from positive territory.
Col says: “The biggest mistake today would be to allocate your portfolio based on what happened in September, October and November last year. That was a very specific time.”
Nevertheless, he accepts many investors who suffered large losses last year will not be returning any time soon. A recent study by Bank of New York Mellon and research firm Casey Quirk estimated that high net worth individuals accounted for 80% of hedge fund redemptions last year.
Col expects institutions to be bigger sellers this year. “A lot of private clients arrived too late and have lost money recently. They generally acted more quickly than pension funds and have already redeemed whereas institutions were slower to sell because of the committee decision-making process.”
While Edmond de Rothschild suffered redemptions last year, it had enough liquidity to pay investors on demand, avoiding side pockets (arrangements struck with individual investors outside the terms offered to others), suspensions and gates.
CHANGE
The crisis has, however, prompted a change in Col’s approach. Previously, he believed in having between 40 and 50 funds in a portfolio – quite a lot by some standards. The spread provided liquidity, mitigated risk and enabled investments in numerous niche strategies that could deliver good performance but only for smaller amounts.
“Currently I think the opposite and we are much more concentrated, because the world has changed,” he says. He has half the number of managers because niche strategies are illiquid and he regards smaller funds as more risky.
He also expects some of the most lucrative investment opportunities, particularly relating to distressed assets, to only be available to larger funds.
There is also a good chance the next year or two will be lucrative ones for the hedge funds that survived the credit crunch.
Research from Citi Private Bank shows hedge fund returns tend to be strong in the two years following a quarter of severe market stress.
The average annual return for the Hedge Fund Research composite in the two years following the third quarter of 1998, when Russia defaulted on its debts, was 24%, according to Citi.
Fewer funds, and less competition from the proprietary trading desks of investment banks, should help boost returns.
Of the strategies run by Banque Privée Edmond de Rothschild, Col expects the uncorrelated and long-short equity funds to perform best this year. “The trends aren’t there for the macro funds and commodities trading advisers.
Most of the big moves in interest rates and currencies have already happened. This year we are back to a stock-picking, trading approach, with short-term, sector views being rewarded.”
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