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
Monday, June 22, 2009
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.
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