30SEP08:
31DEC08 INDICES:
FTSE100:3550
DOW30:7550
# HEDGE FUNDS:4425 30JUN08: Oil to be USD200 by 30OCT08 USA Inflation to be 7.5% by 30OCT08
...oops 23APR08:
Next Rights Issue:
HBOS...yes
All & Lec ...
...1 Nil. 17APR08: Oil to be USD127 by 30SEP08
...16MAY08 losing my touch 27FEB08:
2 Banks go bust by 30JUN08
BS down, Lehman (a bit late I know) 20NOV07: Northern Crock to be sold for 15p
Nationalized 01NOV07: Oil to be USD103 EOM
...peaked too soon 08OCT07:
SEC to fine Goldman for pricing issues
...still waiting 15JUN07: ML to buy-out BS
JPM got there first 06JUN07: The Big Crash: 17OCT07
...well it's here
As its two credit focused hedge funds (High Grade Structured Credit Strategies and High Grade Structured Credit Strategies Enhanced Leverage - HGSCS and HGSCSEL) with about USD20bn of highly leveraged assets are put on ventilators, there is real pressure in the market for the creditors not to sell the collateral for fear of undermining the value of the CDO's and other debt packages. As we all know, they are near impossible to price accurately, due to the nature of the underlying distressed assets, and if these CDO's are valued downwards, then all hedge funds who own similar subprime assets will have to do the same and hey presto we have a falling market, more defaults and the house of cards comes tumbling down. Best therefore to close shop, act for each other and ensure the likes of JP Morgan, DB and Bank of America hold on for a bit longer before hitting the markets and then drip feed their exposures away.
No wonder the ABX Subprime Derivatives index was at a year low yesterday (from 97 to 61), where one of the few licensed dealers is Bear Stearns.
The good news is this near miss is no LTCM and the markets have hardly moved. [Editor:that is a poor link to the picture. Why cannot we have more teddy bears as I liked that one from yesterday?]
The bad news is the reputation of Bear Stearns has been tarnished although the markets have short memories.
The speculative news is that Bear Stearns could end up being bought out.
Viagra For those of you who read this via email I apologise if you did not receive today's newsletter. The reason is the words "Bear Stearns" appear too many times and hence this is assumed to be spam. Given you all had a dose of Bear Stearns yesterday, you are not missing much. I too am as bored as you.
Quotes of the Day “Excessive leverage is the common theme of many financial crises of the past. Are we really so much cleverer than the financiers of the past?” Mervyn King's remarks at the Mansion House last night.
“...at best an embarrassment for Bear Stearns, and at worst it threatens to have a ripple effect on valuations across the subprime sector”. Kathleen Shanley, Analyst
Credit market risks not rattling stock buyers...yet (reuters) Fears that a blow-up in high-yield debt markets may lie just around the corner are making some equity investors edgy, but few expect an event large enough to derail the bull market in stocks.
That faith was put to the test early on Wednesday after reports that two large hedge funds run by Bear Stearns Cos. (BSC.N: Quote, Profile, Research) were on the verge of collapse after big bets on the subprime mortgage market went awry.
In the early going at least, stock investors appeared to be taking the developments in stride, and benchmark equity indexes were modestly higher, with the Dow Jones industrial average (.DJI: Quote, Profile, Research) up 0.10 percent.
"It might be enough to scare it off for a correction but it's not enough to scare it off to end the bull market," said Ken Fisher, author and chairman of Fisher Investments.
Wall Street would probably weather any fallout from a storm in the credit markets as long as stocks continue to return more than bonds, and as long as growth overseas continues to buoy U.S. manufacturers, analysts said.
Still, a jump in bond yields above 5 percent also has prompted plenty of nervous chatter that higher interest rates will shut off the easy money fueling the leveraged buyout boom.
That's a real concern to stock investors because, with most analysts agreeing the peak of the corporate profit cycle has passed, the frantic pace of dealmaking has been the main driver of U.S. stock markets this spring.
To end the rally you would need "a massive increase in long rates or a massive increase in stock prices or some combination of the two," Fisher said in an interview earlier this week.
More than two years ago Fisher predicted a wave of stock buybacks and takeovers sweeping corporate America would lift equity markets as investors were forced into reinvesting proceeds from the deals into a dwindling number of stocks.
Market interest rates could move as high as 5.7 percent -- the benchmark 10-year note yielded about 5.12 percent on Wednesday -- without a disaster, Fisher said.
"I'm not suggesting a half a point raise in long rates isn't in other regards significant," he said. "But I don't think it's enough to stop the bull market."
As long as stocks yield more than bonds, that will keep stocks more attractive, he said.
With yields on the 10-year note backing off from a brief high of 5.30 percent last week, there is little evidence of a looming blow-up, said Mike Jones, chief executive at Clover Capital Management, which overseas about $2.7 billion.
"It seems a little abstract to worry about a 'coming crisis' when the credit markets are hardly cognizant of any type of risk at the moment. I think most bond guys would settle for just a 'reasonable spread' to Treasuries," Jones said.
The earnings yield of companies in the Standard & Poor's Index (.SPX: Quote, Profile, Research) is about 6.25 percent, based on their trading at almost 16 times forward earnings. That means they are yielding at least 1 percentage point more than market interest rates.
EMERGING MARKET GROWTH
Investors who worry about a credit meltdown are not taking into account the world as a whole and are giving the United States too much weight in their outlook, Fisher said.
The U.S. and non-U.S. stock markets, the same as the U.S. and non-U.S. economies, are not negatively correlated and have not been for a very long time, he said.
"The people who are making these arguments are far too U.S.-centric," he said.
Industrial production rose among members of the Organization for Economic Cooperation and Development from 1995 to 2000 at about the same rate as that of Brazil, China, India, Indonesia, Russia and South Africa, according to research by Ed Yardeni, chief investment strategist at Oak Associates.
Since 2000 through last November, OECD-member output rose about 9.7 percent, while industrial production at the OECD and the six big emerging countries was 28.8 percent, Yardeni said.
People don't realize the contribution of emerging economies to world growth, said Shigeki Makino, chief investment officer for the global core equity team at Putnam Investments.
Faster growth from emerging economies has caught industries by surprise as they failed to boost plant capacity to meet the demand. That's created a backlog in airplanes, shipbuilding, refineries and plant-equipment orders, Makino said.
"There's a certain sustainability as their agrarian economies shift to urban industrial economies," Makino said.
However, some investors do see reason for concern. The jump in market interest rates should make investors more aware of risk and the possibility of a market correction, said Joseph Battipaglia, chief investment officer at Ryan, Beck & Co.
A decade-low in corporate tax rates could change while investor demands for bigger dividends and stock buybacks squeeze margins and take the shine off a near picture-perfect environment for stocks, Battipaglia said.
"We could see a meaningful reversal at some point, about 5 to 10 percent, so investors need to have a much more attuned sense of risk coming back into the equation," he said.
Fintag says I love all this denial stuff. Rates are increasing globally, inflation is increasing off the back of inflationary pressures in China but it appears that there is nothing to worry about. When 99% of Nurses in the UK cannot afford to buy a home, the US Saving Ratio is negative and threats of 2 million US citizens being made homeless due to being unable to keep up with their mortgage payments, does this seem normal? Markets are based solely on confidence and nothing else. Computers and quants may operate on the assumption markets are under and over valued, but when the markets shudder you will find the computers are switched off and manual intervention takes over. So far the computers are winning - that is because they do not have to worry about pensions or paying school fees.
PHEW!
Bear Stearns Staves Off Collapse of 2 Hedge Funds (nytimes) The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. Bankers traded telephone calls, frenetically negotiating the fate of two hedge funds.
All wanted to avoid a fire sale in the troubled mortgage-securities market, but at the same time, not get stuck with an exploding liability that could result in steep losses. The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable.
As the morning unfolded, lenders to two hedge funds at a unit of Bear Stearns, the investment bank, tried to ascertain what they could expect if they auctioned off mortgage securities with a face value of up to $2 billion. The solicitations were hastily withdrawn when investors reacted with little enthusiasm. But by the end of the day, some of the less-risky securities did change hands.
At the same time, several lenders, including JP Morgan Chase, Goldman Sachs and Bank of America, reached deals with Bear Stearns that forestalled a need to sell securities in the open market. It appeared that some lenders pulled back over concerns about the effect that a large liquidation would have on bond prices and investor confidence. While the securities involved represent a fraction of the market, a liquidation could have forced a bigger sell-off while setting a lower price.
One lender, Merrill Lynch & Company, moved ahead with plans to auction $850 million in collateral it had seized from the Bear funds, according to people briefed on the matter. And Deutsche Bank was said to be shopping $600 million in assets.
Concern over the Bear funds, along with a drop in energy stocks and uptick in yields, helped drive down stocks yesterday. The Standard & Poor's 500-stock index fell 20.86 points, to 1,512.84 , and the Dow Jones industrial average fell 146 points, to 13,489.42.
In the last week, escalating problems at the Bear Stearns High Grade Structured Credit Strategies Enhanced Leveraged Fund and a related fund have jarred investors into confronting systemic risks in the once booming market for bonds that are backed by mortgages to homeowners with weak, or subprime, credit. Last year, more than $483 billion of such bonds were issued, up 5 percent from 2005.
The deal that JP Morgan Chase reached with Bear Stearns Asset Management allowed it to sell $400 million collateral back to the hedge funds for cash, according to people briefed on the matter. It was not clear what price the two banks agreed to.
Goldman Sachs and Bank of America reached similar deals, though details remained unclear. Also unclear is what price the assets will eventually fetch for the Bear funds and what types of losses investors, who have been unable to redeem their investments since May, will face.
The securities causing the greatest concern within the Bear Stearns funds are known as collateralized debt obligations, or C.D.O.'s. Run by portfolio managers, these complex instrument are akin to mutual funds in that they buy stakes in a variety of bonds backed by mortgages.
They often invest in the riskiest portion of the bonds, usually with a hundreds of millions or billions in borrowed money. Some simply buy stakes in other C.D.O.'s. About $316 billion in C.D.O.'s specializing in mortgages were issued last year, up from $178 billion in 2005.
The leveraged fund at Bear Stearns, which is 10 months old, made a particularly big bet on these C.D.O.'s. But that strategy soured as more homeowners fell behind on loan payments and foreclosures surged. In many regions, home prices are falling and the number of properties for sale are growing.
Traders and industry executives who saw lists of C.D.O.'s on offer from the Bear Stearns funds say that even as the manager of the funds, Ralph Cioffi, bought some protection against a deteriorating housing market, on balance his investments seem to be based on a belief that the subprime market would not crumble, or at least not soon.
“This is some of the more aggressive stuff that has been issued in the last couple of years and is not indicative of what most people have been invested in,” said a portfolio manager who did not want to speak for attribution because his firm may make bids on some of the assets.
He said it would take time — perhaps several days — for potential buyers to drill down into some of the more complex securities in order to value them before any bids could be prepared. From 33 to 45 percent of the $2 billion in C.D.O.'s on offer by the funds early yesterday were investments in other C.D.O.'s, according to officials who have seen the bid lists.
Fintag says The markets were heavy in the CDO space yesterday - lots of window shopping but little action.
SEC Chief: Agency Monitoring Fallout From Bear Hedge Funds (cnn/dowjones) Securities and Exchange Commission Chairman Christopher Cox on Wednesday said regulators were tracking the fallout from the collapse of two big hedge funds at Bear Stearns & Co. (BSC), but noted the problems in the funds so far don't seem to be spilling more broadly to the markets.
In an interview with Bloomberg Television, Cox said that "our division of market regulation is tracking that and I don't have anything to add to what you've already seen in published reports." He said that "our concerns are, as you might imagine, with any potential systemic fallout. So far so good on that score."
The two Bear Stearns hedge funds mostly held investments in securities made up of loans backed by subprime mortgages - those offered to borrowers with less than stellar credit records.
Fintag says That makes me feel warm inside.
JUNE 25, 2007
Hey Nostradamus! Will Blackstone Regret This Week's IPO? (dealbreaker) We are all quivering with excitement over the Blackstone IPO this week, but some, like Breakingviews.com editor Edward Chancellor, are looking further into the future. Because many of us at Dealbreaker hold or are pursuing advanced degrees in comparative literature with a financial sector specialization, we were fascinated by Chancellor's piece in the June Institutional Investor: a fictional and dead-serious letter from Stephen Schwarzman to Blackstone shareholders, dated June 1, 2012, regarding the proposed buyback and delisting of Blackstone shares.
According to the letter, after Blackstone goes public this week, it will face five perilous years marked by “deteriorating economic conditions, extraordinary convulsions in the credit markets, a worsening political and legal environment for the buyout industry, and the consequences of what is not commonly referred to as the 'private equity bubble.'” It will all culminate with a buyback at $15-per-share (a “substantial premium to current price”), about half of the anticipated IPO price.
As a document of 2007, the letter is more didactic than damning, saying of the “Private Equity Bubble,”
The entire buyout industry, including Blackstone, must accept its share of responsibility for our current woes. At the time of our IPO, returns from buyouts had been excellent, largely because both corporate valuations and profits had been rising in tandem for several years.
In hindsight, it's clear that we became over confident. Too much private equity money was chasing too few opportunities. We found it difficult to resist the urge to raise ever-larger funds. And we put that money to work to quickly. In the takeover frenzy, many private equity firms were over stretched. There was a collective loss of investment discipline. Too many businesses were bought at large premiums when profits were near a cyclical peak. Given the fees on offer and the ease with which assets could be flipped only months after acquiring them, out actions were understandable.
Fintag says Spooky.
As you know, I have predicted a stock market correction next Monday and if a Pirate's ship goes down all I can say is "I told you so".
Remember that Finbar Taggit is never wrong (except in the eyes of Mrs Taggit)
(allaboutalpha) As the hedge fund industry matures and becomes more process-oriented, more and more hedge fund managers figure that if they can run their own back offices, why not run other peoples' back offices? For example, Highbridge spun out Harmonic Fund Services in 2003 and Oak Hill spun out its back office into OpHedge in 2005. As various other managers enter this industry by spinning off their own administration functions, they bring with them a new language.
Nowhere is this more evident than in the recent announcement that hedge fund behemoth Citadel is launching an arm's length hedge fund administrator, Citadel Solutions. Hedgeco.Net reports that Citadel caused a stir at SIFMA's Annual “Technology Management Conference & Exhibit“ in New York on Tuesday with news of their new initiative (which is slated to go live July 1):
“John Buckley, President of Citadel Solutions LLC said: 'Approval by the BMA (Bermuda Monetary Authority) is an important step in the further development of our activities. With the addition of Robin to our leadership team, we are well-positioned to become a leader in offshore fund administration. Robin and the Citadel Solutions Bermuda team build upon our unique service offering, the delivery of Operational Alpha to our clients.'”
Whoa. Hold the phone. “Operational Alpha“? At first blush, this term smacks of marketing schlock. But then we recalled a presentation given by a BGI executive to a gathering of AIMA (The Alternative Investment Management Association) last fall that could give credence to this claim. It turns out that the BGI executive, Ananth Madhavan, has since published his research in the form of an article last month called “Transaction Costs Analysis as a Source of Alpha“. While Madhavan's paper pertains to transaction costs - not administration costs - the same lesson still applies: every dollar of expenses is a dollar is taken directly from alpha.
When you think about, this makes a lot of sense. Most costs (save performance fees) are unrelated to performance. They are essentially a guaranteed negative return with basically no volatility. If you removed the negative sign, it would be quite apparent that this return would be tantamount to (precious) alpha. Our example from a few days ago of the hypothetical fund charging 2% in a year when gross returns amounted to 2%, clearly illustrates that fees basically net-out against alpha. The numbers may be small compared to overall returns, but are gigantic compared to the typical amount of alpha delivered. In other words, cutting fees amounts to a serious alpha ”gimme“.
Madhavan has been examining the entrails of securities markets for years. So this article is a little technical. Essentially he and his BGI colleague Mark Coppejans say:
“Once largely overlooked, the impact of realized transaction costs on investment performance is now well recognized. Indeed, transaction costs can substantially reduce, or even eliminate, the notional returns to an investment strategy.”
“...we examine the impact of transaction costs on an active manager's information ratio (IR), defined as the ratio of expected active return (or alpha) to active risk. We build on the deep insights in Grinold (1989), who shows that the information ratio is the product of skill, measured by the information coefficient (the correlation between the manager's predicted and actual alpha) and breadth, measured by the number of independent active bets per year.”
In a nutshell, the authors add another term to the original Fundamental Law of Active Management...
They refer to that additional thingamajig term as the “endogenous transfer coefficient”. It's mainly a function of the transaction costs and the manager's ability to forecast those costs.
Why can't a manager accurately forecast costs? Because “costs” can include a number of potentially unpredictable things (see chart at right from earlier presentation on the topic by Madhavan).
The article shows that a manager's ability to predict transaction costs goes up, so does their information ratio. Conversely, the absolute inability to predict transaction costs can lead to a dramatic reduction in the information ratio.
The bottom line is that expense management isn't just for the back-office any more. Apparently it can have a dramatic impact on a) the alpha-generating capacity of a manager's strategy, and b) her information ratio. And with alpha reputedly in short supply, hedge fund managers are going to need to squeeze all they can out of a limited opportunity-set.
So maybe it's not a bad thing that hedge fund managers themselves are moving into the fund administration space after all.
Fintag says I always thought IT geeks lived in a world of jargon and inner world phrases but I have now decided that the Hedge Fund world is even worse. With portable alpha, alternative beta, enhanced alpha, absolute alpha, omega, delta hedge, delta one, survivorship bias, clone indices, replication, investable indices, short bias, global macro, non-event driven, equalization, high water marks, hurdles, feeder funds, static beta, dynamic beta, CDO, CFO, CFD, transparency, managed account, 130/30, 2 and 20, haircut, lockin, capacity, soft closed, hard closed, PIPES, pivs, PEFs, PBs, redemption fees, softing, upside potential ratio, sharpes and styles it is no wonder that we forget all Hedge Funds are supposed to do is make money - lots of it as compared to sitting on cash, with a low volatility and risk.
If it keeps the academics happy and enables me to employ top draw Quants who speak 6 languages (including C#) then good. Otherwise it just masks what is essentially a simple game of buying low and selling high and selling high and buying low.
All of a sudden, some investors, analysts, and commentators are getting the "feeling" that the economy might be "bottoming."
That is despite the fact that housing continues to slip-slide into a dark abyss, the employment "gains" we've seen in recent months have largely been due to statistical plug-factors, long-term interest rates are rising both here and abroad, chief financial officers and other senior executives are growing increasingly cautious in their outlooks, and an expanding list of historically reliable indicators is signalling tough times ahead.
To top it off, the group that would have to be at the forefront of this alleged turnaround -- because they account for more than two-thirds of U.S. gross domestic product -- is anything but upbeat about the future, according to Editor & Publisher, in a report entitled, "Gallup: 7 in 10 Americans Say Economy Is 'Getting Worse.'"
A new Gallup Poll will only reinforce those who claim that while the rich get richer most Americans don't feel they are sharing in the growth in our economy. The stock market may be climbing and the unemployment remains relatively low, but 7 in 10 Americans believe the economy is getting worse -- the most negative reading in nearly six years.
Only one in three Americans rate the economy today as either excellent or good, while the percentage saying the economy is getting better fell from 28% to 23% in one month.
Gallup adds: "For the first time this year, a majority of Americans are negative about the employment market, saying it is a bad time to find a quality job."
The 70% negative rating is up 10 points since April. Also, just in the past month, there has been a significant five-point drop, from 28% to 23%, in the percentage saying conditions are getting better.
"When asked about the most pressing financial problems their family faces today, Americans mention healthcare costs, lack of money or low wages, and oil and gas prices," Gallup reports. "Healthcare costs are mentioned by 16% of Americans while 13% say low wages and 11% say oil and gas prices. These percentages are virtually unchanged from last month."
The survey of 1,007 adults was taken June 11 to 14.
Based on this, I'm wondering whether those who've been experiencing these warm and fuzzy "feelings" lately should get themselves checked out -- before they start inflicting a great deal more harm onto themselves and others?
Fintag says Happy Times are here again ...
GORDON GEKKO AKA FINBAR TAGGIT
Stereotyped in the City (ft) City types might find themselves attracting unusual attention from an American in a black polo neck over the next few days. Script writer Stephen Schiff is in London doing research for the sequel of the movie Wall Street that goes by the working title of Money Never Sleeps.
Drawing inspiration from the fast-money hedge fund era, and Michael Douglas reprising his role in the original, the 20th Century Fox production relies on Mr Schiff's considerable skills as a writer for the New Yorker and scriptwriter on a remake of Lolita. The onetime musician and film critic for Vanity Fair was hired at the New Yorker by Tina Brown, herself in town for the launch of her Princess Diana biography.
Fintag says I am reading the script right now ...
AND?
Hedge funds run by women do well new index shows (reuters) Investors looking for better performing hedge funds may want to try putting their money into portfolios run by women or minorities, a new industry benchmark launched on Wednesday shows.
The HFRX Diversity Index tracks returns at firms owned and operated exclusively by women and minorities and shows these managers have long outpaced competitors around the world.
Since 2003, these managers have returned 11.26 percent annually net of fees, said Chicago-based hedge fund tracker Hedge Fund Research (HFR), which created the index.
Global hedge fund managers returned 7.76 percent during the same period, according to another one of the company's benchmarks, the HFRX Global index.
HFR created the new benchmark at a time loosely regulated hedge funds are attracting billions of dollars in new assets every year from pension funds, endowments and wealthy individuals.
Together, the world's estimated 9,000 hedge funds invest about $1.5 trillion, but only a fraction of these funds -- about 100 -- are owned and run by women and minorities.
"We responded to demand from large institutional investors like the California Public Employees' Retirement System, or Calpers," Hedge Fund Research President Ken Heinz said.
Calpers invests $245 billion and was among the first pension funds to put money into hedge funds.
Heinz said his team reviewed funds such as Jane Siebels' Green Cay Asset Management, Nancy Havens' Havens Advisors, Tracy Maitland's Advent Capital Management, Karen Finerman's Metropolitan Capital Advisors and Jamie Zimmerman's Litespeed Partners while creating the index.
The index will be rebalanced often and currently includes 15 hedge funds.
Fintag says Strange article. I cannot really comment on this for fear of saying something inappropriate.
AQR Capital Management, a hedge fund manager relying on computer systems to manage its $35bn (€26bn) of assets, is expected to be floating after the Blackstone Group, whose listing is expected this month.
Bankers were optimistic about flotations by Citadel, Avenue Investment Management, Perry Capital and DE Shaw.
And other managers among the 10 largest hedge fund and private equity groups are thought amenable to the right approach from a strategic investor.
Charlie Porter, chief executive of UK hedge fund manager Thames River Capital, said: “We get lots of phone calls, there is no shortage of people who want to take a large minority stake in us.” But Thames River prefers its independence.
The chief executive of another large UK firm asked: “Why sell the business? Why not just give it to the people who make it what it is - the staff?” He kept his options open, however, by keeping his identity secret.
Some of the highest-performing firms in the industry are expected to remain independent.
These include SAC Capital, run by chief trader Steve Cohen with $11bn under management and an average net return since launch of 43% a year; and Renaissance Technologies, a systematic trading group with $26bn of assets and an average net return of 34% a year since launch.
Renaissance generated sufficient fee income to buy its original $5bn fund from its investors two years ago. It has since launched a fund with a capacity it believes of $100bn - the largest hedge fund - and has raised $20bn in less than two years.
Small firms boasting high performance, such as the UK's Gradient Capital, which has generated an average of 28% a year net of fees since launch and runs $2.5bn of assets with two investment staff, are also expected to remain independent.
An investment consultant specialising in hedge funds said: “These firms and others will never consider giving up ownership. They have been so successful and there is no reason for them to hand over power to anyone.”
He said he did not expect any alternative asset manager to give away power without a struggle: “There is a certain amount of arrogance that often goes with the job. The last thing many of them want to do is report to anyone.”
Fintag says And the timing couldn't be worse. Still, they have until October 2007 when we will all be wanting gold and cash.
facebook profile
free e-mail subscription
feedburner feed
I love all this denial stuff. Rates are increasing globally, inflation is increasing off the back of inflationary pressures in China but it appears that there is nothing to worry about. When 99% of Nurses in the UK cannot afford to buy a home, the US Saving Ratio is negative and threats of 2 million US citizens being made homeless due to being unable to keep up with their mortgage payments, does this seem normal? Markets are based solely on confidence and nothing else. Computers and quants may operate on the assumption markets are under and over valued, but when the markets shudder you will find the computers are switched off and manual intervention takes over. So far the computers are winning - that is because they do not have to worry about pensions or paying school fees.