28JAN09:
Q1-09 DOW: 8900
Q2-09 DOW: 7250
Q3-09 DOW: 5810
Q4-09 DOW: 3960
CITI NATIONALIZED
OBAMA GETS SICK 27AUG09:
Mini Crash 21SEP09 Predicted correctly:
Bailout=Bonuses
Demise of Bear Stearns
Demise of Lehman Bros.
Demise of AIG
Subprime would cause problems
Date of 2007 crash
CRAs were to blame
G20 riots were a party
Northern Rock run
Northern Rock Nationalization
HBOS and RBS demise
UBS really was Useless
Another testing week starts today and the UK tax payer breathes a sigh of relief that Northern Crock is to be saved and renamed Northern Virgin. Despite the average Brit being USD70,000 in debt, house prices falling, and identities being sold on eBay for a couple of quid, the rest of the week is one of back slapping and ego massaging for those in the hedge fund industry.
It is revealed a start up hedge fund made 1000% on shorting subprime, 130/30 goes from strength to strength, Cornish-Fisher var is all the rage, quants get kicked again (they are only doing their job - blame the academics), the USD is the new carry trade currency, Oil will approach USD103 this week, Gold to reach another high, IPOs screech to a halt, more traders will be found lurking at the soup kitchen behind the Hilton, markets will continue to rock and roll like a tourist ship on ice, and the hedge fund manager of the year is announced as....
HUGE RETURN FOR HEDGE FUND BETTING AGAINST SUBPRIME
A Californian hedge fund has made more than 1,000 per cent return this year by betting against US subprime home loans, making it one of the world's best-performing funds of all time.
Lahde Capital, set up in Santa Monica last year by Andrew Lahde, last week passed the 1,000 per cent mark, after fees, following the latest leg of the credit market turmoil. The fall in the value of subprime-linked securities has boosted a group of funds which spotted the problems in advance.
The decision to use derivatives to short, or bet against, low-quality US home loans taken by a select group of hedge funds last year appears to have become the most profitable single trade of all time, making well over $20bn in total so far this year. John Paulson's New York-based Paulson & Co, the biggest of the group with $28bn under management, is said by investors to have made $12bn profit from the trade already.
Fintag says USD20bn might sound a lot but this only a small percentage of the market. However, we can only tip our hats and kiss the feet of these mighty managers for their foresight and trading gall. And they are just a start up!
The growing appeal of 130/30 as a long-short strategy has so far been confined to equities, however, that may be changing. Barings Asset Management is implementing the fixed-income version of the strategy on behalf of at least one U.S. pension fund which it declined to name. "It is something very new. We started in the middle of 2007 in order to take out the asymmetries inherent in the fixed-income universe," says Jonathan Cunningham, head of Sales at Barings.
By relaxing long-only constraints, fixed-income investors can achieve excess returns from at least four different sources. The main sources of excess return for actively-managed fixed-income mandates are inter-market spread positioning, duration positioning, yield curve, credit and currency positioning, according to Barings. The one area where 130/30 may not prove to be an optimal fixed-income strategy is in duration positioning since a manager already has considerable freedom in adjusting the duration of a portfolio relative to a benchmark. "With duration management you can go from seven to zero fairly easily," says Cunningham.
Weight matters
The case for pursuing 130/30 is particularly strong in the area of inter-market spread positioning. This view can be implemented if a portfolio manager has a specific view that Australian bonds, for example, are over-priced compared to US Treasuries. The low index weight for Australia makes it difficult to take a meaningful underweight position unless the long-only constraint is dropped. "If you look at the global indexes such as the Lehman Global Aggregate Index, you see that some countries have a proportionally lower weighting which does not allow a portfolio manager to go more underweight than zero," says Cunningham. "130/30 gives the ability to go short."
Fintag says 130/30, the marketers dream is proving to be pretty successful - in raising assets although not in performing. However, it does show that the long only world is trying to make money from falling markets.
FUND MANAGERS RAISE EXIT PENALTIES TO PREVENT PROPERTY COLLAPSE
Schroders, one of the UK's leading managers of commercial property investments, yesterday wiped 12.5 per cent off the value of units in its flagship £2bn fund, amid growing fears of a collapse in the sector.
The company also warned that investors in the fund might have to wait longer than usual to withdraw their money because of a serious downturn in the market. William Hill, Schroders' head of property, said: "The market has moved and there is nothing to be gained by us putting our heads in the sand and pretending otherwise." The 12.5 per cent reduction applies to the value of redemption units in the Schroder Exempt Property Unit Trust, one of the top performers in the sector. Institutional investors in the fund are required to give three months' notice of withdrawals but are usually offered the value of their units on the day they give notice.
Yesterday though, Schroders said it had amended its September valuation of Exempt Property downwards by 12.5 per cent for investors who have given notice of withdrawals. It also said they may have to wait longer than three months to get their money, because the fund manager is determined not to be forced into selling assets in a falling market.
Schroders is the second manager in a week to take drastic action to avoid being caught out by rapidly deteriorating investor sentiment on commercial property. M&G has also told institutional investors they may have to wait longer to get their money back.
CB Richard Ellis, the consultant, now predicts annual returns for commercial property will be down to almost zero by the end of this year - compared with an 18 per cent gain in 2007.
Fintag says It is all so easy when it is going up, but will these illiquid lumbering assets and short term investors, commercial property is not flavour of the month (or the next 2 years).
The time-frame for the potential sale of Northern Rock to a consortium led by Sir Richard Branson's Virgin Group is expected to be unveiled later.
The BBC has learned that the bank will name Virgin as its preferred bidder, but a deal will take weeks to finalise.
Virgin's bid includes an immediate repayment of £11bn of the £25bn the bank owes the Bank of England.
If the bank's shareholders block the deal - which has Treasury approval - it could be taken into administration.
BBC business editor Robert Peston said: "Right to the last, the Treasury has been considering a radical alternative, which was to nationalise the bank.
"But it appears to have decided that taxpayers' interests are more likely to be protected by a private-sector solution."
Fintag says Lets see what the fine detail says - and also what RAB Capital, its largest shareholder has to say too.
telegraph says " Virgin's cut-price plan will slash Rock shares "
Families are stretched to the limit of their borrowing capacity, with personal debt having almost doubled since the turn of the century, an independent report warns today.
The average adult now owes £33,000 through mortgages, credit cards and personal loans compared with £17,000 in 2000, the international accountancy firm PricewaterhouseCoopers claims.
Average Briton is now £33,000 in debt Many households are likely to have to use their credit cards to meet rising mortages
As borrowers default on their debts in growing numbers and banks and building societies try to recoup their losses, annual fees on credit cards will become standard, the report says. These would equate to up to £30 a year.
Despite the prospect of annual charges and higher interest rates on monthly bills, many people are likely to have to use their credit cards more often to meet the rising cost of mortgage repayments.
The report comes as families prepare for Christmas, when the average adult takes on more debt than at any other time of the year.
Further pressure will be applied next year when more than a million people see their discounted fixed-rate mortgage deals end, the report predicts. They face an average rise of £140 on their monthly repayments.
The report delivers a bleak warning about the level of consumer borrowing in Britain, which now stands at more than £1.3 trillion.
Fintag says On its own this is shocking. However, with so many Brits in debt all they have to do is wait for the Government to bail them out - just like they did with Northern Rock. That is what Governments are for - isn't it?
Investors in a structured deal sold by UBS that was backed by the debt of financial companies have lost around 90 percent of their investment, Moody's Investors Service said on Friday.
Moody's cut its rating on one tranche of a deal issued via UBS nine notches to “C,” one step above default, from “Ba2,” after unprecedented spread widening in credit default swaps on financial companies included in the deal hit triggers that required it to be unwound.
The unwind of the deal known as a Constant Proportion Debt Obligation (CPDO) caused an approximate 90 percent loss for investors, Moody's said in a statement.
CPDOs aim to earn high returns by making leveraged bets on credit default swap indexes. The indexes launch new series of contracts every six months, and at this point the CPDOs unwind their existing exposure and replace it with the new index contracts.
Deals that were based on financial companies have suffered from spread widening caused by losses firms have taken from exposure to residential mortgages.
The downgrade impacts 11.5 million euros (US$17.04 million) of debt that was due in 2017. Forty one million euros of the notes were bought back and canceled before the cash out occurred, Moody's said.
Moody's has also placed under review for downgrade 340 million euros worth of debt from five CPDOs that are also exposed to financial companies.
Fintag says What is the purpose of a rating agency? Discuss.
Brian Peterson, knowledge leader at US-based Diamond Management & Technology Consultants, answers this week's questions on Cornish-Fisher VaR.
1. What is Cornish-Fisher VaR and how does it differ from VaR?
Value-at-Risk (VaR) is a measure of the likely loss at a given confidence level (quantile). Historical VaR is calculated by simply ranking the observed returns and looking at the loss at the desired confidence. J.P. Morgan's RiskMetrics parametric mean-VaR was published in 1994 and this methodology for estimating parametric mean-VaR has become what most literature generally refers to as "VaR" (J.P.Morgan/Reuters, 1996). Parametric VaR works by assuming a distribution to more precisely estimate the unobserved risk at the tails of the distribution; the RiskMetrics approach assumes a Gaussian normal distribution. In this case, estimation of VaR requires the mean return ¯R, and the standard deviation of the returns ¾. In the most common case, parametric VaR is thus calculated by ...
Fintag says We are often accused of being trite. Well he is an interesting article on a v@r flavour. Given hedge funds go short and v@r is a really only useful in the long only mutual fund industry (if at all) then I wouldn't bother reading this.
Since when has v@r been used to predict the future from past information? That would be never. Ask your self this question. Why did JP Morgan spin out RiskMetrics and doesn't use v@r itself?
The number of postponed initial public offerings in the US and Europe has reached record levels this quarter, with 10 times as many being put on hold in the past six weeks than in all of the final three months of last year, according to data provider Thomson Financial.
A total of 82 initial public offerings, 67 in the US and 15 in Europe, have been pulled as companies are reluctant to face turbulent equities markets. Only eight, two in Europe and six in the US, were shelved in last year's fourth quarter.
Ken Brown, managing director and co-head of equity capital markets at Lehman Brothers, said: “Following the late July credit crunch, the markets were largely closed until the Fed cut rates and the banks reported their second-quarter results in mid-September. Once the markets reopened, a backlog of IPO transactions began to flow through. However, further large writedowns at the banks, the ousting and resignation of several high-profile figures and financial losses announced more recently beyond the investment banks has led to concerns of a more widespread systemic risk in the financial markets that has jolted the market's confidence.”
Quantitative hedge funds were responsible for August's stock market turbulence as too many of them attempted to de-leverage, then re-lever, at exactly the same time.
And this pattern is likely to repeat itself as assets under management and leverage levels return to levels seen in the summer, leading once more to overcrowding of the strategy, according to research conducted by Lehman Brothers Alternative Investment Management .
Fintag says Computers. Don't you just love them.
HEDGE FUNDS DITCH JAPAN FOR ASIA, GOLDMAN SACHS SAYS
Hedge funds are shifting Asian investments out of Japan because of lower returns and poor corporate governance in the region's biggest economy, said Kathy Matsui, Goldman Sachs Group Inc. chief strategist in Tokyo.
Japan's average return on equity will be about 10.2 percent this fiscal year, compared with 20 percent in the U.S. and 15.7 percent in Asia, according to Matsui. Return on equity is a measure of how well a company uses its cash to generate profit.
Meanwhile, Japanese companies are fending off purchases by foreign firms seeking to boost share prices, by buying stakes in each other or taking so-called poison pill measures. Some 400 Japanese companies, or 10 percent of all publicly traded firms, have taken steps to ward off hostile takeovers, according to a Nikkei newspaper survey published in October.
Fintag says And?
DOLLAR DISPLACES YEN, FRANC AS CARRY TRADE FAVORITE
Using the dollar to pay for purchases of currencies with higher yields is proving to be the most profitable trade in the foreign-exchange market.
A basket of currencies including the British pound, Brazilian real and Hungarian forint financed with dollars returned 17 percent this year, compared with 9 percent when funded in yen and 7 percent in Swiss francs, according to data compiled by Bloomberg. Falling U.S. interest rates and increasing volatility in the yen and franc are making the trade even more appealing.
``With the dollar giving the appearance of being in free fall, it increases the attractiveness of using the currency to fund investments,'' said Avinash Persaud, chairman of London- based Intelligence Capital Ltd., which advises hedge funds that manage more than $89 billion. ``That process will only add more fuel to the decline.''
Fintag says Who would have thought this could ever happen. Three cheers to Bernanke.
U.S. hedge fund manager Paulson & Co. has turned an investment of almost $500 million at the start of the year into almost $3.6 billion by taking out a form of insurance that started paying out as soon as subprime mortgage securities lost value, investors said.
The fund has made a gross return of 690% and a net return, after fees, of 551% for the first 10 months of the year, according to a source close to the firm. The firm's Credit Opportunities II fund has made a gross return of 410% and a net 328%.
The firm began betting on subprime in the middle of last year. Banks were offering credit default swaps, a kind of insurance contract, on the BBB-rated tranches of securities backed by U.S. subprime mortgages. The buyer had to pay a premium of 1% a year to the banks, which undertook to pay out the value of any falls in the BBB tranches.
Fintag says Gets my vote.
3 comments
ozgerbobble said ...
Northern Virgin? Surely that's a contradiction in terms?
26 Nov 07 - 08:49 gmt
anonymous said ...
Virgin have bid 25p for Northern Rock ... I am sure RAB Capital will be voting yes on that one
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