Balyasny Asset Management’s Atlas Global Strategy has finally pulled ahead of the heavy losses it took following the Swiss National Bank’s decision to remove the euro-franc currency peg, and ended 1Q15 up 0.09% (+0.39% in March). While managing partner Dmitry Balyasny acknowledges that the past quarter returns are low, he says that even the macro strategy that looks bad in the aggregate has been successful if you exclude the big drop from the Swiss currency move.
“The beginning of the year proved to be challenging, but performance picked up in February and we ended the quarter in positive territory. Although a disappointing quarter from a return perspective, the performance characteristics of the underlying books have been quite strong,” Balyasny writes in the first quarter investor letter.
New portfolio managers at Balyasny bring in 20% of P/L
Long/short equity drove returns for Balyasny last quarter, with consumer, healthcare, industrials, healthcare, and tech leading the way, while energy and REITs were the biggest detractors. The letter also mentions that the fund had a lot more winning PMs than losing ones, and that five PMs who started in the last year contributed 20% of P/L so far this year.
Credit was roughly flat for the quarter, down 0.02%, which the letter attributes to low rates and a generally difficult trading environment. Macro results, as noted, are dominated by the Swiss currency move but has had solid gains since then.
98% of profit/loss come from alpha last quarter
Average net exposure is 3.9% so far in 2015 and 5.5% in March, and average gross exposure has been 240% in 2015 and 238% in March. Annualized volatility for the last 12 months is 4.60%, below the five-year average of 5.23%. Correlation to the market remains extremely low, average daily market correlation is 0.04% inception to date, and the correlation between portfolio managers is also 0.04 year to date. The amount of profit/loss that comes from alpha instead of market timing or beta is 98% for the last quarter, another reflection of the extremely low correlations, but the letter mentions that short positions are now generating more alpha than long positions.
Capital allocations increased $4.3 billion in the first quarter, and capital usage increased from 62% at the beginning of the year to 69% at the end of 1Q. Allocations to macro, which dropped from 17% to 14% in January, are now back up to 15%, while long/short equity gets 83% of capital. The biggest increases during the quarter were to healthcare, financials and the consumer sector, while Balyasny decreased exposure to energy. REIT exposure was also decreased, but the letter mentions that there was a change in portfolio managers, so it doesn’t necessarily signal a strategic shift in how Balyasny views REITs.
Looking ahead, Balyasny warns that the combination of high valuations, weak growth and earnings, and the likely start of a Fed tightening cycle means that we might be nearing the end of this bull market. At the same time, he expects the market to continue to grow unless interest rates reverse, high valuations turn into an actual market-wide bubble, or some macro event causes a sharp drop in growth. Since there’s now enough dispersion to allow stock picking strategies to really shine, he concludes that it’s best to take a market neutral approach for the time being.
According to investor documents obtained by ValueWalk, the Atlas Global fund was up +1.08%in April, bringing YTD performance to +1.21%. Atlas Enhanced was up an estimated +2.09% for the month, bringing YTD performance to +2.56%. The April return is impressive in what was a very tough month for most high profile CTAs.
Chris Rokos hired Borislav Vladimirov, a former partner at Brevan Howard Asset Management to help him launch his new hedge fund, Rokos Capital Management—expected to become one of the biggest startups in Europe since the financial crisis.
Allan Kilkenny, the spokesman for Rokos Capital Management, confirmed that Vladimirov joined the hedge fund last month. According to him, Vladimirov will likely focused investing in emerging markets once Rokos Capital starts trading.
Vladimirov joined Rokos Capital from Graticule Asset Management Asia, a macro hedge fund partly-owned by Fortress Management Group based information from the Financial Conduct Authority register of individuals approved to work in finance.
Vladimirov was a partner for eight years at Brevan Howard. Chris Rokos co-founded Brevan Howard in 2002, and he was one of the top traders of the hedge fund.
Mr. Rokos is hiring traders as he prepares for the launching of his new hedge fund with support from outside investors. He is expected to raise several billions of dollars for his firm this year.
Earlier this year, Stuart Riley, a former co-head, Asia Pacific macro trading at Goldman Sachs joined Rokos Capital.
Brevan Howard supports Chris Rokos
Earlier this year, Chris Rokos settled a dispute with Brevan Howard regarding a non-compete agreement. Rokus filed a lawsuit against the hedge fund he co-founded to invalidate a clause in his contract that prohibits him from managing investments from outside investors for five years. Brevan Howard filed a counter-suit to prevent him from establishing his own hedge fund.
Following the settlement of the case, Brevan Howard decided to take a financial interest in Rokos Capital, but did not disclose the amount of its investment.
During his tenure at Brevan Howard, Chris Rokos was one of its top traders. He is expert in macro trading. He generated approximately $4 billion trading profits for Brevan Howard. In 2011 alone, Mr. Rokos generated $1.2 billion in trading profits, which accounts for 30% of the returns of Brevan Howard’s Master Fund.
Larry Robbins’ Glenview Capital Management’s Opportunity Fund delivered 7.2% during the first quarter, significantly outperforming the S&P 500. In this article, I’m taking a closer look at some of the fund’s top calls during the quarter and outlook for the rest of the year.
If you’re interested in a condensed version of the fund’s performance during the quarter, ValueWalk author, Mark Melin has put together a brief overview here.
Glenview: AbbVie
After talking up AbbVie at the Sohn Conference earlier this year, Larry Robbins continued to tout the stock in Glenview’s first quarter letter.
Robbins says that he sees a 100% upside for AbbVie from present levels. Glenview believes that AbbVie is widely misunderstood and, as a result, materially undervalued. The company’s main product is the largest drug in the world, Humira, a treatment for autoimmune disorders and Glenview sees scope for the company to follow the trend of so-called “New School” of pharma companies.
The “New School” of pharma, (Endo and Actavis) applies rigorous operating and financial discipline to create tremendous value for shareholders.
“AbbVie is projected by analysts to grow EPS at 20% per annum through 2017, and our models project them to grow at 28% per annum, fueled by the strong growth in their core Humira franchise, growth in their oncology and Hepatitis C franchises and the accretion coming from their pending acquisition of Pharmacyclics. Despite this strong growth, on our numbers, ABBV trades at only ~12x 2016 and 9.3x 2017 earnings per share…”
But, as Glenview goes on to note; what’s wrong with the company? Why the low valuation?
“The answer is the market is fearful of an earnings cliff post-2017 from potential generic competition coming from biosimilars to compete with Humira.”
However, Glenview then goes on to note that due to the complex nature of Humira, there’s a strong chance that the market is overdoing its concern regarding the patent cliff.
“A close evaluation of each risk has led us to conclude that the decline curves suggested in the highly pessimistic valuation of 9.3x 2017 earnings are irrationally bearish, and that the central tendency of Humira will be to grow through the decade and decline at a small rate for the subsequent 3-5 years.”
“1. According to industry experts, developing biosimilar Humira is literally a thousand times more complex than simply copying a small molecule like generic acetaminophen (Tylenol).”
Modeling Humira’s sales decline to reflect these factors, Glenview believes that AbbVie can generate 8% earnings growth after the patent on the product expires.
“However, when we start to add up the myriad of options to accelerate the value at AbbVie, ranging from pipeline success, to the enhanced durability of the Humira franchise, to options to drive value in SG&A, tax and cost of capital similar to “New School” of pharma, we see the potential for meaningfully higher annualized returns over the medium term.”
There are six key options that could add value to AbbVie shares over the next few years.
Another Glenview long is Brookdale Senior Living, a play on an ageing population.
“We view the senior living industry as an attractive long-term secular growth market and we view Brookdale as the best positioned in the industry given their significant scale advantages in an otherwise fragmented, inefficient industry comprised primarily of local operators.”
Glenview lists six main reasons that they believe will drive Brookdale’s long-term economic growth.
Strong demographic trends in the US. The senior population is set to grow three times faster than the overall population.
New demand for senior accommodation is exceeding supply across the industry
Private negotiated rents
An increase in dementia among the elderly population, increasing demand for specialist care.
Senior living facilities are considered to be more comfortable than nursing facilities.
“6) Given these positive industry drivers and Brookdale’s position in the sector, we estimate that Brookdale will compound cash flow from facility operations growth (CFFO) in the 13-15% range going forward with the main drivers being revenue growth in the 4-5% range driven by occupancy and price and leverage through the income statement in a high fixed cost business yielding EBITDA growth in the 9-10% range.”
Glenview believes that Brookdale can unlock value through multiple channels over the next few years. Not only will the company benefit from favorable demographics, the company also has an opportunity to its owned real estate. In the past few months the company has made moves to monetize its real estate, including positive rhetoric, adding three new members to the board of directors with real estate experience and revamped an investment committee with the sole purpose of assisting the board in managing its real estate portfolio.
Glenview on the economy, interest rates and shareholder engagement
The Brookdale and AbbVie theses’ made up the bulk of Glenview’s first quarter letter. The letter also contained some commentary on interest rates, the US economy and shareholder engagement.
On the US economy, Glenview notes:
“Our proprietary research team, who survey private company executives for general trends in business conditions, confirm the published data – the US economy is growing modestly with consumer pickup in April and May beginning to offset weakness in energy capex.”
On the topic of interest rates, Glenview believes that rates across the board are still attractive for borrowers. Spreads for A borrowers are largely unchanged since the beginning of the year and, for BB borrowers, spreads have tightened by 41bps. Credit markets remain supportive of constructive capital aggregation and deployment.
And finally, on the topic of shareholder engagement and activism:
Shareholder Engagement – We continue to see constructive signs of partnership and cooperation amongst owners and managers with the shared objectives of building long-term sustainable value. We elaborate more on this topic below, but in summary we see widespread momentum for owner engagement with positive results.
In total, while valuation has clearly gone from great to good, the overall environment remains constructive with the forces of convergence omnipresent: a stable systemic and economic backdrop combined with cooperative debt markets and strong owner engagement. These factors embolden our focus on “convertible equities” as the odds of constructive actions by Boards remains high.
The financial press has identified two potential seminal moments in the ongoing debate about activism and shareholder engagement: the constructive commentary by Marty Lipton and DuPont’s victory in a proxy fight with the investment partnership Trian, led by Nelson Peltz. Mr. Lipton has been a long-time critic of activist strategies and has established his firm as a leader and innovator in building tools to “protect” Boards and Companies from Activists. We applaud his recent comments that not all activism is value destructive and there are some constructive elements to owner engagement.
One hundred and fifty years ago, at the corner of Broad and Wall, the idea of a public stock exchange was to provide growth capital and liquidity to corporations to then invest in building businesses and industries. Imagine an entrepreneur had a good idea whose cost to implement was greater than the entrepreneur’s resources – he or she would be the CEO, sell 1% of the company to 100 different investors, 10 of which would agree to be on the Board of Directors and off they would go to build the Company (I realize this utopian version is not exactly how it happened, but stick with me on the analogy). At that time, if any of the 1% investors had a good idea or suggestion on how to best build the Company and its value, it is likely their views would be welcomed as owners with the Company’s best interests at heart.
In 1951, John Bogle wrote his senior thesis that mutual funds failed to outperform the index, and 23 years later he founded Vanguard to bring low-cost index funds to the marketplace that offered superior value on average due to their lower costs. Thus began 40 years of growth and innovation, including the $5+ trillion index and ETF industry whose only research function was to verify that the company in fact was in the index or industry group that corresponded to the fund’s mandate2. This had the unintended consequence of disintermediating the ownership function from public equity holdings, and boards and managers began to look at public equity as “equity lending” where there were no covenants and no conditions, only permanent capital to be managed at the discretion of the board. To further reduce expenses, most index and ETF funds followed the recommended votes of the Board or matter, most companies were financially owned by many, but functionally owned by the Board.
While much has been written about the rise of activism, we at Glenview believe what we are seeing is a broad-based return to a culture of ownership that was as originally intended on the corner of Broad and Wall. As Suggestivists, we have always felt it is our right and our responsibility
Earlier this month we reported that Odey Asset Management was down by 20% in April due to its log USD/ short AUD trade, and now that the April letter is out Odey is reporting 27.8% losses for the USD class of its Master Fund, 23 percentage points attributed to forex positions, stately simply that ‘April was bloody’. Fund manager Crispin Odey is still convinced that obsolete operating assets and the debts attached to them will have to be written off, but he is no longer willing to bet that it will happen soon.
“Nobody likes being wrong. Nobody likes looking foolish. Nobody likes losing money,” Odey writes. “In hindsight the tail wind that was the leveraged position in the US dollar against Emerging Market currencies in particular, meant that I did not respond quickly enough to the aggressive QE introduced by Draghi in December of last year and the effects of the fall in the oil price two month earlier.”
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Forex exposure cut from 500% to less than 200%
Although forex losses were the most severe, Odey’s short equity position also contributed a 7.0% loss, government bond positions contributed a 0.9% loss, and long equities were flat. In response, forex exposure has been slashed from over 500% NAV to 185% of NAV. The fund is still long USD, short GBP and AUD, but the positions aren’t so extreme and the euro exposure has gone from short 39% in March to long 55% at the end of April.
Instead of focusing on forex, Odey has increased the long equity book from 83.4% exposure in March to 126% at the end of April, compared to 153% short exposure in March and 146% in April. Even though net equity exposure is still negative, Odey writes that the fund is “moving towards being net long equities.”
Rank, Security, Strategy, Notional Exposure (%)
1, Sky, Long, 9.7
2 Las Vegas Sands Short 7.6
3 Intu Properties Short 5.9
4 Adidas Short 5.9
5 Swatch Short 5.8
Rank Security Strategy Notional Exposure (%)
1 JPN 10Y Bond(Ose) Jun15 Short 31.2
2 ACGB 2 3/4 04/21/24 Long 29.8
3 JPNK400 Index Fut Jun15 Long 6.8
4 DAX INDEX FUTURE Jun15 Short 5.1
5 ETFS WTI Crude Oil Short 0.8
Data via Odey letter, ValueWalk
Odey is still pessimistic, despite moving towards a net long position
Odey’s long-term view is unchanged. He sees the combination of a global economy that can’t sustain its debt levels indefinitely, a developed market asset bubble that’s at least partially due to central bank monetary policy, and emerging markets that now account for 40% of the world’s debt. Eventually he believes that the debt associated with unproductive operating assets will have to be unwound, at great cost to the economies that have to absorb the losses, but after a brutal April Odey is forced to admit that he doesn’t know when that will actually happen.
Specifically, Crispin Odey states:
This bubble will end badly, but not yet.
It only began at the beginning of this year. However it does mean that the US dollar, where they are hoping to end the QE experiment this year, has to remain the favoured currency. Its rise was probably too quick and undoubtedly attracted too many followers, but here it looks interesting. However it does not look a powerful enough bull market to be leveraged into.
As I have said for the last year, the risk to the world economy does not come from the developed world where, post 2008, debt growth has been steady, but from out of the Emerging Markets. E.M. economies now represent 50% of the world’s GNP and nearly 40% of the world’s debts. The world has been unable for thirty years now to get growth without debt growing even faster. Operating assets are being asked to work harder to service ever increasing debts. Productivity growth has disappeared. No wonder the pressure is still downwards on interest rates.
The letter was first reported earlier today by Stefanie Eschenbacher of Dow Jones.
The Optimal Portfolio strategy of Bridgewater Associates already raised $10 billion in less than a year, according to report from P&I based on information from a person familiar with the matter.
The Optimal Portfolio strategy started trading on February 1. The fund has $10 billion of assets under management (AUM) as of April 30 with additional clients preparing to invest, according to the source, who requested anonymity.
Bridgewater said the Optimal Portfolio strategy aimed to generate an 8.5% return with a volatility level of 10%. Bridgewater registered the new fund with the Securities and Exchange Commission (SEC) under exemptions Rules 506(c) of Regulation D. Under the rule, offerings of securities to sophisticated professional investors are exempted from general solicitation guidelines. The hedge fund also filed for other exemptions under the Investment Company Act Section 3(3c) and 3 (c) (7).
Bridgewater institutional clients
Some of the existing institutional clients of Bridgewater that allocated a large amount of investment to the Optimal Portfolio included the Teacher Retirement System of Texas, University of Michigan and Pennsylvania Public School Employees' Retirement System.
During a meeting with trustees on April 30, Susan E. Oh, senior portfolio manager of Pennsylvania Public School Employees' Retirement System said Bridgewater’s Optimal Portfolio aims to combine the best beta with tailored value-adding and risk-reducing alpha, producing a high, consistent and diversifying return of stream.
The trustees of the Pennsylvania Public School Employees' Retirement System approved a $600 million investment in the Optimal Portfolio strategy.
The University of Michigan Endowment invested $250 million to the Optimal Portfolio in January. The Teacher Retirement System of Texas also invested $250 million in the fund in February.
The source also indicated that approximately 50% of the assets of the Optimal Portfolio strategy were new allocations from the existing clients of Bridgewater. The rest of the assets came from conversions from the hedge fund’s All Weather strategy.
Quam Asset Management pulled further ahead of the pack as its Quam China Focus Segregated Portfolio continued to be the top performing fund of 2015, with 59.71% returns through May 31 up from 52.09% a week earlier, according to this week’s HSBC Hedge Fund Weekly. The rest of the top five shuffled around during the week, with Russian Prosperity Fund – A dropping from second to fifth (YTD returns fell from 31.47% to 24.87%), and Perceptive Life Sciences jumping from tenth to second (YTD returns up from 17.56% to 29.71%). The rest of the top five at the end of May were Segantii Asia-Pacific Equity Multi-Strategy and the Zeal China Fund Ltd (USD).
Glenview Capital Partners ($4.31 billion AUM) jumped to 6.84% returns at the end of May from 0.53% at the end of April, while David Einhorn’s Greenlight Capital ($4.0 billion AUM) turned positive, getting up to 1.23% from negative 2.19% over the same time period. Leon Cooperman’s Omega Overseas Partners ($2.4 billion AUM) also improved in the month of May, YTD returns rising to 6.43% from 5.43%.
Long/short credit fund Aristeia International ($2.38 billion AUM) fell further into the red, dropping to YTD returns of -0.99% at the end of May from -0.24% at the end of April, while Axonic Credit Opportunities Overseas Fund improved to 3.20% returns from 2.81% over the same time period. Pine River Fixed Income ($3.27 billion AUM) improved to 1.76% YTD return from 1.14% at the end of April, and US credit fund Brigade Leveraged Capital Structures Fund ($3.6 billion AUM) improved to 6.34% from 6.18%.
Distressed security specialists Redwood Offshore Fund ($2.82 billion AUM) improved to 3.74% YTD returns from 2.91% at the end of April.
The Golden China Fund – NR Class ($1.89 billion AUM) fell to 24.8% returns at the end of May from 29.4% the week prior while diversified equities fund Adelphi European Fund (USD, $1.77 billion AUM) improved to 9.39% YTD returns from 9.06%. Diversified global equities fund Bluecrest Equities Strategies ($1.11 billion AUM) had a great two months, improving YTD returns to 8.59% from 5.72% at the end of March, and Duet Global Plus Fund ($1.5 billion AUM) jumped to 1.4% YTD returns from 0.1% at the end of April. The Lansdowne Developed Market Fund (GBP, $8.5 billion AUM) tripled its YTD returns, to 1.54% at the end of May from 0.50% the previous week.
Passport Global Strategy Fund ($1.9 billion AUM) improved to 11.34% YTD returns at the end of May from 9.48% at the end of April while the Passport Long/Short Strategy Fund ($562 million AUM) jumped to 8.10% YTD returns from 5.06% over the same time period.
Carlson Capital’s Black Diamond Thematic, L.P. finished the first quarter of 2015 down -1.46% net, underperforming the fund’s benchmark. The fund suffered a similar underperformance during the first quarter of 2014 but due to a well-timed bet on oil, the fund’s performance improved significantly during the second half of the year. The letter authored by Richard Maraviglia, Portfolio Manager, and Mr. Matthew Barkoff, Analyst was reviewed by ValueWalk.
Carlson Capital, L.P. is an alternative asset management firm. Founded in 1993 by Clint Carlson, they currently manage over nine billion dollars in assets.
Carlson is positioning for a rapid recovery in US economic growth. Additionally, as global quantitative easing programs come to an end, Carlson is expecting a frenzied bout of M&A activity with deals based on the idea that any deal is a good deal.
Carlson Capital - Economy will accelerate
The fund believes that over next six months, the US economy will accelerate, and inflation expectations will rise, causing a major upheaval for many investors. The reasoning behind Carlson Capital’s thesis is the prediction that normalized consumer spending and housing investment may lead to as much as a 500bps improvement in real GDP from the trend rate of 1.5% to 2%.
Unemployment should hit 5% by year-end 2015 based on this growth and inflation could hit 2%, the historic norm for an unemployment level of 5%. At this level, nominal interest rates should start to increase.
Moreover, the trend of offshoring, outsourcing jobs to Asia is starting to reverse. China can no longer import good deflation into the US as they have become uncompetitive versus other emerging markets. Unless there is a substantial currency devaluation, China is unlikely to regain its competitive advantage anytime soon.
The clearest way to play this macro view, according to Carlson is via banks. The banking sector has traded at an increased discount to the market over the past few years as growth and inflation expectations have declined. Legal costs and regulatory uncertainties have also weighed. JMP is a key example. As the 10-year yield has declined over the past six years, JPM’s discount to the wider market has widened to around 40% on a forward earnings basis.
The market’s current valuation is underpinned by zero rates. M&A activity, REITs and Yeildco’s all require rates to remain at zero in order to keep their lofty valuations. As rates begin to move higher, valuations should adjust to more normal levels.
Economic growth: Time to play out
However, while Carlson believes that this trend of economic growth is on the verge of playing out, the fund is asking its investors to remain patient. If forecasts are to believed, the US economic output gap only six months from closing and a number of temporary overhangs, such as weather, a west coast port strike, and a higher than normal consumer savings rate should all dissipate soon fueling economic growth.
Loan growth has picked up over the past six months, and the three-month average now stands at a high not seen since the financial crisis. According to Carlson, the Eurozone is also well positioned to experience the same kind of economic growth. Combined with a large current account surplus, barring any sudden shocks (Greece) the euro has likely found a bottom.
Lastly, Carlson picks on ETF’s in its April letter, stating that the time for catchy ETF’s that promote passive momentum following, rather than active investing is over, as the “Fed Put” is no longer a guarantee. Improving inflation figures, real economic growth, falling unemployment and rising interest rates should favor active strategies.
Steven Cohen has had to send the swine to a sanctuary after it became too big to live in his house.
Despite possessing a outsize bank balance and art collection, billionaire Cohen has seen fit to send his pet pig to fat camp after the animal grew too big due to a lavish lifestyle, writes Emily Smith for Page Six.
The report cites multiple sources who claim that SAC Capital and Point72 Asset Management founder Cohen had been keeping a massive pig named Romeo at his estate in Connecticut. They say that the swine lived as part of Cohen's family, and had his own room in the house.
Cohen, who is worth $11.4 billion, apparently kept the pig inside the 35,000-square-foot, 30-room property. However he decided to take action when the animal reached 150 pounds and outgrew even such a lavish home.
The pig has now been sent to a vegan animal rescue facility in Florida. A source who saw the pig inside Cohen's home has revealed just how well it was treated. “Their pet pig was like a member of the Cohen family. Romeo had a room in their house. He was treated like the king of the house, but he got too big, and was sent to a sanctuary in Florida. They even threw a leaving dinner for him,” they claimed.
Steve Cohen's pig - Sources claim that Romeo became "moody"
Romeo was originally bought as a pet for Cohen's children. “Romeo was purchased by Stevie Cohen as a piglet, but he grew to be over 150 pounds. Romeo is actually a very domesticated, intelligent and affectionate pig, but recently he started to get a little moody. The family got advice from a vet that Romeo would be better in the company of other animals, so Steve arranged for him to go to a farm to be with other pigs,” said a second source.
Instead of buying a smaller pet, Cohen bought his 7 children a piglet which would grow into a beast of an animal. “Most people get one of those Vietnamese teacup pigs, but Romeo is the size of a German Shepherd who has eaten too much,” continued the source.
Page Six recently revealed the story of Cohen's purchase of Giacometti's "Pointing Man" for $141 million, the most expensive statue ever auctioned. Cohen remains one of the most successful hedge fund managers despite having to shut down SAC Capital due to an investigation into insider trading.
News of the pig's existence was first reported by Julia La Roche of Business Insider - its is unknown whether the pig indeed is Tattooed.
As social media rises in popularity, much of Wall Street, including hedge funds and registered investment advisors (RIAs), is turning to Twitter, Facebook and other social networks to share information. Unfortunately most people view social media as very casual in nature, but regulators don't see it that way, particularly when important disclosures are posted and shared on social platforms.
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Now the Securities and Exchange Commission is proposing new rules that could change the way RIAs, private-equity firms and hedge funds use social media.
SEC strives for transparency in hedge funds' use of social media
The goal of the proposed rule change is to require RIAs to disclose details about their business social media accounts and how they use them. Included in the proposal is the requirement for RIAs to keep tabs on the social media accounts of their employees as well.
Needless to say, this will significantly increase hedge funds' and private-equity firms' costs. It's worth questioning whether it's even possible for firms to sufficiently track their employees' social media accounts, and the SEC is aware of this difficulty.
Regulators are seeking public comments on the proposed rules. If they do end up deciding that firms must keep tabs on what their employees post on social media, then these firms will have to figure out how to do it.
Why the SEC wants to track Hedge Funds on social media
The rise in the popularity of social media has led the SEC to question the types of information that are being disseminated through social media. Regulators want to force hedge funds and other RIAs to disclose all the social media channels they use so that they can more closely scrutinize statements made over those accounts.
They also want to make it clear that hedge funds and other RIAs must be careful what they post on their Facebook or Twitter accounts.
"The major misconception is that statements made through social media are informal," Blue River Partners founding partner Michael Minces told Value Walk. Blue River is one of the biggest compliance firms in the country.
"Such statements are subject to the same disclosure and marketing rules applicable to traditional advertising by RIAs, and many managers miss that point," Minces added. "The SEC has been highly focused on this disconnect by the RIA community over the past few years and social media has continued to be increasingly utilized."
Some hedge funds are exempt
Minces said it's important to understand that the proposed rules apply only to RIAs, so hedge funds that are not registered with the SEC as investment advisors. Also hedge fund managers who are registered with agencies other than the SEC, like the Commodity Futures Trading Commission, wouldn't have to comply with the proposed rules.
However, he also said he wouldn't be surprised if regulators add firms registered with other agencies to the disclosure requirements down the road if they end up being enacted. Any firms found not to be complying with the social media disclosure requirements (if enacted) could face fines or other penalties.
"The broader point here is that the SEC is highly focused on the types of communications that are being made in these very public media channels and, based on the nature of such communications by regulated entities like RIAs, such statements could create regulatory enforcement issues for managers," said Minces.
He warned that even investment advisors that are exempt from the regulations still face some regulation by the SEC.
"To the extent that the SEC will be focusing specifically on social media, exempt advisers can still encounter regulatory enforcement issues relating to statements made in these forums to the extent that such statements rise to the level of perceived fraud or misrepresentation, or in the event that investors complain directly to the SEC about a specific exempt manager," he said.
The HSBC Hedge Weekly top 20 performance list, little changed from the previous week, has been rather like watching a sleepy golf leader board without much change or drama. But key to watch is the date at which performance has been reported. While many of the Chinese hedge funds that continue to dominate the list, their reporting date, June 15 in many cases, does not reflect much of the recent drop off in Chinese stocks.
If Bill Gross is correct on Shanghai Stock Market, HSBC Hedge Funds leaderboard could change
On June 12 the Shanghai Stock Market Composite Index was trading at 5166.35. Today, that index stands at 4785.45 and, if one follows Bill Gross, the Chinese market is expected to go even lower. If the Gross prediction is correct we might see then see some significant movement on the top 20 list.
Among the Asian funds, George Jiang’s $1.88 billion Golden China Fund was up 6.61 percent as of June 15, the top monthly performer in a category benchmark where the category benchmark was 22.12 percent year to date. Golden China fund is up 33.05 percent on the year.
Credit hedge funds category sees winners, while EU fund doing well
A European fund doing well is the $321 million Lucerne Capital Fund, run by Pieter Taselaar and This Hovers, reported May performance of 4.85 percent, up 23.83 on the year and beating the category benchmark, which is 6.37 percent. Other notable equity fund performance includes John Burbank’s $495 million Passport Special Opportunities Fund, which was up 4.20 percent in May and is up 24.18 percent on the year.
The $142 million Pine River Credit Relative Value Fund had a big month in May, up 2.14 percent, which accounted for a significant portion of the 4.54 percent year to date rise. The fund, operated by Mike O’Connell and Abhishek Bhutra, moved above the Global Credit category benchmark of 3.37 percent year to date performance. Another notable fund in the category, Boaz Weinstein’s $1.59 billion Saba Capital Offshore Fund, was up 1.02 percent month to date, 3.05 percent on the year. In distressed securities, Richard Deitz’s $1.8 billion VR Global Offshore Fund is reporting performance up 4.75 percent year to date, after a strong April where they were up 5.55 percent on the month.
The managed futures systematic category continues to struggle, with the benchmark year to date performance a slight 0.39 year to date performance. The large category showed every fund was in the red in the current reporting period, with the exception of Alex Brockmann's TradeLink Integrated fund, which is up 0.15 on the current reporting period, and up 0.19 on the year.
As the likelihood of Greece exiting the euro keeps going up, hedge funds that had been attracted to low equity prices and high yields in the past few years will have to manage the fallout (or those that haven’t already left, anyhow). In its weekly brief, Lyxor Asset Management takes stock of its Greek exposure and decides that its positions are ‘moderate and reasonably hedged’.
Lyxor says that only ten of its funds are directly exposed to Greece with net exposure ranging 0.4% to 5.8% of the funds’ NAVs. Nine of those funds own Greek equities and about half own Greek sovereign bonds. Some of the funds have been reducing their exposure and others have hedged their positons and Lyxor says that, “In a worst case scenario, we estimate that the losses would be limited to their total Greek assets’ net exposures.” For that the one fund that has almost 6% NAV exposure, that would still be a brutal setback.
Lyxor sets a maximum 14% net exposure to European assets as a matter of strategy, including 37% long credit exposure. Core European sovereign bond yields have fallen today at the expense of peripheral bond yields in what looks like a mild move to quality, and the Lyxor brief doesn’t go into enough detail to know if that’s net positive or negative for them. Lyxor’s long/short equity and event-driven funds are long on European equities, while CTA and global macro funds are long equities but short the euro.
Lyxor Hedge Fund Index up slightly third week of June
The Lyxor Hedge Fund Index was up 0.8% in the third week of June, led by global macro and the CTA Broad Index, pushing it further ahead of the S&P 500 for the year. Long/short equity funds mostly did well thanks to long European equity positions, though many Asian funds have taken a hit from China’s falling stock market. Global macro also benefited from a European stock rally, though many were also short the euro, which is looking like a great position as the situation in Greece gets worse. Global macro funds continue to hold relatively light commodities positions, so they didn’t contribute much either way. Overall, Lyxor estimates that 85% of all hedge funds ended the week in the black.
The California Public Employee’s Retirement System (CalPERS) is heading towards a big miss for its fiscal year, which ends today, having only earned 3% in the first ten months of the fiscal year compared to its 7.5% annual target, reports Dean Starkman for the Los Angeles Times.
“We don't like to get too excited about any one-year return,” CalPERS CIO Ted Eliopoulos reportedly said in a public meeting last week. “As the board is well aware, we would like to look at longer time periods as they are much more meaningful in measuring our performance.”
CalPERS on a campaign to reduce costs, risk, complexity
CalPERS, the country’s largest public pension fund, has been cutting back on alternative investments specifically and the number of managers it work with in general in a campaign to reduce “costs, risk and complexity” in its portfolio. Yesterday it also announced that it is selling $3 billion of its underperforming real estate portfolio as part of the same shift in strategy.
The challenge is that when you have $300 billion to allocate it’s difficult to do anything other than own the market, and CalPERS seems to have been taking an unfocused approach to selecting managers and strategies in the past. While two different tilts might cancel each other out, the fees have a way of adding up.
Targets seem high, while liabilities may be understated
But the deeper problem is that CalPERS is planning on 7.5% annualized returns to meet its liabilities, but they’ve barely managed that over the last twenty years (8%) and they haven’t managed it over the last ten (6.7%). Even without a bear market, 7.5% per year will be tough when bonds and equities both look fully valued and the pension fund is pulling back on other types of investments.
At the same time, it could be underestimating its liabilities. In its 2014 actuarial reports CalPERS was still using the Scale BB Mortality Improvement Table that was developed in 2012 and has since been replaced by the SOA. When the 2015 actuarial reports come out with the updated tables, their funded level should drop because of the change. Since the pension fund is already below 80%, the combination of weak returns and a bigger hill to climb could be expensive for California taxpayers who are ultimately on the hook for future payments.
No the Greek poker player is not John Paulson, but the story is still interesting.
Brevan Howard Asset Management, one of the largest hedge funds in the United Kingdom hired Alexios Zervos, a former professional poker player from Greece. Zervos will be working at the London office of the hedge fund, according to report from Giles Turner of the WSJ Money Beat.
The report indicated that Mr. Zervos admitted that he was a former professional player. He refused to provide further comments regarding the matter. A spokesman for Brevan Howard also declined to provide details regarding Mr. Zervos’ appointment.
Currently, Mr. Zervos ranked 18th in Greece All Time Money List. He is 3,234th in the Global Poker Index Ranking. During the 2014 World Series, Mr. Zervos ranked 55th and collected $124,447.
Brevan Howard has approximately $27 billion of assets under management. Last April, the hedge fund disclosed the departure of its three partners, Mathew James, Fillippo Cipriani and Stephanie Nicolas.
Mr. James served as senior credit strategist at Brevan Howard. Mr. Nicolas served as manager of the firm’s commodities strategies fund, and Mr. Nichols was a senior trader, emerging markets local fixed income strategy at Brevan Howard.
In 2014, Brevan Howard recorded its first losing year since its inception in 2003. Its Master Fund posted a total loss of 0.8% last year.
[buffett]
Some hedge fund managers play poker
It is not surprising for hedge funds to hire poker players. Some hedge fund managers play poker such as David Einhorn of Greenlight Capital Management. Einhorn is a serious poker player at the World Series of Poker.
Last year, Einhorn played during the Big One for One Drop poker tournament, which was hosted by the World Series of Poker. He participates in large poker events for charity.
Other hedge fund managers who play poker include Steve Kuhn of Pine River Investments, John Rogers of Ariel Investments, Jim Chanos of Kynikos Associates, and Steven Cohen of SAC Capital.
Mr. Cohen previously told the Wall Street Journal that he learned to take risks from playing poker. He changed the name of SAC Capital to Point72 Asset Management. SAC Capital and its former portfolio managers became the center of insider trading charges over the past few years.
Masters In Business: Leon Cooperman, Omega Advisors via Barry Ritholtz
This week, on our Masters in Business radio podcast, we speak with Leon Cooperman of Omega Advisors.
He studied for his MBA from Columbia University, where he became steeped in the methods of deep value investment. After earning his MBA, his began his career in the Investment Research department at Goldman Sachs in 1967. He stayed there for 22 years, eventually running the research department. Institutional Investor ranked him number one for Portfolio Strategy each year from 1977-1985.
He then launched Goldman Sachs Asset Management in 1989. In addition to becoming CIO + CEO of GSAM,he was also the Investment Policy Committee and chairman of the Stock Selection Committee.
After 25 years, Cooperman left Goldman to launch, launched Omega Advisors, now a 9.3 billion dollar hedge fund. The firm’s flagship fund has outperformed the S&P 500 by 450 basis points over that time; the tax sensitive fund, launched in the early 2000s, has dome even better.
The British hedge fund reversed its decision to leave the United Kingdom amid concerns that London’s status as Europes leading hub for the investment industry was at risk.
Brevan Howard Asset Management started briefing investors regarding the return of some of its senior fund managers in London, according to people familiar with the situation.
The British hedge fund’s decision came after several other hedge funds plan to launch or expand their business operation in the British capital. It is a sign that international investors remain attracted or continue to gravitate to London.
Alan Howard, co-founder of Brevan Howard Asset Management remains in Geneva. He decided to move to Geneva in 2010. He made his decision after the European Union’s introduction of tighter regulations for hedge funds. More than 50% of his staff and most of his senior traders also transferred to Geneva within three years.
Michael Platt, co-founder and CEO of BlueCrest Capital also left London. The departure of the two hedge fund managers prompted some people in the industry that London would start to lose billionaire traders to the Cantons of Switzerland. Mr. Platt relocated to Jersey last year.
According to some hedge fund managers and investors, the low tax rates in failed to win over the traders’quality of life in Switzerland as many of them left their families behind in London.
“They think it will be fine leaving London, and that they can come back and visit all the time and that the family will adjust, according to an investor. He added the many of the traders got bored in Switzerland.
London’s hedge fund industry is growing
Steven Cohen, the chairman and CEO of Point72 Asset Management is considering a return London. Cohen closed his office in London after his previous hedge fund SAC Capital admitted committing insider trading in 2013.
Chris Rokos is in the process of launching one of the largest hedge funds in Europe since the financial crisis. He was a former star trader at Brevan Howard Asset Management. Rokos settled his dispute with Brevan Howard, which decided to take a financial interest in his new venture.
Data from HFR showed that 576 hedge funds launched in Europe last year. Most of the hedge funds were based in London.
Looking for out-sized performance? Perhaps following the Twitter account of Alexander Alternative Investments will help, and perhaps it won't. The Florida-based firm's account, @OutsizedReturn, will ultimately lead you to the firm's website, where returns promises are whispered into an investor's ear like sweet little nothings. But the tale of Alexander and its founder, Michael Corcelli, might be a cautionary one, highlighting how investors should, at a basic level, learn to identify “yellow” and “red” flag headline due diligence warnings.
Hedge fund due diligence: Consistent market out-performance, forward-looking promissory statements cause for investigation
“We are highly confident that our energy investments will produced Out-Sized Returns over 50% in 2015,” the website promises, a statement that legal observers find questionable. “We are currently being paid 8.5% dividends while waiting for the value of our investments to appreciate up to 85%,” the site boasts.
What the investment firm fails to mention, however, is perhaps most important. A ValueWalk investigation found that the website makes future promissory returns projections and specifies past returns but doesn’t mention that those returns were not based on actual performance of investor funds. Such modeled performance, even if it uses the fund manager's personal investment capital, is required to be differentiated from actual investor returns in disclosures. (Since confronting Alexander on the issues raised, the website appeared to change in some respects, including deleting the apparent promissory claims referenced above.)
At the time of ValueWalk’s investigation, the firm claimed at one point to be in the 96th percentile hedge fund ranking based on performance reported to Bloomberg, but these claims could not be corroborated. When asked, Corcelli was unable to provide backup documentation. He may or may not have achieved this status, but the lesson to investors is that if a claim cannot be supported with third party documentation, it might best be questioned.
“Presenting forward-looking guidance that appears substantially higher than industry standards is troubling,” said Braden Perry, a partner with Kennyhertz & Perry, a Kansas City law firm specializing in securities and due diligence legal issues. After reviewing Alexander's original web site, Perry noted several issues.
For an experienced hedge fund watcher, the case of Alexander Alternative Investments may stand out in obtuse fashion. The process of investigating Alexander Alternative Investments highlights how investors might want to consider professional due diligence approaches at even a basic level, even with a fund manager who has been profiled by respected publications such as The Wall Street Journal, Bloomberg News, and Reuters.
In regards to returns, the statistical fact is that investment managers rarely "beat" the market on a consistent, year in year out basis. Whatever the alternative investment, professionals often use an industry benchmark to model the hedge fund performance relative to its beta market environment, or index benchmark. Those hedge funds significantly performing above their “beta market performance driver” should require additional due diligence.
Regardless of the hedge fund benchmark index being used, consistent annual returns in any alternative investment in excess of 25% are sometimes flagged for skeptical investigation – particularly if the returns stream does not correlate to the beta market environment. While hedge funds can and do deliver such over-sized performance, the key is understanding why and how this occurred and if that occurrence is logical and the performance is audited.
For instance, a trend-following hedge fund that consistently claims positive performance during periods of a market environment of price persistence, beating trend-following benchmarks, often warrants further investigation. Certain hedge fund strategies can deliver noncorrelated returns on a consistent basis, a claim that can be validated based on benchmarking the beta marketing environmental measures of performance, but to always win is a feat usually reserved for the likes of Bernie Madoff.
When speaking with ValueWalk, the Corcelli's Alexander fund strategy could not be correlated to a beta market performance driver, which is another flag for potential obfuscation. While returns performance is often the first consideration, it might actually be considered subservient to another review factor.
Registration, independently audited performance are the first questions
Before a conversation considers returns, two questions an investor should ask take priority. First, is the fund manager registered with a regulatory body? And second, are the returns independently audited and available for private inspection?
“Most troubling to me is the fact Alexander is selling investments but is not registered,” Perry said.
The clues to Alexander’s apparent lack of registration stick out like sore thumbs on the website, with the lead clue being a lack of the mandatory risk disclosure on the site and the absence of registration status. Websites selling alternative investments must have a risk disclosure before anyone can enter the site. In many cases, alternative investment websites are restricted to only “qualified participants,” wealthy individuals and professionals, and identification as such is required before accessing any returns or promotional content. For the Alexander website to discuss returns without a regulatory risk disclosure or clear identification of regulatory status is a serious red flag, say those with knowledge of regulatory enforcement guidelines.
Regulatory differences between stocks and derivatives: Meet the SEC & FINRA, and the CFTC & NFA
The regulators for investments in stocks and other securities are the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). If a fund manager uses regulated derivatives, the authorities are the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA). These organizations have best practices and, in the case of the NFA, periodically audit the investment performance and business operations of fund managers selling to general investors. The fund appears to be affiliated with the Florida Alternative Investment Association, but such association with such professional groups is often not as significant as appropriate registration with regulators.
Third-party firms selling investment products are almost always registered, particularly if they are soliciting the general public. Exemptions exist for those selling investments to very wealthy individuals and professional investors, but regardless, all must operate by a similar code of ethical conduct. Perry did say that non-registered consultants to pension funds and institutional investors can make recommendations and evaluate alternative investments for their “qualified” wealthy clients and professional investors.
Individuals who provide consulting services in connection with alternative investments may need to register as an investment adviser with either the SEC or their state regulatory body, Ron Geffner, a partner at Sadis and Goldberg told ValueWalk. A former enforcement attorney with experience practicing regulatory and securities law, Geffner noted that any person who provides investment recommendations or conducts securities analysis in return for a fee, whether through direct management of client assets or via written publications, operates as an investment adviser. In certain circumstances, the need for registration as an investment adviser may hinge on whether there is compensation, or alternatively, the method or type of compensation paid (e.g. commission) may result in other registration requirements (e.g. broker-dealer requirement).
“The threshold question is how is the investment adviser compensated?” he noted, observing that regulators can categorize compensation in terms of non-monetary benefits such as reputation enhancement.
Geffner said the laws and regulations vary by state and regulatory jurisdiction. New York, for instance, has financial regulations which are slightly different from the federal ones, but Florida, where Corcelli is registered, is governed by the SEC and FINRA standards. Generally speaking though, publishers and those delivering investment recommendations to a mass audience, one that is not particularized or tailored to any individual, are exempt from registration as a bona fide publisher. Once a recommendation becomes particularized to a certain group and the consultant is compensated for such services, then the exemption from registration may no longer be available, Geffner advised.
Under SEC guidelines, an investment adviser with over $150 million in assets under management and an individual managing over $100 million in separately managed accounts must be registered. Further, any adviser with over 15 U.S. clients and over $25 million in assets must register.
Alexander, Michael Corcelli fall under FINRA, SEC registration
In a ValueWalk interview, Michael Robert Corcelli, Alexander’s president, fresh off what he said was a marketing campaign looking for new investors, revealed that the fund is not trading client capital, leaving the impression that some performance occurred using his own capital while other performance might have been a modeled back-test. While modeling is an acceptable method to present performance under certain circumstances, it must be done with proper disclosure and consistent testing methodology. Certain regulators do not allow modeled performance and actual performance to be co-mingled in the same presentation table.
Another key for investors is to question unclear or obfuscating answers to direct and simple questions, which at times requires interpretation and understanding of the investment's nuances. Upon vising the Alexander website, one downloads a report that touts the firm’s oil strategy and, again, highlights strong performance. When asked directly whether the fund actually invested in the positions represented on its website, as an Alexander report on the topic implies, Corcelli didn’t directly answer. “It’s clear in the report,” he said. The report indicates actual money was invested in the programs, but the wording was unclear and open for interpretation.
Making forward-looking promissory statements regarding statistically outsized performance can lead to stiff punishment, including disbarment from the financial services industry, assuming the individual is registered. In the interview, Corcelli said he was trading all equity-based products, so if he was registered, it would fall under the SEC and FINRA domain. However, a check of the FINRA Broker Check and NFA online registration systems for securities and derivatives brokers, respectively, reveals that Corcelli currently (as of time of publication) is not registered, although both he and the firm have been registered in the past with both FINRA and the NFA. Just because he is not registered, however, does not mean the firm is out of the reach of the SEC and CFTC, as enforcement action can be taken whenever rules are broken.
Watch for conflated claims of experience and special connections
Consider the old adage that people fortunate enough to have achieved a reasonable degree of success and are well-connected don’t need to talk about it. Now apply this to analysis of an alternative hedge fund investment.
Beyond claims of strong performance, fund managers can at times make over-sized statements that conflate their reputation, but the real size of their experience is smaller than they perceive it to be. This can be one of the easier methods to double check by simply calling the organizations with which the investment manager is associated. Signs of saying something is larger or more potent than it actually is can be commonplace. But if the facts don’t jive with the story, this can be a red flag and, for many institutional investors, a reason to walk out the door before “performance” is even considered.
In the case of Alexander, the firm made claims it was one a major stockholder of The Receivables Exchange, affiliating itself with a prestigious list of Wall Street names that includes Bain Capital, Fidelity Partners and PRISM. When ValueWalk called The Receivables Exchange, however, the firm said “they had never heard of Alexander Alternative Capital.” When confronted with this in an interview, Corcelli claimed a meeting room was named after him, saying it is the responsibility of a firm to know their investors. Corcelli provided a contact, but the exchange official did not return ValueWalk's calls or emails.
Other claims raised similar questions that, rather than leading to answers, led to more questions. Corcelli also claimed to be a partner at Dara Capital AG since January 2014. However, when ValueWalk contacted the firm, Carol O’Donnell, director of legal and compliance at the U.S. division of the firm, said Corcelli has no affiliation with the U.S. division of Dara Capital. She told a ValueWalk researcher that while he might have done some business with the firm’s Swiss entity, he was not a partner in the U.S. Corcelli provided the name of a Swiss executive who might confirm he was a partner at the company, but the contact did not return requests for an email comment by publication time.
Corcelli's claims could be accurate in both instances. However, when an investment adviser provides a referral and that endorser does not return calls or emails, the claims might be best questioned. Other discrepancies in claims should be noted as well. For instance, in his profile, Corcelli claims to have worked at UBS from 2001 to 2005, but based on the FINRA BrokerCheck, he only worked at the firm from 2004 to 2005 and was dismissed for an apparent compliance / marketing violation, sending out letters without approval.
Brokerage firms are required to know their clients
Perhaps the most knowledgeable outside individual regarding a hedge fund’s performance is the brokerage account executive who executes trades. These are people typically with a trading background who enjoy watching a hedge fund strategy being executed. Behind the scenes, brokerage executives are known to respect their hedge fund clients and might occasionally gossip about them as one would a celebrity. The difference is these brokers have direct knowledge of assets under management and asset flows in and out of the fund. Brokerage firms are generally required to “know their customer” to various degrees, and many brokers serving hedge funds actually enjoy tracking performance and getting to know their hedge fund clients.
Due diligence with the brokerage firm can yield interesting results--if they agree to answer questions. It is not uncommon for a brokerage firm to closely monitor the strategy execution of a hedge fund trader, and typically brokerage firms are up front with others in the industry, as any false and misleading statements can land the broker in trouble. This is a point where due diligence can lead to interesting clues, but many brokerage firms are not eager to speak to investors without their client’s approval. Even then, they might walk on eggshells if one doesn't know the revealing questions to ask that provide the broker some protection.
When asked if ValueWalk could ask questions of Corcelli’s listed prime broker, Barclays, Corcelli declined to provide contact information.
Initial steps of due diligence
In this report, several factors of due diligence have been put forward, but true due diligence goes much deeper and is significantly broader. This report, while extensive, is by no means meant to include thorough and complete information on Alexander Alternative Investments and Michael Corcelli. We are simply raising questions for consideration and are not in any way accusing Corcelli or Alexander Alternative Investments of any wrongdoing.
Investors who are interested in conducting their own investigations of any fund or adviser should start the due diligence process on their own by using FINRA’s BrokerCheck, SEC's IAPD, and NFA’s BASIC systems.
Dai Jixin, who used to work for Soros Fund Management, recently opened his Hong Kong-based Trigram Global Macro Fund to international institutions. It is the first time that he has done so, according to sources who requested to remain anonymous, writes Bei Hu for Bloomberg.
Turmoil in China presents opportunities
Trigram started trading in July 2013, and managed assets worth $284 million in March 2015.
Macro hedge-fund managers profit by forecasting trends in equity, credit, currency and commodities. A number of Asia-based managers see an opportunity to profit from recent Chinese initiatives designed to encourage international use of its currency and bring foreign investment to its financial markets.
Government intervention after volatility in the Chinese stock market raised concerns that Beijing was not ready to embrace financial reforms. However the Chinese government responded by lifting barriers to foreign central banks, sovereign wealth funds and global financial organizations who wish to trade in the country's interbank bond market.
Former Soros manager hoping to grow assets
In Q1 Trigram returned 9.2%, according to the sources. Last year the fund returned 22%, up from 3% in 2013.
Dai worked at Soros Fund Management from 2001-2012, leaving late that year after the company returned client capital and regained its status as a family office. According to Dai's official biography, he moved from New York to Hong Kong in 2010, where he worked as a fund manager and responsible officer for Soros Hong Kong unit.
Macro funds make up 7.2% of Asian industry assets, compared to 64% for stock-focused funds. On a global scale, 19% of industry assets are managed by macro managers, according to Hedge Fund Research Inc.
Asia has witnessed the rise of several large macro managers over the last few years. Graticule Asset Management managed $4 billion of assets in March, led by Adam Levinson, while Dymon Asia Capital (Singapore) managed $3.5 billion under the stewardship of Danny Yong and David Chan.
Sources claim that Dai is seeking as much as $750 million, the first time that a funding target has been made public.
36-year-old Liu Qiang allegedly jumped to his death from a building in central Beijing.
Liu, a fund manager at Ruilin Jiachi asset management in China, was apparently suffering from depression. News of his death first surfaced on social media on July 24, according to Caixin Online.
A lawyer for Liu's family issued a statement on July 27, in which he specified that Liu had died on July 21. The statement cited "personal reasons" for his death, unrelated to his work as a fund manager or the recent volatility of the Chinese stock market.
The report cites "several people close to Liu" who stated that he had only returned to work in April after 3 years of treatment for depression in China's southwestern province of Yunnan. "He has had a very tough time in recent years," one of Liu's friends said.
Other friends claim Liu had grown frustrated by government attempts to intervene in China's stock market. He apparently believed that "the rules and order of the market had been broken … and was desperate, feeling that he was at his wit's end," one of his friends said.
Liu published a blog post on July 7, questioning his involvement in the market. "The stock market disaster has turned many of my investment principles upside down … and made me doubt many times whether I'm still suitable for the market," he wrote.
"Value investor" sadly takes his own life in China
Liu entered the futures market in the 1990s, one of the first in China to do so, and developed a reputation as a value investor. That investment philosophy is now being questioned online as commentators analyze his performance.
His death prompted speculation that he committed suicide due to losses incurred by the recent volatility, it is not thought that he suffered large personal losses. However recent data reveals that the fund he managed did lose approximately 18% of its value in 2015.
Officially the fund would have been shut down if losses had reached 20%. However most of the investors were friends of Liu that trusted in his long-term approach to investment and were willing to keep the fund open.
How Not To Fall A Victim Of A Hedge Fund by Arkady Bukh, Esq
Over the past decade, the US Securities and Exchange Commission (SEC) has led the way in high-profile enforcement actions against hedge funds. The SEC point to fraud in the hedge fund universe as a reason for expecting hedge fund managers to register. Just like other things in life, that is good — and bad — news.
According to the SEC, the news is that in recent years a number of actions claiming hedge fund scams have been instigated. The great news is there is no proof showing that hedge funds engage in fraudulent activity out of proportion for the total invested.
In view of the attention-grabbing hedge fund frauds, it is vital for investors to know how to keep from being victimized by the relatively few instances of hedge fund fraud.
While the precise figure of hedge funds is hard to know because of an absence of centralized reporting requirements, it is obvious that hedge funds have developed, in number, exponentially, over the last decade.
Industry trade publications show that hedge funds have more than quadrupled in number from roughly 2,100 to over 9,000. Hedge funds currently account for up to 50% of everyday trading volume on the New York Stock Exchange.
How Investors Can Protect Themselves
Investors must conduct detailed due diligence before investing in any hedge fund. There aren't any one-size fits all approach, though. Due diligence has to be tailored to the particular hedge funds being considered.
Regulatory agencies have identified nine indicators of hedge funds fraud:
Lack of trading independence
Investor complaints
Audit issues
Litigation
Unusually strong performance claims
Illiquid investments
Valuation issues
Personal trading
Aggressive Bear shorting
Interview
Interview the fund manager, chief compliance officer, general counsel and chief operating officer as well as the portfolio managers and other key people.
Knowing how the financing is handled and how it fits is vital to grasping a better understanding of risk exposure.
Don't hesitate to ask the tough questions. It's your money and if you don't understand the strategy, then you should ask more questions.
Too Good to be True
When speaking with the fund manager, reviewing the documents and examining the fund's performance results, always ask, "Is this too good to be true?" If it is, then it may be a sign that the manager is potentially crooked.
Look, for example, at the Manhattan Investment Fund — MIF. MIF's manager, Michael Berger, ran the $575 million hedge fund from 1996 until 1999. During that time, Berger assured investors he would make them money by shorting technology stocks based on his belief that it was dramatically overvalued. And he did.
The problem was he was doing so while there was an unprecedented boom in the market. While the tech sector was booming, Berger was telling investors he was making money by shorting the stocks. Berger's plan didn't make sense — it was too good to be true. Many high-quality investors threw money at Berger and invested hundreds of millions of dollars.
Berger continued to tell investors that the fund was making money by shorting the tech stock. Ultimately, many investors lost all of their investments — only because they failed to conduct due diligence.
The ability to honestly analyze and fully understand the results of your research can't be overstated. Too many investors have been burned by following a simple "checklist mentality," where they asked many of the right questions but failed to drill down and completely understand the answers.
When conducting due diligence, the investor has many tools at their disposal. For example, thoroughly read the fund's documents including the offering memorandum, LLC agreement or articles of association. Search for, and read, any additional judicial documents about the fund including the administration agreement and management agreement. Pick up and digest the marketing materials. Examine the fund's performance results as well as review its financial statements.
Review federal district bankruptcy and appeals court records
Much of this will sound obvious, but many investors only read some of these documents. The difference between skimming the documents or thoroughly studying them may form an expectation gap such as when the investor assumes the administrator to value the portfolio.
Private Investigator
One last consideration — consider hiring a private investigator to perform a background check on the key people within the fund management company.
You can’t know what you may learn.
Lodge a Complaint
If you believe you have been victimized by criminal activity in a hedge fund, a complaint can be filed with:
Arkady Bukh, Esq received his Juris Doctor degree and was admitted to the state bar of New York in 2003. He was subsequently admitted to the Federal bar for the Southern and Eastern districts of New York.
Attorney Bukh stays active in his community by performing pro bono services to needy constituents in New York. He is a distinguished member of many professional organizations in the legal community, including the Russian American Bar Association, the Serbian American Bar Association, the Brooklyn Criminal Bar Association, the National Italian-American Bar Association, and the National Association of Criminal Defense Attorneys.
Activist hedge fund Jana Partners added to its positions in the media and cloud spaces during the second quarter. The fund also initiated several new positions in the engineering sector.
During the second quarter, Jana added five new large positions to its portfolio: ConAgra Foods Inc, Johnson Controls Inc, Williams Companies Inc, Precision Castparts Corp. and Mobileye NV.
Jana’s stake in ConAgra made headlines earlier in the year when the fund demanded that ConAgra add two new members to its board of directors in an attempt to drive change at the company’s ailing private-label business.
Hedge fund Tiger Global is also a supporter of Mobileye NV, a global leader in the design and development of software and related technologies for camera-based advanced driver assistance systems (or ADAS).
Jana initiated a number of smaller longs in the quarter as well as. These were Eaton Corp plc and General Electric Company.
Jana: Increased Positions
During the second quarter, Jana added to five of its key positions. These included Rackspace Hosting, Inc. (+83%), Lions Gate Entertainment Corp. (+67%), Time Warner Inc (+272%), Pinnacle Foods Inc. (+66%) and AerCap Holdings N.V. (+9%)
Jana has been a fan of Rackspace since the end of last year, after the company announced a management change and new strategy, moving away from “low touch” web site hosting service that was in competition with giants such as Google to its roots in “high touch” human involvement that had less competition and higher margins.
Jana: Decreased Positions
Jana reduced five positions during the second quarter, including NCR Corporation, eBay Inc, Ashland Inc, HD Supply Holdings Inc, Golar LNG Limited (USA).
Jana has been busy selling down its stake in Golar for around a year. Golar has underperformed the S&P 500 by around 45% over the past 12 months.
Since the end of the second quarter, Jana has actually dumped its entire holding of NCR Corporation as the company’s search for a buyer hit a wall. According to the New York Post, Jana dumped its entire stake in the company after talks over a potential $9 billion bid collapsed. Jana also sold its position in Ashland during May according to marketfolly.com.
Jana: Closed positions
In addition to the close positions above, Jana also announced that it had exited positions in SUPERVALU INC., Market Vectors Gold Miners ETF, Applied Materials, Inc. and Yum! Brands, Inc. during the second quarter.
