Oil Drops 56% Since June: What to Do

The hot topic in the new year has been the falling price of oil.  A barrel of oil to $48 for West Texas Intermediate crude.  Fund managers are positioning their portfolios to take advantage and protect themselves from the situation.  Some opinions and investment ideas were presented in two articles in Pensions & Investments on January 12, 2015.

Winners:

• Countries that import oil in the emerging markets (Turkey, Indonesia and India) 
• Stocks in the consumer discretionary sector
• Infrastructure investments

Risky:

• Countries that export oil in the emerging markets (Russia, Venezuela and Nigeria)
• Oil industry stocks
• High yield bonds
• Index investors for UK and emerging markets

The sources for these ideas can be found here and here.

Hedge Fund Hopes for 2015

Since the global credit crisis of 2008, the central banks of various nations have been using various utilities (i.e. non-existent interest rates, quantitative easing and expanding their definitions of conservative debt) to prop up asset values to protect the banking industry according to Frank Brosens, co-founder and risk manager at Taconic Capital Advisors in New York.  These actions reduced asset price volatility and hedge funds' opportunities to produce alpha.  This is now ending.  The last three months of 2014 saw increased volatility and portfolio managers are predicting it to continue in 2015.

Managers with different strategies are seeing good investments:

• Long/short
• Joel Greenblatt, managing principal and co-chief investment officer of Gotham Asset Management in New York, believes there are "..good opportunities on the short side with currently very expensive stock prices if the market drops."
• Eric Mindich, CEO of Eton Park Capital Management in New York, is long in Japanese and Chinese markets.  Both countries will benefit from cheaper oil prices and valuations are very low in China.
• Global macro - Kenneth Tropin, chairman of Graham Capital Management in Rowayton, Connecticut, is monitoring the quantitative easing initiated by Japan's and European central banks, the improvement in the US economy and unrest in various political hotspots around the world.
• Multi-strategy - Michael Hintze, CEO and senior investment officer of CQS (UK), sees short trades based on geopolitical situations (i.e. Ukraine and Russia), failling oil prices and terrorist activities.
• Credit - Several fund managers are positioning their funds on different themes.  The most interesting one is from Paul Twitchell, partner and global head of event strategies of Whitebox Advisors.  He is looking at energy-related distressed debt.  He is interested in "...supplying secured debt to energy companies at a certain price..."

The source for this article can be found at here.

Emerging Managers To Launch in 2014

Several hedge fund industry service providers are predicting 2014 to be the year of the emerging manager launch according to an article in Pensions & Investments.  These include consultants, fund of fund managers, law offices and capital introductions departments.  Experienced managers are launching new firms because their former firms are closed to new investors.  Not only are managers starting new firms, they are also hiring their investment teams at their former firms. Banks continue to divest from proprietary trading desks and hedge funds.  Investors are seeking emerging managers to meet their asset allocation target or replace their current funds according to Stephen Nesbitt, CEO of Cliffwater LLC, an alternative management consultant.   As most investment is based on relationships, they are more willing to invest with managers with a shorter history according to Dean Backer, managing director of Goldman Sachs.

Asset raising will be easier for these intact teams according to Robert Kaplan, co-CIO of the Permal Group.  The largest ones are Three Bays Capital ($500 million in assets under management) which is run by Matthew Sidman, an alumnus of Highfields Capital Management and Junto Capital Management ($317 million in AUM) which is run by James Parsons, an alumnus of Viking Global Investors.  On the horizon are Aravt Global with Wui Yen Liow, formerly of Ziff Brothers Investments, and Anand Desai, formerly of Eton Park Capital Management.  It is anticipated that they will launch with $500 million to $1 billion in AUM.  Everyone else will need to provide incentives for their seed money such as reducing their management and performance fees and offering investors equity in their business according to Tracy McHale Stuart, partner and CEO of Corbin Capital Partners, a hedge fund of funds manager.

A Sampling of Hedge Fund Views on 2014

Hedge fund managers are predicting financial markets to be more volatile and, thus, afford them more opportunities for improved investment returns in 2014 according to articles in Pension & Investments 2014 Outlook report.

Central bank intervention from the Federal Reserve, European Central Bank and Bank of Japan has kept interest rates low and caused equity prices to rebound impressively in 2013.  Their policies, along with the US budget accord and a recovered housing market, will continue to help the world economy to strengthen.  This will give investors confidence to pursue more risky assets such as emerging markets and small cap stocks.

According to Lee Ainslie of Maverick Capital, equity long/short will have better performance as the correlations between securities' returns will be lower.  Managers relying on fundamental analysis of corporates will have their positions less influenced by macro economic factors.  Other hedge funds are looking at complex strategies for returns.  Farallon Capital is investing in distressed European debt, event driven equity in merger arbitrage and US commercial real estate.  They are buying foreclosed properties and flipping them to other investors after rehabilitating and finding renters for them.  DW Investment Management will continue to hold positions in single corporate credit securities, structured corporate credit, residential and commercial mortgage backed securities and student loan backed instruments.  Magnetar Capital will invest in the US energy build out caused by the explosion of hydraulic fracturing.

A Summary of Sovereign Wealth Funds and Their Alternative Investments

As of October 2013, the total assets under management for sovereign wealth funds was estimated in the Preqin 2014 Sovereign Wealth Fund Review to be $5.38 trillion.  The entire alternative investments universe has $5.5 trillion in AUM.  To sum up, these are national investment funds originating from foreign exchange/ reserve assets or revenues from commodities, especially oil.  They are used to diversify the country's economy from oil, maximize their return on revenues and stabilize their economy despite the volatility inherit in commodities.

More and more funds are being created.  66% of the funds were launched since 2000.  Asia and Middle East North Africa, an investing region known as MENA, have 47% of the sovereign wealth funds with 67% of AUM.  These regions have large natural resources i.e. oil and include China, which has a huge US dollar reserve balance to stabilize the yuan to dollar currency rate.  These funds are continuing to grow and allocate to alternatives.  Below are some findings from the report:

• 31% invest in hedge funds.  They are trending towards direct investments and away from fund of funds - as is everyone else.  The most popular strategies are distressed, equity long/short and global macro.
• 51% invest in private equity with 7% investing directly.  The most popular strategies are leveraged buyout and venture capital.
• 54% invest in real estate with most doing direct investments.  The most popular strategies are opportunistic and value added.
• 57% invest in infrastructure.  Of these investors, 34% invest directly only and 50% invest directly and by using funds.

Hedge Funds Replace Mutual Funds

Hedge fund and fund of funds managers have been adding long-only as an investment strategy according to an article in the December 23, 2013 issue of Pensions & Investments.  These include such famous names as CQS, Lansdowne Partners, Lone Pine Capital, Maverick Capital, Tiger Global Management, Viking Global Investors, Winton Capital Management, Blackstone Alternative Asset Management and the Rock Creek Group.  The new strategy has been driven by institutional investors - of which, 44% invest in long-only funds.  The interest has been fueled by several other factors:

• Institutional investors' disappointment with mutual fund returns
• Since the financial crisis of 2008, shorting securities has been underperforming as an investment 
• strategy
• Confidence in hedge fund managers as stock pickers
• Performance fees are easier for the manager to attain as they are based on returns relative to the performance of an index i.e. S&P 500

Blackstone and Rock Creek have almost $7 billion in assets under management (AUM) in the long-only strategy.  Both companies launched the strategy a few years ago.  In 2007, Blackstone used hedge fund managers to trade the long-only components of one of Blackstone's commodity indices.  In 2009, Rock Creek launched an emerging markets equity fund.  This fund has grown to $1.8 billion in AUM.

Innovations in the Fund of Hedge Funds World

The fund of fund managers that have survived the redemptions stemming from the 2008 financial crisis have updated their methods of delivering value to investors.  There were five new ways listed in the September 16th issue of Pension & Investments, Managers in Midst of Metamorphosis article.  They are:

• Hedge fund mutual funds with daily valuation and liquidity - Aurora Investment Management LLC in Chicago has launched a hedge fund mutual fund in March with $145 million in assets under management 
• Hybrid hedge fund/private equity funds of funds with 3 to 5 year lockups - Mesirow Advanced Strategies Inc. has launched opportunistic hedge fund of funds using five strategies:  corporate liquidations, European credit and structured products, secondary collateralized debt obligations, distressed non-agency retail mortgage backed securities and distressed emerging markets debt arbitrage trades.  The lockup period allows for the manager to retain cash reserves in order to take advantage of mispriced markets while allowing for the manager to hold positions during times of market stress.
• Hedge fund beta strategies to be used with alpha generating hedge fund portfolios - GAM created the hedge fund beta portfolios based on Barclays PLC risk premium indices.  They actively manage left-tail risk during market downturns of 1 to 2 standard deviations.
• New investment capabilities to create broader alternative investment boutiques - Grosvenor Capital Management LP offers customized separate managed accounts across many alternative investment strategies
• Single strategy hedge funds with concentrated positions for institutional investors