Investing and Global Finance News

Blog

Are Hedge Funds Still Profitable?

While there have unquestionably been some negative yields indicating poor hedge fund performance, the word on the street is that some of this is, “misleading.” According to Legal & General Investment Management head of asset allocation, Emiel van den Heiligenberg: “There are ways of making money from it.” 

The question is, how?  Outside of Europe, hedge fund managers can purchase Europe’s negative-yielding government debt.  These funds are based on relative short term interest rate levels which are way higher in America than in the Eurozone.  As such, dollar-based investors are indirectly paid to ensure options are available for their euros to be transformed back to dollars.

It was also  noted by HedgeWeek that there is continued performance growth in the second half of 2019.  July ended with a 7.68 per cent year-to-date return and positive returns in six of the past seven months. According to BarclayHedge president, Sol Waksman:

“Anticipation of the first interest rate cut by the Fed in more than ten years propelled the S&P 500 and the Nasdaq to all-time highs in July. Concerns over the economic implications of a no-deal Brexit and slowing growth in Europe helped push German 10-year bond yields to new lows. The equity and interest rate sectors provided enough of a tailwind for a positive month.”

Woodline Partners

Woodline Partners has just started trading.  For 2019 to date, it is the largest hedge fund startup.  Debuting with $2billion in investor commitments, it is headed by Michael Rockefeller and Karl Kroeker, both former traders of Citadel.

Ilana Weinstein, founder and CEO of IDW Group said that this amount is very “significant” for a startup “especially in this environment where startups are struggling to raise a couple of hundred million and can be at it for years until they get to break even, if that.”

Over the last few years it’s been very difficult to raise this kind of money.  Investors have become quite disillusioned with the hedge fund industry’s uber high fees and performance that is not guaranteed.

Brexit and the Hedge Fund Industry

Brexit is apparently impacting everything and everyone.  Are they in? Are they out?  Every day it’s a different story and the British pound has recently plummeted to a two-year low as a result of this hokey-pokey dance.

According to a recent news article:

“Sterling plunged to 28-month lows and headed for its biggest daily fall against the $US since November as investors scrambled to factor in the risk of a no-deal Brexit and the possibility of a snap election. A still-deeper fall in sterling remains on the cards; all metrics show that a disorderly British exit from the European Union is far from being fully priced in.”

The author then claims that even though the majority of investors have – until this point – bet on a “last-minute agreement to avert a hard Brexit” with the election of Boris Johnson, that “expectation is now receding.”  According to Head of Global Economics and Strategy at Millennium Global Investments, Claire Dissaux:

“There is a realisation the market had not fully priced the increased chances of a no-deal Brexit. The appointment of the cabinet (at the end of last week) showed that the default policy of this government is to leave with no deal.”

In addition, the National Audit Office (official spending watchdog of the UK) has already warned what the repercussions of remaining would do, arguing that it would result in a reduction of the economy by 2 percent next year and also catalyze a recession. 

But what about the hedge funds?  according to David Cameron’s government advisor Baron O’Neill, those in the industry are viewing remaining out of Europe as a “chance to make some money.”  Just the figures being published are political since he believes they are “deliberately promoting the no-deal Brexit risk” to the benefit of traders.  He added

“I’m pretty sure that a lot of big foreign exchange and hedge fund type people are… probably looking at what’s being said coming out the UK as almost close to a free lunch. The world I was in a lot of them are saying thank goodness for Boris, he’s giving us a chance to make some money.”

China’s Strategic Impact on Global Economics

China has “opened up” to the rest of the world.  This has “ushered in a new wave…particularly visible in the newly-released Catalogue of Industries for Encouraged Foreign Investment 2019 and the 2019 Negative Lists.”

This was recognized at the 13th Summer Davos Forum as well as the recent (Japan-hosted) G-20 summit.  The “opening up” movement has helped in the decrease of ambiguities that occur in trade and economics, like the Chinese-U.S. trade conflict.

But how bad is it really?  According to some experts:

“Investors are being too pessimistic about the global economy and the effects of the trade war between the United States and China, according to HSBC Global Asset Management.” 

In addition, Asia-Pacific’s CIO Bill Maldonado pointed out that 2019 was a lot stronger for markets than last year, showing strong returns within an environment of low inflation and low interest rate.  He said:

“We should keep calm and carry on. It’s important not to get too distracted by the pessimism, on the trade dispute, on the economy and everything else. The asset that can benefit the most from this is emerging markets.”

Furthermore, America is now in a much more competitive stage with China and the growth China is encountering is likely to remain somewhat stable.

Alternative Investments: Why?

What do investment industry experts when they add the adjective alternative to their investments?  According to CEO of the Chartered Alternative Investment Analyst Association (CAIAA) William J. Kelly, regular investments are those made in cash, bonds and stocks etc. Alternative investments are ones in intellectual property, land, private equity and real estate. 

Toward the end of 2018, India’s Securities and Exchange Board (SEBI) changed one of its policies.  This resulted in a lifting of the ban on Alternative Investment Funds operating from the International Finance Services Center Gift City.  This was implemented to help bring the Alternative Investment Fund sector out from offshore regions such as Singapore and Maritius.  Kelly believes this is making “Venture Capital Funds even more attractive…for AIFs.”

Alternative investments can be very beneficial as a diversification potential, guard against inflation, provision of new opportunities and more.

GDP and Public Wealth

According to a recent article put out in the IMF Blog

“advanced economies have larger balance sheets compared to emerging markets and low-income developing countries. This reflects the size of their public sectors, which generally provide more infrastructure and services. But advanced economies also have larger liabilities and, on average, lower net worth.”

So what does that mean?  Almost 40 countries has a total of public sector assets (infrastructure, financial assets and natural resource reserves) worth $103 trillion. That comprises 216% of GDP.

It has been found “that having large assets does not necessarily reduce how vulnerable a country is to large debts; this will depend on the nature of the assets.” How can this situation change?  Possibly with better management. According to the Blog:

“Better management of government assets could earn 3 percent of GDP in extra revenues each year—that is more than the interest payments advanced countries pay to cover their debt.”

Some countries are already doing this.  Examples include: Australia, the UK and New Zealand which are all engaging in a review of their balance sheet. Jersey is making waves toward greater transparency such that by 2023 the law will really be forcing the issue.  A joint Guernsey, Jersey and the Isle of Man statement included the intention to:

“bring public company registry legislation to their respective parliaments within 12 months of the EU publishing a review in 2022 outlining how their members states have created their own public registers.”

GDP can be a good indicator of wealth.  When it is codified correctly it has the power to give us information about consumption levels and when GDP depletes it can be a useful red flag for new policies.

Equity Investment Firms: Recent Awards

John K. Castle, CEO, Castle Harlan, Inc.
John K. Castle, CEO, Castle Harlan, Inc.

Awards presented to private equity investment firms are given for a variety of reasons, including recognition of excellence in the establishment, growth and management of a new or existing acquisition, a testament to consistent performance and a high chance of continued stability.   They are selected via senior, experienced members of the industry.  Here we take a look at a few recent ones.

Earlier this year, Castle Harlan Inc. received the “Deal of the Year” award from the Association for Corporate Growth Houston.  This was for the acquisition of Exterran Corporation’s production equipment assets, since renamed Titan Production Equipment.  CEO of Castle Harlan, John K. Castle said:

“The business is an important part of its community. It employs about 200 people today, and we plan to add more.  Titan’s leadership starts with its skilled and knowledgeable team in Columbus.”  

The Canadian Venture Capital & Private Equity Association handed out its Deal of the Year Awards earlier this month. The two recipients were TVM Capital Life Science (in the venture capital category) and the Caisse de Dépôt et Placement du Québec – CDPQ (in the private equity category).  TVM’s award was for its sale last year of Aurka Pharma (a $575m deal which generated a 348 percent IRR) and CDPQ for its 2018 sale of Camso (a transaction valued at $1.45billion).

Hedge Fund Fluctuations

Hedge funds are a very fluid industry.  As Alan Greenspan once said: “One of the problems with hedge funds is that they are changing so rapidly. If you have the balance sheet that closed business last night, by 11 A.M. this morning, that won’t tell you very much about what they’re doing.” In this article we take a look at fluctuations within two firms and one industry:  Atlas Impact Partners, Elliot Management and the oil industry.

A new hedge fund has been launched by Atlas Impact Partners.  The firm – set up last year, uses “a long-short absolute return strategy designed to capture investment opportunity at the nexus of innovation, disruption, and impact.” It has just now opened its first fund geared toward investing in firms that are focused on coming up with creative ideas for enhancement in environmental and social spheres.  At the same time, it bets against business stocks that are potentially damaging in these areas.  Company founders are: a former Generation Investment Management partner (David Lowish); former research head at Just Capital (Rob Brown); David Castricone and Richad Billing.

Now we look at a hedge fund quite the opposite to Atlas, at least in its age.  Elliot Management Corporation has been around since 1977.  After a year of talks it has now acquired Barnes & Noble for a price of approximately $638 million.  Last year the hedge fund also bought Waterstones.

Between Brent, NYMEX, ICE West Texas Intermediate, US gasoline and US heating oil, 122 million barrels have been sold in the week ending May 28.  This marked the largest amount of barrels sold in the timeframe since October 2018.