Property Crushes Hedge Funds in Alternative Markets – Bloomberg 07-10-13

Salient to Investors:

Hamilton “Tony” James of Blackstone Group said stocks were a fool’s game compared with alternative investments. and investing in alternatives makes sense even when they underperform. James said the return from these idiosyncratic investments are very uncorrelated to the broader markets, so portfolio volatility falls.

Hedge funds have been disappointing investors for years. Virtually every alternative investment category crashed in the financial meltdown of 2007 to 2009, none more severely than property, with housing and commercial real estate prices falling as much as 40 percent.

Bloomberg Markets says over the past three years to March 28, 2013:

  • REITs gained more than any other alternative category: large-cap REITs returned 17.3 percent annualized versus private equity which returned 15.2 percent.
  • The best-performing unconventional investments ranged from corn, 33.8 percent annualized, and silver futures, 20.5 percent annualized, to a Chateau Pavie Bordeaux and a 1957 Ferrari 250 Testarossa.
  • Among the worst-performing alternatives were hedge funds, 3.3 percent, and funds of hedge funds, which lost money.
  • The S&P 500 returned 12.7 percent annualized.
  • For investors in real estate and REITs, valuations fell further and faster than other assets and have in the past three years jumped higher than the S&P 500.
  • REITs that invest in shopping malls boasted the best performance with an annualized return of 25.3 percent. REITs that invest in self-storage units, industrial plants, health care, retail and Asian real estate produced 20 percent-plus gains.
  • Hedge-funds invested in mortgage-backed securities gained more than 20 percent annualized
  • Overall commodities returned 3.1 percent, but corn futures returned 33.8 percent.
  • Classic cars and coins gained more than 15 percent annualized.
  • The poor performance of macro funds has been a reason for hedge funds’ overall mediocre 3.3 percent return.

  • Fund-of-funds have lost an annualized 3.8 percent over 3 years, while more than 600 funds of funds, or 25 percent of the total, have gone out of business since 2007.

Bob Rice at Tangent Capital Partners said things that are way down are going to come back, while central banks have given people a prevalence of cheap money to borrow and get back into alternatives such as real estate. Rice says you are starting to see more and more REITs that are borrowing to pay their dividends; a yellow flag to those chasing the asset class right now. Rice says private equity offerings to small investors is the next wave of alternative offerings.

REITs are a growing asset class in Europe and Asia.

Brian Hargrave at ZAIS Financial said the single biggest advantage of REITs is that they’re required to distribute at least 90 percent of their taxable earnings to shareholders as dividends.

The real estate moguls whose heavy borrowing helped fuel the 2008 financial crisis are back at it, taking advantage of Fed-driven low interest rates to amplify their returns through leverage.

David Fann at TorreyCove Capital Partners said real estate has been a huge beneficiary of QE so when central banks finally start raising interest rates, that could quickly end the new property boom and curtail the longer-term appeal of real estate investing. Fann said many of the large private equity deals that were undertaken during the boom period got salvaged because of quantitative easing.

Carl Friedrich at Piermont Wealth Mgmt said hedge funds in aggregate will more and more like the broader market as their asset base continues to grow.

Paul Ashworth at Capital Economics says corn and other agricultural commodities are a bubble which will burst in the next few years – low interest rates to buy farmland and higher yields for corn per acre.

Private equity, aka leveraged buyouts, has benefited greatly from the post-crisis low-interest-rate environment.

Preqin says global private-equity holdings surpassed $3 trillion of assets under management in 2011 for the first time and have continued to grow. KKR owns companies that employ 980,000 people. Blackstone’s more than 730,000, and Apollo’s 370,000.

David John at Brookings says if private equity offerings to small investors start to take hold, there needs to be either licensing, a seal of approval or some level of higher oversight so people don’t find that they are investing in unsuitable for their stage of life.

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Bubble, Bubble, Money and Trouble – Barron’s 06-01-13

Salient to Investors:

Marc Faber at the Gloom Boom & Doom Report says:

  • High-end assets from stocks to art to real estate are in a bubble caused by central bank money-printing. This money doesn’t increase economic activity and asset prices in concert, instead creates dangerous excesses in countries and asset classes. Money-printing fueled the stock-market bubble of 1999-2000, the housing bubble in 2008, and the commodities bubble.
  • Owns equities because easing money is flowing into the high-end asset market, including stocks, bonds, art, wine, jewelry, and luxury real estate.
  • The government bailed out S&L depositors in the late 1980s. Treasury and the Fed bailed out Mexico in the mid-1990s. The Fed-supervised bailout of Long-Term Capital Management in 1998 gave a green light to Wall Street to keep leveraging up. Neither Keynes or Friedman would have approved current policies.
  • In the fourth year of an economic expansion, near-zero interest rates will lead to a further misallocation of capital. The S&P 500 is a near a long-term top and could rally to 2000 in the next month or two before collapsing.
  • Money-printing leads to a widening wealth gap. In the Western  democracies, large numbers of people will at some point target the rich through wealth taxes or significantly higher tax rates. The rich have seen huge wealth accumulation in Asia in recent years but the middle class has seen diminishing purchasing power. Growing wealth inequality has always been corrected either peacefully, through taxation and wealth redistribution, or by revolution, as in Russia. European voters will turn against the arrogance of the bureaucracy.
  • China will not tolerate US interference long-term in their region.
  • 25% in equities – no US, some Asian shares and Singapore REITs.
  • Except for some high dividend stocks, Philippines, Indonesia, and Thailand markets are unattractive having quadrupled from post-crisis lows. Dislike Chinese equities unless conditions worsen and China prints money like crazy, when the currency will weaken and stocks will rise.
  • Japanese stocks made a generational low in 2012 and won’t go below that. Like Japanese REITs.
  • Vietnam exports are strong, and the people are hard-working. The beach between Danang and Hoi An will be a huge resort area in the future and is only an hour and 10 minutes by plane from Hong Kong, and two hours from Singapore. Likes stocks with yields of 5% to 7%.
  • Many rich Asian companies have been buying other Asian companies. Asia long-term economic outlook is good. Laos, Cambodia, and Myanmar are opening up, and Vietnam is reopening. Myanmar market is hot but like Vietnam near its peak in 2006-07, looks dangerous for investors.
  • The huge credit bubble in China won’t end well. The economy officially grew 7.7% in Q1 but in truth is growing 4% a year, at best. China reports export figures to Taiwan, South Korea, Hong Kong, and Singapore that are much larger than those countries report as imports.
  • Markets in Europe have made major lows so own European shares – and plan to buy more – and corporate bonds, and real estate. Money in European banks is no longer 100%.
  • Like Singapore REITs whose yields of 5% and 5.5% compare favorably with US REITs. If inflation picks up, REITs can raise their rents.
  • 25% in gold and add to positions every month. When the asset bubble bursts, financial assets will be particularly vulnerable.

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Why Are People Hoarding Coins? – Investopedia 09-26-12

Salient to Investors:

Prior to 1965, dimes and quarters were made primarily of silver. Prior to 1982, pennies were composed of 95% copper. Nickels are 25% nickel and 75% copper.
At today’s prices for copper and nickel, a dime is worth almost seven cents, though it is illegal to melt down pennies and nickels.

Small-time hoarders get coins from their local bank tellers, more serious ones buy online in bulk. 

Hoarders’ investments won’t pay off unless the government lifts the restriction on melting currency.

Pennies and nickels are the most popular with hoarders because of their high copper content. Most pre-1965 dimes and quarters have been removed from circulation by collectors and rarely seen mixed in with other coins.

Coin hoarding has not yet affected the amount of coinage in circulation in the US, unlike Argentina which is facing a coin crisis. and the Philippines.

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