Looking for the lifeboats – The Economist 09-19-15

Salient to Investors:

  • Both equities and government bonds are overvalued but are unlikely to fall in tandem. Long-term investors should ignore short-term market declines because over the long-term, asset prices rise – US equities overcame the dotcom bubble and 2008 financial crisis to reach record highs in 2015.
  • However, equities could be in for a long slow decline, a la Japan, the first rich country to fight deflation and zero interest rates. Japanese equities are still down 50% since the end of 1989, while bond yields have remained very low since the late 1990s. At least Japanese investors could have escaped into foreign assets, but that option is narrowing because all the developed world faces deflation, including emerging markets.
  • Robert Shiller at Yale said more investors fear US stocks are overvalued than at any time since 2000. Deutsche Bank says government bonds are the most expensive they have ever been.
  • AQR research found that:
    • In the 10 worst quarters for global equities between 1972 and 2014, equities lost more than 18% on average, bonds gained 4.8%, commodities and gold gained. Corporate bonds lost value, relative to government bonds.
    • In the 8 bad equity quarters since 1990, hedge funds lost and average of 5.2%, excluding trading costs and fees, but a combination of value, momentum, carry, defensive and trend-following strategies would have produced very good returns, excluding trading costs and fees.
    • In the 10 worst quarters for government bonds between 1972 and 2014, bonds lost 3.9% on average, while equities gained 3.5% on average thanks to a big gain in Q2, 2009, gaining in 6 of the 10, and commodities rose.
  • In the 10 worst quarters for government bonds, cash averaged a small gain.
  • Back-testing strategies is unsafe because there is no guarantee that they will be as successful in future.

Read the full article at http://www.economist.com/news/finance-and-economics/21665026-which-investments-work-best-when-markets-decline-looking-lifeboats

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Why Hedge Fund Hot Shots Finally Got Hammered – David Stockman’s Contra Corner 09-06-15

Salient to Investors:

David Stockman writes:

A growing chorus of investors blamed last week’s stock market sell-off on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.

Hedge fund performance has benefited from broken capital markets rigged by the Fed. Thesecasino gamblers bought every one of the 30 identifiable dips in the SPX since the March 2009 low, confident that the Fed would intervene to keep the stock averages rising. A few ten thousand punters have made trillions in return for little economic value added.

Bridgewater profited by buying more stocks when prices were rising and equity volatility was falling, and more bonds when prices were dipping and equity volatility was rising as investors retreated to fixed income securities. Pumping out volatility and milking the market on alternating strokes is only possible when the regularity of market waves are unnatural, engineered by a Fed held hostage to the casino gamblers. However, bond prices in August did not rise like they were supposed to when the stock market dropped 12%, so Bridgewater’s entire profits for the year were wiped out in a few days. Bridgewater now pleads for QE4, while Goldman Sachs said the latest jobs report calls for no rate increase in September, despite the failure of 80 months of ZIRP.

China’s 20-yr long, $4 trillion cumulative bids for US treasuries and DM fixed income securities has now become “offers”, and which will prove to be one of the great financial pivots of history. China bought US debt to peg the RMB exchange rate and keep its exports humming, but eventually was forced to let the RMB slowly rise against the dollar, drastically accelerating global fund inflows into the Chinese economy. Deng’s naivete unleashed a credit monster that sucked in capital and resources from all over the globe into a domestic spending boom that was inherently unstable. To prevent the RMB exchange rate from plunging and inciting even more capital flight, the PBOC has now shifted into reverse in a large, sustained and strategic way.

If the market holds above next week’s retest of the SPX 1967 low, the Fed will likely announce a “one and done” move in September, and if the market does not hold this low, then the Fed will defer its rate rise: both outcomes will cause a short-lived, half-hearted rally, but not another leg higher in the phony bull market because the global “dollar short” is unwinding and China’s house of cards is cratering, causing economies to plunge throughout the China supply chain.

Read the full article at http://davidstockmanscontracorner.com/why-hedge-fund-hot-shots-finally-got-hammered/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Sunday+10+AM

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Jim Simons: A rare interview with the mathematician who cracked Wall Street – TED.com 09-03-15

Salient to Investors:

Jim Simons at Math for America said:

  • In the old days, commodities or currencies had a tendency to trend. Trend-following was great in the ’60s, sort of OK in the ’70s,  but not OK in the ’80s.
  • You look for anomalies in the data, when efficient market hypothesis is incorrect. Any one anomaly might be random but with enough data you can tell that it is not. If an anomaly is persistent for a sufficiently long time, the probability of it being random is not high. However, these things fade after a while and anomalies get washed out.
  • My hedge fund charged the highest fees in the world at one time: 5% and 44% of the profits.
  • Bringing science into the investing world has reduced volatility, increased liquidity, narrowed spreads.

Watch the video at http://www.ted.com/talks/jim_simons_a_rare_interview_with_the_mathematician_who_cracked_wall_street?utm_source=newsletter_daily&utm_campaign=daily&utm_medium=email&utm_content=button__2015-09-03 or read the full transcript at http://www.ted.com/talks/jim_simons_a_rare_interview_with_the_mathematician_who_cracked_wall_street/transcript?language=en

Hedge Fund Losses From Commodity Slump Sparking Investor Exodus – BloombergBusiness 08-06-15

Salient to Investors:

Cargill, the world’s largest grain trader, shut its commodities hedge fund last month, a sign that commodity speculators are in trouble.

Donald Steinbrugge at Agecroft Partners said hedge funds are supposed to make money in both bull and bear markets but managers bias towards rising prices. Steinbrugge said demand for commodity-oriented hedge funds is very low as no one wants to catch a falling knife. Christoph Eibl at Tiberius Asset Mgmt said no money is going into commodities.

The Bloomberg Commodity Index is down 29% in the past year and 18 of its 22 components are in a bear market. Hedge Fund Research said assets of commodity hedge funds are 15% below the peak 3 years ago. The Newedge index suggests natural resource funds have lost money for clients during most of the past 4 years. At the end of June, the average commodity hedge fund had fallen 7% since the January 2011 peak vs. the S&P 500 index gain of 80%, including dividends. The index rose almost sixfold from 1999 to a peak in June 2008.

Read the full article at http://www.bloomberg.com/news/articles/2015-08-06/hedge-fund-losses-from-commodity-slump-sparking-investor-exodus

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You Too Can Clone Bill Ackman Without Buying His New Fund – Bloomberg 09-22-14

Salient to Investors:

  • Armen Karamanian at Admire Capital said you can replicate Bill Ackman’s portfolio very easily and for free and with immediate liquidity without the headline risk, and Ackman’s focus on a small number of large investments makes Pershing Square easier to replicate. Karamanian said the public hedge funds’ target buyers are European money managers, probably wealth managers, allocating capital for individuals who invest outside the US and are not wealthy enough to buy into the hedge funds directly or get exposure to activists.
  • Bill Ackman said the first day rise in the stock price of an activist target often represents only a small percentage of the ultimate increase achieved by a successful activist – in 26 out of 30 of his activist commitments the day-after price was still a bargain price versus the ultimate price achieved from our involvement with a company.
  • Hedge Fund Research said hedge funds globally charged an average management fee of 1.52% in Q2 2014 and an average incentive fee of 17.96%. Since inception in 2004, Ackman’s Pershing Square LP’s gross return was 1,199.1% but 626.7% net of all fees.
  • Ken Squire at 13D Activist Fund said Ackman’s public stock allows another whole part of the investment world to get access to activism.
  • Chris Donegan at Azure Wealth said public hedge funds provide certainty of capital and for investors a higher degree of transparency and benefits from the manager’s ability to take measured actions without regard to redemption periods. The hedge fund manager likes no panic redemptions or providing liquidity to the market.

Read the full article at http://www.bloomberg.com/news/2014-09-22/you-too-can-clone-bill-ackman-without-buying-his-new-fund.html

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James Says Use Buyouts to Shoot Lights, Not Hedge Funds – Bloomberg 09-18-14

Salient to Investors:

  • Tony James at Blackstone said hedge funds are a way to play the stock market with lower volatility and lower returns – shoot-the-lights-out returns are best left to private equity and real estate.
  • Neil Chriss at Hutchin Hill Capital said Calpers’ hedge-fund allocation was not big enough to move the needle but big enough to require real resources.
  • Wilshire Trust Universe Comparison Service said pensions with more than $5 billion in assets had an average of 1.35% in hedge funds as of June, versus 0.85% in 2008. Public retirement plans with $1 billion or more in assets generated a 5.1% annualized return from hedge-fund investments in the 3 years ended June 30 versus 5.3% from fixed-income holdings, 11.5% from private-equity, and 12.7% from stocks.

Read the full article at  http://www.bloomberg.com/news/2014-09-18/james-says-use-buyouts-to-shoot-lights-not-hedge-funds.html

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Texas Pension Cuts Hedge Fund Exposure by 1 Percentage Point – Bloomberg 09-18-14

Salient to Investors:

  • The Teacher Retirement System of Texas cut its hedge fund allocation to 8% from 9%, cut equities by 4 percentage points and fixed-income by 2 percentage points, and increased risk parity – a strategy based on allocation of risk and private equity and real assets – and private markets by 5 percentage points each.
  • TRS has 80.8% of the assets needed to fund future payments to retirees. Wilshire Consulting said state funds last year had 75% of the assets they need to satisfy expected claims .

Read the full article at http://www.bloomberg.com/news/2014-09-19/texas-pension-cuts-hedge-fund-exposure-by-1-percentage-point.html

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No Magic Bullet for Pensions as Calpers Exits Hedge Funds – Bloomberg 09-17-14

Salient to Investors:

  • Calpers’ exit from hedge fund investing underscored that there is no magic bullet to dealing with mounting pension fund costs. Chris Mier at Loop Capital Markets said the problem cannot be fixed very rapidly.
  • Wilshire Consulting said that in 2013, state pension plans had 75% of what they needed to cover retirement obligations. State and local governments put $95 billion into the 100 largest pension funds in 2013, up $23 billion from 2009.
  • Peter Hayes at BlackRock said those plans that take action will have a better rating profile, all things equal, and those that do not are going to be penalized with lower ratings and higher interest costs.
  • Riskier investments are luring pensions, which typically need to earn more than 7% annually to avoid falling behind.

Read the full article at http://www.bloomberg.com/news/2014-09-18/no-magic-bullet-seen-for-pensions-as-calpers-exits-hedge-funds.html

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The Dumb Money Is Getting Smarter Every Day – Bloomberg 09-17-14

Salient to Investors:

  • Amateur investors are giving up on trying to beat the market, while even the most sophisticated investors are rejecting strategies that require advanced math and managers with million-dollar salaries. ICI reports the average expense ratio on an equity mutual fund is down 25% in 10 years.
  • Boston Consulting estimates the market share of index funds and ETFs has doubled since 2003.
  • Target-date funds are taking over retirement plans, and are the favorite of young workers.
  • Grant Easterbrook at Corporate Insight said that the new online advisors eliminate a million features that only 5% of the user base actually wants.

Read the full article at http://www.bloomberg.com/news/2014-09-17/the-dumb-money-is-getting-smarter-every-day-.html

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Calpers Is Done With Hedge Funds; Paid $135 Million in Fees Last Year for 7.1% Return – Bloomberg 09-16-14

Salient to Investors:

  • Ted Eliopoulos at Calpers said their small hedge fund allocation did not effectively diversify or hedge any meaningful portion of their total portfolio and their decision to divest the entire allocation was unrelated to its performance.
  • Keith Brainard at National Assn of State Retirement Administrators said Calpers is often a trend setter among pension funds on investment strategies, though many public pension funds consider hedge funds to be a vital part of their diversified portfolios.
  • Calpers’ annualized rate of return on its hedge fund investments over the last 10 years is 4.8% versus its fund return goal of 7.5%
  • McKinsey said that assets in alternative investments such as hedge funds, real estate and private equity may double by 2020.

Read the full article at  http://www.bloomberg.com/news/2014-09-16/calpers-pulls-all-4-billion-in-hedge-funds-citing-costs.html

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