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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Buffett Waits on Fat Pitch as Cash Hoard Tops $50 Billion – Bloomberg 08-04-14

Salient to Investors:

  • Few businesses are large enough to merit Warren Buffett’s attention. Berkshire Hathaway spent a third of the total from a year earlier on equities in half1 2014, while sales of stock more than doubled. Buffett dislikes paying a dividend and rarely buys back shares.
  • David Rolfe at Wedgewood Partners said Buffett’s list of ‘fat-pitch’ companies is not large and Warren – the best market timer he ever saw – won’t spend for the sake of spending.
  • John Fox at Fenimore Asset Mgmt said it is more difficult, across the board, to find cheap assets.
  • Preqin Ltd said private-equity firms were sitting on a record $1.16 trillion of capital as of July.
  • David Fann at TorreyCove Capital Partners said private equity has record levels of capital to spend.
  • PitchBook Data said transactions of more than $250 million were valued at 10.2 x EBITDA in Q1 2014 versus 9.8 x EBITDA in the prior period. Bain & Co. say a reasonable LBO price is under 8 x EBITDA.

Read the full article at http://www.bloomberg.com/news/2014-08-04/buffett-waits-on-fat-pitch-as-cash-hoard-tops-50-billion.html

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Solving the alternatives riddle – InvestmentNews 11-17-13

Salient to Investors:

There are more than 400 liquid alternative, hedge-fund-like strategies offered in a mutual fund wrapper, up from a few dozen prior to the financial crisis.

Many observers think it unlikely that equity returns will continue to be as robust as the last 5 years, while bonds face the well-known risk of rising interest rates.

Christine Johnson at Deustche Asset & Wealth Mgmt said alternatives are not going to keep up with a bull market and while they reduce volatility, they are not a yield replacement. She likes long/short equity for aggressive clients.

The Morningstar MSCI Composite AW Hedge Fund Index rose less than 5% through September 30, 2013 versus almost 20% for the S&P 500.

Nadia Papagiannis at Morningstar said alternatives should be used to reduce risk and volatility and not to chase returns, so are more suitable for more risk-averse investors, while younger investors who don’t need to worry about liquidity could benefit from the more illiquid strategies, such as private equity or private real estate, because of their long investment horizons.

She prefers strategies that are hedging volatility, such as long/short equity funds that buy puts to protect the downside. Papagiannis said that nontraditional bond funds tend to take on a lot of credit risk and are therefore vulnerable if the stock market falls.

Philip Roberts at Round Table Services said funds of funds give you immediate diversification. Morningstar said the average expense ratio of such funds is 1.85%. Roberts prefers merger arbitrage strategies.

Glenn Myers at The MDE Group said we are at the end of 30 years of falling interest rates, so we need creative ways to control volatility and get returns without relying on a large allocation to fixed income.

Natixis Global Asset Mgmt found that only 25% of advisers said they regularly use alternative investments, while 75% don’t primarily due to a lack of understanding.

Read the full article at http://www.investmentnews.com/article/20131117/REG/311179998#

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Colleges Cut Alternative Investments to Recoup Losses – Bloomberg 11-06-13

Salient to Investors:

The NACUBO and the Commonfund Institute said US college endowments allocated 47 percent of their investment portfolios to alternative assets in the year ended in June, versus 54 percent the prior year.

NACUBO-Commonfund said colleges earned an average endowment investment return of 11.7 percent in the year ended in June, versus 0.3 percent the year prior – domestic equities generated an average of 20.5 percent veruss 8.6 percent for alternative strategies.

In September, Yale University cut its target for private equity investments to 31 percent from 35 percent, while  Harvard said it is cutting its private equity strategy as returns have trailed expectations.

Read the full article at http://www.bloomberg.com/news/2013-11-06/colleges-cut-alternative-investments-to-recoup-losses.html

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Wall Street’s Rental Bet Brings Quandary Housing Poor – Bloomberg 08-29-13

Salient to Investors:

Private-equity firms, hedge funds and REITs have bought more than 100,000 US homes, becoming dominant single-family landlords in markets hardest-hit by the housing crash such as Atlanta.

Christopher Thornberg at Beacon Economics said investors that are building home-rental companies may not want to take on the red tape, stigma of renting to poorer tenants and the potential extra costs. Thornberg said that as the markets become more saturated with rentals, you may find these investors going to a Section 8 model, if they don’t sell, simply because they don’t want these houses sitting empty.

Raphael Bostic at the University of Southern California said these investors are not really rental people but transaction oriented and are buying houses for the potential value appreciation as much as the rental cash flow, and may be reluctant to commit to Section 8 tenants because those leases come with long-term constraints that reduce the ability to sell quickly.

More than 7 million Americans that lost their houses to foreclosure and the US homeownership rate is the lowest since 1995.

RealtyTrac said institutional investors bought 24 percent of homes sold in the Atlanta region in half1 2013, the most of any metro area, and up from 12 percent a year earlier.

CoreLogic reports 49,000 completed foreclosures in July, down 25 percent from a year earlier.

Jeff Pintar at Pintar Investment said investors that shun some of the 2.2 million Americans with federal vouchers in certain regions risk higher vacancy rates and lower yields.

Susan Popkin at the Urban Institute said Section 8 has the connotation of poor people of color moving into my neighborhood, but research shows no evidence they bring crime to a community or hurt property values.

Susan Wachter at Wharton said over the long-term, affordable housing will be harder to find as government subsidies fail to keep pace with demand, rents continue to rise and new construction falls behind population growth. Wachter said rents have increased through the recession and vacancies have declined so it’s unlikely to be a market where rents stabilize or decline long-term.

Read the full article at  http://www.bloomberg.com/news/2013-08-29/wall-street-s-rental-bet-brings-quandary-housing-poor.html

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Fortress to Blackstone Say Now Is Time to Sell on Surge – Bloomberg 08-01-13

Salient to Investors:

Private-equity managers from Fortress Investment to Blackstone say now is the time to exit investments as stocks rally and interest rates start to rise.

Wesley Edens at Fortress said he is preparing holdings for public offerings while struggling to find attractive new deals. Pete Briger at Fortress said the environment extends to credit and distressed investments and said this is a better time for selling existing investments than making new investments as more uncertainty has been fed into the markets.

Leon Black at Apollo Global Mgmt said last month the environment is ripe for selling because credit markets are still hot and equities strong.  Black said in April said it is a fabulous environment to be selling everything that is not nailed down in our portfolio as the stock market rally has helped push up average prices for LBOs to 9 times earnings. Bain says a reasonable buyout price is less than 8 times EBITDA.

Tony James at Blackstone said last month that with credit markets hot and equities strong, it is a better time for selling assets than for buying, as activity levels shift from the US to Europe, where there is more distress, and Asia and emerging markets, where liquidity issues are arising. James said there will be a growing series of real estate sales over the next 12 to 18 months.

David Fann at TorreyCove Capital Partners said within the five-year period from 2008 to today, we have gone from one of the best times to be a buyer to one of the best times to be a seller.

Read the full article at  http://www.bloomberg.com/news/2013-08-01/fortress-to-blackstone-say-now-is-time-to-sell-on-rally.html

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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.

Read the full article at http://www.bloomberg.com/news/2013-07-10/property-crushes-hedge-funds-in-alternative-markets.html

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NYC Pension Chief Seeks $500,000 Managers Not Wall Street – Bloomberg 05-30-13

Salient to Investors:

New York City’s retirement system is the only one of the 11 biggest US public-worker pensions that refuses to manage any assets internally.

The typical fees for hedge funds and private-equity and real-estate firms is 2 percent of assets plus 20 percent of profits.

Last year, three city pension funds paid more than $1.2 million in fees on a $160 million investment in a real-estate fund – the fund has returned 0.3 percent since 2004.

Miller Samuel and Douglas Elliman Real Estate said the median sales price of a two-bedroom condominium in Manhattan was $1.6 million in Q1, 2013

Read the full article at http://www.bloomberg.com/news/2013-05-31/nyc-pension-chief-seeks-500-000-managers-not-wall-street.html

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Calpers Tops $260 Billion as It Recoups $95 Billion Loss – Bloomberg 04-25-13

Salient to Investors:

Calpers market value exceeds the high set before the global financial crisis wiped out more than a third of its wealth, but is is still short $87 billion, or 26 percent, of meeting its long-term commitments.

Calpers has half of its money in equities, and returned 13 percent in 2012, the same as the S&P 500.

The 100 largest public pensions in the US had $2.9 trillion in assets in Q4 2007, $2 trillion in 2009 and almost $2.8 trillion as of September 30 2012.

As of January 31, 2013, Calpers is 16 percent in bonds, 13 percent in private equity, 8 percent in real estate, 4 percent in cash-equivalents, 4 percent in inflation-linked holdings such as commodities, and 1 percent in forest land and infrastructure such as airports and power plants.

Read the full article at http://www.bloomberg.com/news/2013-04-25/calpers-tops-260-billion-as-it-recoups-95-billion-loss.html

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