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from Counterparties:

Trimming the hedge funds

The California Public Employees Retirement System is getting out of hedge funds. Calpers’ decision to divest the $4 billion it had in hedge funds (of about $300 billion total) isn’t exactly a surprise, since members of the organization openly expressed doubts about the investment strategy last year. But Calpers’ reputation as the gold standard among public-employee pension funds may portend changes in the way smaller pension funds invest their money.

It’s not that Calpers’ investments with hedge funds were performing badly; it’s just that they weren’t performing well enough to make the extra costs worth it. Hedge fund management fees cost Calpers $135 million in the last fiscal year, according to Bloomberg. Hedge fund investments earned it a return of 7.1 percent (below the target of 7.5 percent) and massively underperformed the fund as a whole, which earned 18.4 percent. Dan McCrum writes that “the more hedge funds that are added to the [Calpers] portfolio, the closer returns will be to that of the average hedge fund, which has failed to beat a simple mixture of stocks and bonds for many years.”

Matt Levine says this is, in part, about Calpers’ position as the largest U.S. public pension fund: “Calpers is the market. If you're getting something pretty close to the market return anyway, then indexing is going to be cheaper and easier…” than putting a lot of money into hedge funds trying to eke out a slightly higher return. Chris Flood thinks that other pension funds are not as likely as Calpers to divest from hedge funds because they aren’t as large.

Other writers are more convinced that the gravy train for hedge funds is about to come to an end. Tadas Viskanta predicts that hedge funds won’t go out of fashion entirely, but rather, the last ones standing will be those who are really, really good at what they do. Barry Ritholtz thinks that Calpers has the power to put a serious dent in hedge funds’ high-performance aura (an aura that, he says, already “has proven to be a myth”). And Yves Smith thinks the age of the hedge fund is over: “There aren’t enough dumb enough rich investors to go around once the hedgies have lost the pension fund business. Short yachts, watch markers, GT cars, and Greenwich real estate.” — Jordan Fraade

from Breakingviews:

Hedge-fund-free – the latest Californian fad?

By Richard Beales

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Call it the Sacramento Model. In contrast to the famed Yale Model for endowments, Calpers, the $300 billion Californian pension manager, is exiting its $4 billion of hedge fund investments. For retirement funds, Calpers’ hedge-fund free regime could be more than the latest fad from the Golden State.

from Counterparties:

MORNING BID – I was dreaming when I wrote this…

The move by Roche to buy biotech company Intermune for $8.3 billion at a 38 percent premium isn’t going to make Janet Yellen happy, given her thoughts on the valuation of certain biotechnology and Internet retailing names. Still, with the Fed chair on board for low rates for some time given the slack situation in the labor market that the Fedsters keep talking about (basically, the unemployment rate, like the old grey mare, ain’t what she used to be), the long march to 2,000 on the S&P looks like it’s probably going to be over before long (it's been done on an intraday basis, and now we're just waiting on a close above that level), representing a tripling in that average in a bit more than five years and raising again all those questions about whether this all makes sense and if anyone cares anyway.

On the first point, well, nobody knows anything – earnings were generally strong in this most recent quarter, particularly when one expands the universe to the Russell 1000, where Credit Suisse points out more companies that are beating analyst expectations are growing sales, a sign of improved demand.

from Breakingviews:

Argentine opportunity cost is reason to cut deal

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Argentina’s debt negotiators need to think about opportunity cost. A failure to reach agreement with holdout creditors by Wednesday might not make things immediately worse. But it would set back recent efforts to curry favor with international financiers – efforts that could pay off richly for the Argentine economy.

from Breakingviews:

Soros takes sub-quantum leap into activism

By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Is George Soros turning activist? His $29 billion hedge fund has famously confronted governments. But facing off with a $1 billion U.S. oil and gas company is novel. The move gives underperforming corporate bosses another scourge to fear.

from Counterparties:

MORNING BID – Two to Tango

Wednesday's version of reading tea leaves involves Argentina's economy minister Axel Kicillof, who will be in New York to speak to the United Nations about Argentina's debt situation. In case the U.N. missed it, Argentina defaulted a while back - 12 years ago - and they've been fighting with a group of investors on paying some of their debt since. Which is a roundabout way of saying Kicillof may not just be in New York to talk to the U.N., not when NML, Aurelius and the other holders are all also in New York too, and the judge in question, and any special envoy he introduces to try to wring some kind of compromise out of this situation. There's a big coupon payment due June 30, and the country has been prohibited from doing so unless it pays the holdouts, which it has pledged not to do, giving it a 30-day grace period before being declared in default.

So the thing to watch for is something like a clandestine meeting between all parties to find a way to reach an accord, even if it's the kind of thing that comes down to the July 30 wire - when Argentina would be considered in default again (double-secret default, as Dean Wormer would have it, and really, if John Vernon were alive, he'd have solved this mess a long time ago).

from Breakingviews:

Take hedge fund exuberance with grain of SALT

By Jeff Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A wave of hedge fund exuberance should be taken with a grain of SALT. At SkyBridge Capital’s so-named Las Vegas confab this week, a near-unanimous confidence emerged amid moans about conference fatigue. Long-anticipated opportunities in M&A, bargains in Europe and collapsing correlations have finally arrived all at once, if some of the world’s richest investors are to be believed. The consensus itself may, however, give reason for pause.

from Counterparties:

MORNING BID: Mo-Mo and the Hedge Fund Reckoning

Who had the mo-mo mojo and who was crushed by the steamroller becomes evident late in the day Thursday when filings from major hedge fund managers – those things known as 13-Fs – are released.

Hedge funds were hit hard by the decline in the likes of Twitter, Tesla, Netflix and a lot of other names that long/short investors had favored throughout 2013 and early 2014, but their substantial decline cut the legs out of a lot of leveraged managers looking to continue to profit on the big run-up in that sector.

from Breakingviews:

Hedge fund customers’ yachts washing further away

By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Hedge fund customers’ yachts are washing further away. The flood of money – now $2.7 trillion – in hedge funds has squashed returns below public stock markets. Private equity doesn’t seem to be doing much better. Investors beware.

from Counterparties:

MORNING BID – Momentum stocks: A primer

Lots of stocks have been getting killed in the last several weeks and the declines don’t seem really like they’re set to abate headed into a week where news is again at a premium (sure, earnings, but it’s just a few names, and they’re mostly decidedly not in this category of the momentum names that fueled the rally in 2013). So the likes of Facebook, Tesla Motors, Netflix, Alexion Pharmaceuticals, and a bunch of others have seen their fortunes turn in the market. But at this time we thought it would be a good way to get into this topic again by trying to lay out just what the hell a momentum stock is in the first place, because they exhibit a number of characteristics beyond just “a stock that’s going up very high.” So here goes:

Growing Industries: Internet retail, internet security, solar, cloud computing, companies that use the cloud for providing services (think Salesforce.com), biotechnology, and anything else where the prospects for growth are big and related to a growing sector of the economy. Utilities don’t really qualify here, naturally. The reasons are two-fold: for one, in order to jump onto a rising growth story, you’d want to be in a place where the expected future returns outpace the returns you’re getting now, something you won’t get from the telephone company, someone who sells toothpaste, or the guys hooking up the electricity.

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