Funds Hub

Got those Great Recession blues

Given the amount of money central banks have been pumping into the global economy you’d be forgiven for thinking we should be getting a pretty decent recovery right now. And whilst that seems true for emerging markets, market participants and consumers just can’t rid themselves of the feeling that there is another shoe yet to drop.

Citi’s Matt King encapsulated this general nervousness in his presentation at the CFA Institute’s European Investment Conference in Copenhagen on Tuesday. And according to King, there are some very good reasons why corporates and households just can’t bring themselves to load up on more debt.

“We’ve had the worst recession since the 1930s, but it doesn’t feel like it, because we haven’t taken all the pain yet,” he said. “We’ve simply shuffled the debt around – that’s why markets are still so volatile and correlations are so elevated.”

King argued that if this is a normal cycle, corporates will soon come under pressure from shareholders to start borrowing again in order to invest and expand. “The risk is this is not a normal cycle, but something different,” he said. 

He pointed to the lesson of Japan, where even when interest rates were cut to zero, corporates didn’t want to borrow because they had taken on too much debt in the boom years. He sees a similar problem in the West today where although banks are willing to lend, corporates and consumers have no appetite for more borrowing.

With austerity now the order of the day, King said it was difficult to see where growth would come from. In the past when governments have cut spending it was because that was the heart of the problem. But today it is corporates and households that have too much debt on their balance sheets.

“So if the government cuts back on the spending that has been propping up the economy, it could drive the economy back into recession. That’s what’s happening in Spain and possibly some of the other peripheral eurozone countries,” he said. “You can’t have an economy in which all three sectors are saving at the same time.”

CQS upbeat on credit

It’s not often that the bigger hedge fund firms share their market positioning, especially at a time when funds are struggling to find decent investment ideas.

So it’s interesting to see CQS, which runs $7.5 bln, offering its views on credit markets.

The firm upped its risk across investment grade and junk bond markets 3-4 weeks ago, and, despite taking off some bets during the rally, is still positive short-term.

It cites cheap valuations and also the condition of the economy — while many believe a severe double dip has been averted (hence the recent narrowing in credit spreads), this doesn’t mean the economic picture will be rosy. CQS argues growth won’t be strong enought to force up interest rates, meaning bond prices would still be supported.

From Reuters TV: PB’s fishing, but are Hedgies biting?

In a desperate attempt to win market share, prime brokers are courting blue-chip hedge funds with offers of cheap credit. But are hedge funds biting?

Counting sheep

By Lorraine Turner

Speakers at the Reuters Hedge Fund and Private Equity summit this week were asked “what keeps you awake at night” and the answers were wide-ranging, from “my 7-week old daughter” to “the next meteorite”.

Blowin’ in the wind

The timing of the Alternative Investment Management Association’s hedge fund disclosure initiative indicates just how strong the winds of change are blowing in hedge fund land.

Coming just a day after ECB President Jean-Claude Trichet called the credit crisis “a loud and clear call” for extending hedge fund regulation, the move shows the hedge fund industry feels it must be more active in deciding the future shape of regulation.

The move, which will include regular — probably quarterly – disclosure of systemically significant holdings and risk exposure to national regulators, goes further than that suggested at last month’s Treasury Select Committee by Marshall Wace chairman and Hedge Fund Standards Board trustee Paul Marshall, who had proposed aggregating data through prime brokers.

“The international agenda is starting to gallop away… We can see which way the wind is blowing and we want to exercise leadership,” said AIMA CEO Andrew Baker, adding the proposals had been in the pipeline since early in the new year.

But AIMA’s drive to do this also serves to highlight the low number of funds that have signed up to the HFSB’s voluntary code – a fact seized upon by last month’s Treasury Select Committee.

AIMA is proposing unifying all the industry standards — AIMA, the HFSB, IOSCO, PWG and MFA — into one code. Their fear is that regulators may do this for them.

A loud and clear call

It may not have been a massive surprise, but ECB President Jean-Claude Trichet had an unwelcome message for hedge fund managers today.

The current crisis is, apparently, “a loud and clear call” to roll out regulation to all important market players, “notably hedge funds and credit rating agencies”.

For those hedge fund managers who felt, perhaps with a degree of justification, that their industry had been relatively blameless in precipitating the current crisis, that call may have been somewhat quieter and more muffled.

But the drumbeat of those calling for greater hedge fund regulation is growing and it seems increasingly likely that hedge funds will face a new raft of rules in the not too distant future.

Hedge funds have attempted to justify the slow take up of volunatry codes aimed at staving off heavy-handed regulation, but day-by-day the industry looks like it may have missed the chance of a quiet life… well, relatively speaking.