Funds Hub

Public pensions: the billion/trillion/TBC issue for the new fiscal watchdog

 The moment of truth has come: the new government is going to outline £6 billion of spending cuts and to make sure it will stick to deficit tackling measures, it has appointed a new fiscal watchdog, the Office for Budget Responsibility (OBR).

As part of its remit, the new agency will also ”have a role in making an independent assessment of the public sector balance sheet including analysing the cost of ageing, public service pensions,” the Treasury says.

Public employees retain a pension deal that entitles them to a portion of their wages when they retire, a right that private sector workers have mostly lost. This disparity has been described as ”pension aristocracy”. But while aristocracy is defined under strict parameters, you would need a title for starters, when it comes to finding out how much it costs to pay for public pension, covering the NHS and the police for instance, there are different schools of thoughts.

There is the official line: the cost of the public pension obligation over a year is about £20 billion a year or 20 percent of pay-roll, while fund manager Neil Record, who has spent years researching the issue, reckons it costs double  that.

Record also reckons that as of March 31, the outstanding public pension cost will be about £1.3 trillion, versus what the government is likely to put at £793 billion using the interest rates of 3.2 percent above inflation used last year.

Finding an investment yielding 3.2 percent above inflation is a tall order, according to Record. But using what he sees as a more realistic interest rate of 0.75 percent — the yield offered by a 20-year index-linked gilt — adds a further £500 billion to outstanding public pension liabilities.

In other words, optimistically the public pensions bill is about £ 800 billion but a more conservative estimate may add an extra £500 billion. The OBR will  shed some light on the point, putting finally a figure to the whole pension matter. Until then we can take comfort in the £6 billion  spending cuts, which — painful as they may be — have been quantified.

ML note – hedgies sell equities

Bank of America-Merrill Lynch’s latest “Hedge Fund Monitor” note shows managers are aggressively selling equities and building a record net long position in 2-year Treasuries.

According to the note, hedge funds last week continued to decrease aggressively their net long position in S&P 500 futures and added to net shorts in the Russell 2000.

In commodities they held onto their “crowded longs” in gold but added marginally to net shorts in copper, while in energy they cut their net long positions in crude oil and heating oil and marginally covered crowded shorts in natural gas.

Elsewhere, they added to shorts in 10-year Treasury notes and built a record net long in 2-years.

Meanwhile, market neutral funds’ market exposure dropped last week, while long/short funds are now modestly underweight equities.

In the brown stuff

The unfolding crisis in British politics makes for fascinating viewing for the populace and great work for journalists, but it also of course has potentially far-reaching implications in the financial sector.

As cabinet ministers resign and Labour MPs call for Gordon Brown to step down, several outcomes now distrinctly possible — Brown stays, a new Labour prime minister emerges or a general election is called and (if polls are correct) the opposition Conservatives win. The future direction of UK government policy is far from clear.

And while it may not exactly be topping the main contenders’ manifestos or dominating the discussion on the doorsteps, the future regulation of the hedge fund industry is also likely to be affected by any change in leader.

This week executives from London’s top hedge funds met with Treasury officials and the Financial Services Authority to discuss the UK’s position on the (at least in Britain) widely-derided draft EU law on hedge funds and private equity.

However, privately, some hedge fund executives are already looking ahead to a possible change of government — an election must be called in Britain within the next year — and the change of policy and potentially greater willingness to fight the EU laws this may bring.

The hedge fund community has tended to have closer ties to the Conservatives than to Labour (ex-Man Group CEO Stanley Fink was earlier this year appointed election fundraiser for the Conservatives). If, as the opposition is now demanding, a general election is indeed called as Gordon Brown’s authority is shaken then London-based hedge funds could find new support for a fight with Brussels.

(See also Draft chills hedgies and Politicians also to blame for crisis, say bankers)

Levered out

With the finalisation of new EU laws on regulation of hedge funds and private equity likely 6 months away, we should be prepared for an awful lot of hand-wringing and much talk of an industry exodus to lakeside retreats in Switzerland.

The latest word on this is that some managers have warned the Treasury that funds are already looking around for alternative locales where their love of leverage attracts less concern.

But are there really that many funds using prohibitive levels of leverage? Average prime broker leverage in the UK fell to around 1.15 times in October 2008, according to the FSA, although European lawmakers may end up judging excessive what hedge funds feel is relatively low. Meanwhile, hedge fund execs routinely enjoy juxtaposing relatively modest aggregate hedge fund gearing against the excesses of the banking sector.

We’ve written before that some funds are finding the thirst for investor due diligence such that they are moving into London to become more accessible to the new jitterati.

And although lawyers and administrators will keep plugging away in pursuit of the fees that would accompany a wholesale shift away from Curzon Street, there are some that seek to play down the risk. City of London Mayor Ian Luder told Reuters last week he thought hedgies would want to stay where the action is, and John Schneider, managing director of Navigant Consulting’s financial services practice, told us today that he simply did not believe there was “sufficient economic case” for hedge fund managers to leave.

(See also Relocation, relocation and Quality Control)

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.

Saving Hendry? Thanks but no thanks, says Hugh

It was always unlikely that a letter of advice was going to change the mind of maverick hedge fund manager Hugh Hendry.

And in his latest letter to investors, Hendry has smartly rebuffed any attempt to ‘save’ him from his bond investments.

The letter in question – Gregor.us’s monthly note, entitled “Saving Hugh Hendry” – praises the Eclectica co-founder and CIO as a “brilliant and colourful” hedge fund manager who saw the coming storm and took cover well in advance.

But it goes on to argue that the 27-year bull market in government debt, in which Hendry is a big investor, is probably coming to an end: