They may be placing smaller bets, but sovereign wealth funds were back with a vengeance in the third quarter.

Global corporate mergers and acquisitions activity involving sovereign wealth funds jumped sixfold to nearly $22 billion in the quarter, with 37 deals completed. Global announced M&A volumes involving state investment vehicles stood at $21.8 billion, up from $3.6 billion in the second quarter, according to our data.

The number of deals more than doubled from 17 in the April-June period. Only two weeks into the fourth quarter, there were five pending or completed deals with a combined value of $164.7 million. At the height of the boom in the first quarter of 2006, sovereign wealth funds sealed 35 deals worth $45.7 billion.

Managers at sovereign wealth funds -- those who have kept their jobs -- probably feel they have a lot to make up for, having lost most of some $80 billion they poured into banking shares before the peak of the crisis.

I’ve been building up a couple of dummy funds on Reuters’ new Portfolio tool. Not only is it a welcome diversion from actual work, but it allows me to test the mettle of the fund managers we speak to, and check out the guidance offered by the Lipper Leader fund rankings.

One of my portfolios uses the stock picks and short ideas offered up by the managers we interview for the many FUND VIEW stories which dot the Reuters wire. The other simply picks some of the funds which score highest across the Lipper fund sectors.

In theory, it gives me ample room to lay blame elsewhere when the dummy funds inevitably go belly up and I’m forced into a fire sale of assets to repay my dummy investors with dummy money. In truth though, I’m going to set the asset weightings and decide when to buy and sell so any abject failures will be more fairly laid at my door.

The early results, in fact, are pretty encouraging.

The Fund Viewer stock picking portfolio has delivered me a comforting 8 percent return since I put it up on Sept 25 (my wedding anniversary — must be a good omen) and that’s with a ridiculously cautious 36-percent weighting in cash, as well as some equally ridiculous single-stock exposures caused by misreading the denominations. (That little ‘p’ is pence folks, big ‘P’ is pounds)

My Fund Leaders fund of funds has even less of a track record, but has still managed close to 2 percent returns since Oct 6.

Both funds are outperforming the FTSE Europtop 100 index, my chosen benchmark, by more than 18 percent on a three-month view. I’ve not exactly been scientific about choosing the index, but fortunately my dummy investors have notoriously poor due diligence standards.

Get on to the portfolio page, see if you show up my performance record as a painful underachievement, and try to top the Reuters Portfolio league.

Doubtless the FSA would like me to point out that the value of investments can go down as well as up. Mind you, anyone not conversant with that little peccadillo of the markets has either been asleep for the last year and a half or houses a memory so short-term they may well have forgotten the first half of this paragraph anyway.

  By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

Even for an American who's not wealthy, Geneva has a reputation as a global centre for wealth management - the place the world's rich come to stash their money and (they hope) make it grow.

    But you don't necessarily expect it to be so aggressive -- after all, the rich tend to be demure when it comes to their banking.

    Imagine one reporter's surprise, then, on arriving in the airport in Geneva and seeing bank ads everywhere. Think of the casino adds in Las Vegas's McCarron Airport or the technology ads in San Jose's Mineta Airport: it's the exactly the same in Geneva, only with wealth managers.

    Look left - there's UBS. Look right - there's Julius Baer. Look up in the baggage queue - there's a Swiss bank that emphasises a focus on the Arab world. A complete unscientific guesstimate suggests the display ads in the terminal run about 75 percent wealth management and 25 percent fine watches. (No surprise that every other storefront in the Ville Centre area of Geneva has watches on offer.)

    There is one plus to all of the bank ads in the airport for the less wealthy though. Tell your cab driver to head toward their addresses and you're likely to find the city's best cafes.

The mood was not so much one of indignant fury but quiet disappointment in Founders Hall for the Candover AGM yesterday. 

A contrite and clearly uncomfortable chairman Gerry Grimstone took the stand – looking like a schoolboy caught with his hand in the biscuit tin, wishing he could be anywhere else. 

He said he had lain awake at night re-examining the decisions that have devastated the share price and brought the company to the brink of sale. And it was easy to believe him. 

Company founder Roger Brooke spoke from the floor of his personal hurt and sadness at the damage to the company’s reputation.

“I do find it odd that the board was not aware there was a financial crisis,” added his co-founder and past chairman Stephen Curran.  

Other shareholders expressed their polite astonishment at the “lack of foresight” from the board of directors, and questioned how the listed parent could have made a 1 bln euro commitment to the Candover 2008 fund last August without having any say in how of when the money was spent. 

“We were wrong, the board was wrong, they were wrong,” said Grimstone, indicating that too much money was invested by Candover funds in 2008 and too little more was returned to investors. 

Another shareholder asked whether the board had followed the market like sheep in borrowing to fund its commitment. 

“If so you should be rounded up and put in sheep dip,” he said. 

“I have never been sheep-dipped – it doesn’t sound a very pleasant process,” grimaced Grimstone. 

If Nigerian banks appear to have suffered disproportionately in the global financial crisis, maybe they have Heathrow Terminal 5 to blame.

Nigerian banks were advertising their services on billboards in Terminal 5 last year, and travelling investors felt it showed the banks were rashly trying to keep up with international investment banks in aiming for a global profile, causing many to sell, a banker specialising in Africa told journalists this morning over breakfast.

“Those adverts were a sign to sell Nigerian banks,” Luca del Conte, executive director in treasury and capital markets at Medicapital Bank said.

“We have about 100 institutional investors, and of 50 funds that we speak to actively, more than half mentioned this.  Once capital markets started shaking, funds did not ask any more questions, they just sold.”

Medicapital says the banking sector represents over 60 percent of market capitalisation on the Nigerian Stock Exchange, but daily volumes on the exchange have dwindled to $10-15 million a day, suffering also from a fall in the oil price, compared with $100 million a year ago.

Reuters released its February asset allocation polls today, showing an ever so slight increase in average holdings of stocks. The signficiance, however, was not in the small increase but in the fact that there was no decrease. February has not been kind to riskier investments, with a drumbeat of poor economic news combining with new fears about banks to send global stocks to fresh six-year lows.

Dig inside the various polls — they come from the United States, Britain, Japan and continental Europe — and you find different moods. Three-quarters of U.S. managers polled, for example, made no change at all in their allocations over the month. Europeans, meanwhile, are so gun shy that they are holding more than twice as much cash as their long-term average. Japanese investors were a bit more optimistic than a month earlier, apparently because fears of deep trouble in China are easing.

What it all says is that investors are generally sticking to the sidelines, but are not being particulary spooked by continuing bad news. So is that the bottom? Or maybe familiarity breeds contempt?

Equities may be having a stop-start kind of month, but investors do seem to be more willing to take on risk than before. The latest numbers from EPFR Global, a tracker of investment flows, show high-yield bond funds raking in the money in the second week of January. A net $766 million flowed into the HY funds tracked by the firm. At the same time, a net $578 million flowed into U.S. municipal bond funds.

The drive behind these flows is a mix of a desperate search for yield and a belief that the risk might well be worth taking. Investment grade corporate debt is considered to be priced at Armageddon levels. That is, the price assumes too much trouble ahead than is likely. This has led, for example, to a monthly record in new bond issuance in January in Europe.

High yield is not pricing in quite as extreme a default rate from a historial perspective. But it is still evidently attractive, hence $3.38 billion in global net inflows over the past seven weeks.

Municipal bonds, meanwhile, may be getting a boost from expectations for the incoming Obama administration. EPFR says U.S. investors are anticipating higher taxes, which would help municipal finances.

Investors learned the wrong lesson from the dotcom bubble, and ended up blowing another. 

That’s the view put forward at the CFA Institute’s conference in Amsterdam by Ben Inker, head of asset allocation at GMO. He believes investors became so enamoured of diversification – which seemed to work like a charm for the large US university endowment schemes – that they ran headlong into risk asset classes and blew a giant risk bubble. 

Inker argues that because investors rushed into risk asset classes indiscriminately, they ended up paying for the privilege of taking risk.

“What you cannot do is say: ‘Because I’m diversified, I can take more risk.’ But after the internet bubble, diversification became the mantra,” he said. “Investors looked uncritically at the idea of having a diversified portfolio. That made the risk/return curve negatively sloping.” In effect, investors were paying more to take on risk. 

A small crumb of comfort for those diversified investors surveying the remnants of their portfolios, is that markets have fallen so far you are now once again being paid to take on risk. But is there anything they could have done to avoid this unpleasant sequence of events in the first place? 

Inker suggested they should have gone short risk. Unfortunately, as he conceded, it is not possible for the whole market to do this. 

Lesson learned?

How bad will hedge funds’ year-end performance figures look?

According to Credit Suisse/Tremont, funds fell 6.30 percent in October after a 6.55 percent drop in September, taking losses for the first ten months to 15.54 percent.

Seven strategies are now nursing double-digit losses, with only two — managed futures and dedicated short bias — in positive territory.

Even global macro, which bets on the likes of global equity markets, world currencies, sovereign debt and commodities, is now back in the red. These funds are down 7.10 percent after substantial losses in September and October.

Many investors who have not already pulled out their money will be keenly watching year-end figures as they review their portfolios.

The last time hedge funds lost money over a calendar year, according to Hedge Fund Research, was in 2002 when they fell 1.45 percent.

The questions for hedge funds are how bad will it look in 2008, and will it be any better in 2009?