Global Investing

The art of being passive

Hundreds or even thousands of  ”active” fund managers are competing to add alpha to beat benchmark indexes, be it in stocks, bonds or alternatives.

water

The market is so efficient, historical performance is no guide to the future. It’s nearly impossible to find a reliable method to pick advisers who deliver the best industry returns year in and out. There are also costs, from visible ones such as management fees and custody and administration expenses to “below water” costs such as trading commissions (due to higher turnover), bid/ask spread (price to buy, another to sell) and market impact costs (larger buy/sell orders affecting price).

Given this, is there a point in investing in active funds? What about just diversifing your assets through passive indexes?

This is the philosophy behind London-based fund Frontier Capital Management, run by Mike Azlen.

Azlen told a briefing in his Berkeley Square office this week how a passive approach beats active investment most of the time.

from MacroScope:

Economic Ties?

Ties

As rare as it is to get any two economists to agree, the chances are even slimmer of hearing three Nobel economics laureates concur.

And so it was that each of the award winning economists -- Eric Maskin (2007), Michael Spence (2001) and Robert Merton(1997) -- all had their own take on the legacy of three years of financial and economic crises when they spoke to a conference organised by Pioneer Investments  in London last week.

 To be fair, they broadly coagulated around the inevitability of greater regulation of banking and finance and also on the enormity of China's now imposing position in world economic affairs.

When is a speculator not a speculator?

A lot of fuss is made about the dangers of speculators in commodity markets. But who is a speculator and who isn’t is based on a definition drawn up in the early part of the last century in the United States. The definition is no longer valid and anybody looking at those reports should be wary of drawing any firm conclusions.

For a start the word “speculator” with negative connotations is applied to pension funds, which invest over the long term to provide retirement income for many people around the world. Hedge funds are normally speculators but if they have hold the physical commodity then they can say they are commercial hedgers. Taking this theme a little further many natural resource companies run their Treasuries as profit making centres, which encourages them to trade the commodities they produce.

The London Metal Exchange has said it won’t go down the route the CFTC has and publish a weekly report detailing speculative long and short positions because there is no clear definition.

from Funds Hub:

Short-sellers back in the money for now

For better or worse, hedge fund returns have a tendency to follow markets, in part because most long-short funds are net long most of the time.

rtxak52So after a huge rebound in the stockmarket this year, which has helped hedge funds make up some much-needed ground, October proved a difficult month when the market fell in the second half of the month.

After all 2009's growing optimism, investors were suddenly concerned that a withdrawal of government stimulus would harm an economic recovery in its early stages.

from MacroScope:

The word on Gordon Brown from Cayman

Gordon Brown is truly having a rough time. Rebuffed by the United States, International Monetary Fund and others for floating the idea of a tax on financial transactions at this weekend's G20 meeting, he has now got short shrift from the Cayman Islands.

McKeeva Bush, the veteran Caymanian politican who is now premier of the British Overseas Territory, popped in to the Reuters London headquarters for a chat this week. His main concern was to explain plans for making the islands an easier place for financial services personnel to live in. He would like some of those 8,000 hedge nearly 10,000 funds that are registered there to be more than just brass plaques. But, when asked, he also had time to dismiss the idea of a transaction tax out of hand.

"That's an old hat. I have been hearing about it for 25 years. It's just not practicable. It will not work."

from From Reuters.com:

Following the smart money

At least 20 of the 30 biggest hedge funds boosted their positions in financial institutions in the last quarter, a sign that Wall Street is ready to bet on more risky sectors in the hope of longer-term rewards.

The push into financials indicates fund managers including Steven Cohen and John Paulson -- closely watched as barometers of risk -- have shifted from routine merger arbitrage plays to directional bets with more reward potential.

More coverage analyzing the Smart Money:

Paulson's AngloGold bet points to inflation

Betting on a takeover of CF Industries Holdings

from DealZone:

Goldman’s Viniar: Why pay twice?

HEALTHFOOD-ASIA/Turns out Goldman Sachs is a staunch advocate of going organic -- when it comes to the money management business.

As Barclays auctioned off its Barclays Global Investors unit this year, Goldman was widely seen as a likely acquirer. That is until Blackrock In under Larry Fink emerged as the buyer with a $13.5 billion deal.

Lots of other money managers are expected to be sold, as the industry consolidates and cash-strapped banks look for valuables to pawn. But Viniar told analysts Goldman's preference is to grow the business without deals, and appeared to question the very idea of money manager deals.

Reuters Funds Summit: Madoff, the silent presence

Master-fraudster Bernie Madoff is the invisible guest at an annual fund fest in Luxembourg, the European capital for fund administration.

Even though the former Nasdaq chairman is under arrest thousands of miles away from this discreet financial centre nestled between Belgium, France and Germany, his presence was omnipresent. Fund managers just can’t stop mentioning him.

 One example: “The hedge fund bubble has popped. The market bubble has popped, and to put a cherry on the top you had the Madoff probe in December,” said Ken Kinsley-Quick from hedge fund Thames River Capital.

Reuters Funds Summit: The end of equities?

Another in our series of one-minute managers. This time it is Ken Kinsey-Quick, who heads up multi manager investing at Thames River Capital. He reckons the old days of buying and holding equities over the long term are gone for good. Is he right?

(more…)

from Funds Hub:

The attraction of the toxic

Nothing like a bit of toxicity. Wealth managers at Citi are telling their clients to watch for a burst of hedge fund interest in bad assets. They reckon the biggest opportunity for hedge funds is probably around the Public-Private Investment Fund, which is part of the huge U.S. plan to stabilise the toxic1financial sector.

The idea is that the U.S. government will lend money to investors to buy up toxic assets from banks, thus setting a market price. But the notes are non-recourse ones, which means that any default is limited to the actual cost of whatever collateral is require. In short, it limits liability if asset prices fall.

As a result of this, Citi says, hedge funds are likely to find the system attractive. But it warns: "Returns are likely to be volatile, at least in the near term. To take advantage of these new opportunities, investors need a long time horizon and a lot of patience."