Unstructured Finance

The sultans of swing

Although most investors have been pleased with the steadily rising U.S stock market over the past six months, funds that profit when markets are convulsing are licking their wounds.

With market stress at multi-year lows, volatility hedge funds returned just 1.16 percent in the first quarter, compared with 3.7 percent for the broader hedge fund group.

Some of the volatility specialists are doing better than others by capitalizing on major market moves in Japan, for example. And some are doing better simply because they are ‘short’ volatility funds – they tend to perform better when markets are calmer. But those funds are now few and far between.

“If I were to turn the clock back there were a lot more short volatility funds than long in 2004,” said Joshua Thimons, a portfolio manager at PIMCO. “There are fewer now – 2008 wiped most of the face of the map.” Short volatility funds earn a risk premium by selling volatility in the markets, capitalizing on the fact “that some managers use it as tail hedging,” he explained. “These funds have done better this year, but there are fewer of them.”

The problem the long volatility funds face right now– and long vol funds now make up the lion’s share of the strategy – is that, quite simply, there’s not a lot of volatility. Even the short volatility funds require some degree of movement in the market for there to be a relative value opportunity to exploit.

Pay close attention to the timings in JPMorgan’s internal report

By late January last year, not even the London Whale himself thought the massive derivatives bets that eventually cost the bank $6.2 billion were such a good idea.

The Wall Street Journal reported today that Bruno Iksil, the credit trader nicknamed ‘the London Whale’ for the outsized positions he took in the small market for the CDX Index, warned his bosses a year ago that the size of his desk’s positions had gotten “scary.”

JPMorgan admitted as much in the internal report it released to the public on Jan. 16, but kept Iksil’s name out of emails quoted in the report, supposedly to protect UK privacy laws. The Journal got confirmation that Iksil was indeed the author of the emails, and that he made a presentation expressing his worries to the bank’s chief investment officer, Ina Drew, on Feb. 3, 2012.

Gundlach doesn’t whine over his stolen wine

By Jennifer Ablan and Matthew Goldstein

Who said bonds are boring? In recent days, Jeffrey Gundlach, the new king of the fixed-income world, has been dominating headlines with his lengthy CNBC interview on everything from counterparty risk to the market’s love affair with Apple stock to talk in the blogosphere about Gundlach’s pricey Santa Monica, Calif. residence being burglarized of more than $10 million in assets.

Against this backdrop, Gundlach’s firm, DoubleLine, hit a huge milestone this week as well, hitting $45 billion in assets under management.

For those who watched Gundlach’s TV interview on Wednesday they would never have guessed that the 52-year-old lost several high-end paintings and a 2010 red Porsche Carrera 4S in the burglary at his home a week earlier. The stolen goods include paintings by such artists as California Impressionist Guy Rose and landscape artist Hanson Duvall Puthuff. Also stolen were five luxury watches, wine and cash.

Jamie Dimon’s teflon coating

By Matthew Goldstein and Jennifer Ablan

Jamie Dimon’s coat of teflon is wearing well, even as the criminal and regulatory investigation into the London Whale trading scandal deepens.

Shares of JPMorgan Chase, which plunged more than 20 percent in the days after the bank revealed in May that the trading losses were much worse than previously believed, have rallied back. The stock is now trading around $38.66 a share. On May 10, when the bank disclosed after the bell that it had lost at least $2 billion on derivatives bets made by a group of London-based traders, the stock closed at around $40.

When Dimon was called before Congress to testify on the trading scandal in June, he was generally treated like the king of Wall Street by congressman and senators. At the time, bank’s internal probe had not yet found evidence that the three traders may have tried to hide their losses, so the fallout from the scandal appeared limited. The bank disclosed those finding to federal authorities before releasing its second-quarter earnings and restating its numbers for the first quarter.

UF Weekend reads – The PIMCO edition

Jenn Ablan likes to tell me that people are always writing about PIMCO and Bill Gross, the long reigning “king of bonds.” And when you think of it there’s a lot of truth to that assertion.

Gross’ mammoth $263 billion Total Return Fund gets endless coverage because–by its very size–it really is the bond market. It’s one reason why so much ink is spilled whenever the Total Return Fund has a month where investors pull more money out of the fund than put in.  And it’s why there’s so much analysis of what Gross & Co. are doing with Treasuries and mortgage-backed securities–and whether they are using lots of leverage and derivatives to boost exposures.

Then again, it’s hard to ignore Gross & Co. since the bond king and his co-partner and heir apparent, Mohamed El-Erian are on TV virtually everyday offering their views on just about anything doing with the economy.

Exchange traded derivatives could mean low Treasury yields for years

By Matthew Goldstein and Jennifer Ablan

Fears of rising interest rates  may be overstated, especially if federal regulators push ahead with plans to have a good chunk of derivatives traded through organized clearing houses.

Todd Petzel, chief investment officer for Offit Capital, which manages $6 billion for wealthy investors, argues that the need for traders to post collateral for derivatives contracts traded with clearing houses could provide a new buyer for all the Treasuries the Fed will print to fund the U.S. government deficit and help spur the economy.

In other words, a new source of buyer for Treasuries will emerge.

In a recent letter to Offit’s clients, Petzel says moving derivatives onto clearing house platforms “should reduce systemic risk.” But the move could have the “unintended” effect of creating a new buyer for Treasuries because right now collateral postings in most derivatives trades is irregular and n0t always required at the outset of a transaction.

UF’s Weekend Reads

We’re introducing a new feature on UF: a link to some weekend reads. Here is the first edition complied by Sam Forgione.

 

From The Guardian:

Andrew Balls, head of European investment for PIMCO from its London office, shares similar views on Europe and regulation with his brother, Ed Balls, of the British Labour Party. Brotherly love even extended to one of PIMCO’s major investment decisions: when Bill Gross decided to sell UK government debt in 2010, and Andrew Balls allegedly disagreed with the move, apparently backing his brother’s political status.

From The New Deal 2.0:

An eye for an eye, a rebuttal for a rebuttal. Bruce Judson argues that Jamie Dimon’s vengeful jab at the media for making less money than JP Morgan is unfair. For one, banks are government-backed while media companies aren’t.

PIMCO and BlackRock go strolling down K Street

By Jennifer Ablan and Matthew Goldstein

Wall Street may hate financial regulatory reform, but lobbyists certainly love it—especially ones working on behalf of giant asset managers PIMCO and BlackRock, which control a total of nearly $5 trillion in assets.

Last year, PIMCO and BlackRock both upped their lobbying expenditures in a big way.

The not-for-profit group OpenSecrets.org reports that Bill Gross’s Pacific Investment Management Company spent $450,000 on lobbyists last year, up from $120,000 in 2010. BlackRock’s spending on lobbyists rose to $2.5 million in 2011, up from $1.45 million in the prior year.

Deutsche’s he said/she said derivatives mystery

By Matthew Goldstein

Valuing derivatives–especially complex ones tied to esoteric assets–is always a tough proposition. And maybe that’s what a previously unknown whistleblower action involving Deutsche Bank is all about.

The other day I wrote about a big settlement Deutsche reached in that matter with a former trader, who claims some of the bank’s most esoteric derivatives were improperly valued to hide trading losses. Deutsche denies the allegation and says an internal investigation found no substance to the trader’s charge.

Then again, the bank did find some substance to Matt Simpson’s allegation that another former top trader based in London, Alex Bernand, may have done some improper trading in one of his personal accounts. As I reported, the bank in October 2009 quickly dismissed Bernand–its former global head of credit correlation–after a quick internal investigation substantiated much of what Simpson alleged on that point.

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