Securities Lending Today

Hedge Funds & Private Equity in or Out?

We are starting to see news that I consider to be indicative of a change.  I consider it to be a positive indicator that firms are taking divergent views of their investment direction.  It is no longer a one way bet of funds shutting and people pulling investments.  Not unbridled enthusiasm, but neither is it the death bells of doom.

The first hedge fund has shut down where the caused is rumoured to be  the VW/Porsche trade.  JO Hambro Capital Management is supposedly closing one of its two hedge funds partly because of  losses attributed to positions in VW.  The official line from the company spokesperson is that the fund’s closure is due to poor performance, dollar strength reducing European denominated returns and investors pulling assets from medium sized companies.

On the other hand, GAM has announced it plans on launching a new global long/short fund in February – the GAM Eclectic fund. 

USS, the second largest pension scheme in the UK is looking at boosting investments in alternatives, and CalPERS has said it is looking to get back into private equity deals.  Meanwhile, the Austrian APK pension fund has delayed its decision to increase its exposure to hedgies and private equity.

The CEO of Ignis – which was created through the merger of Resolution and Axial – has reported to Reuters that the firm plans to expand its short-selling capabilities into areas such as 130/30 funds.

Different and opposing views – slipping back into a normal market?  The stock market turnaround always precedes the end of the bad news.   Any future bull market depends on having bearish sentiment first.  Although it looks like my 8,000 floor on the Dow was a bit optimistic!

That's it for today - I am off to an Album Launch tonight.  I am SUCH a media darling!

P.S More jobs go

After the Citi announcements earlier this week, Blackrock announced it would be culling staff, and in London yesterday Morgan Stanley slashed jobs in the PB/Equity Finance business as part of its job cut program that were recently announced in the US. 

Stock Lending World Tour

In my Friday night wrap up for members of the Securities Lending Traders Network I recommended that people have low expectations for the G20 meeting this past weekend.  I didn't want anyone to be disappointed, but it looks like it was even more of a non-event than I thought.  Long talk, short action - a tried and true political strategy.  The good news is that eventually we will get to join in.  The global strategy seems to be Borrow. Spend.  Tax (this is where we come in!).

India is a great source for stories about securities lending, short selling and the like.  A constant stream of news comes from the market.  On Friday, the Finance Ministry said the sharp decline in their stock market during October was a fallout from the global financial turmoil rather than stock-lending by foreigners.  Hey, maybe we can get this person to go on a regulatory world tour? 

It's not just shorting stocks that are a problem.  The Loan Syndications and Trading association has accused Goldman Sachs of engaging in naked short selling of high yield, risky loans. 

When I was first involved in the securities lending business all those centuries ago, I dreamed about the day where it was important enough to be mentioned in my company's Annual Report.  It now regularly does appear in company reports but not the way I had hoped.  The latest is the ANZ Annual Report where the CEO mentions the review of their business and the actions against 13 staff.  Ummm, maybe "below the radar screen" is not such a bad place to be.

Speaking of CEOs, Vikram Pandit has announced another potential 50,000 job cuts from Citi through disposals and redundancies.

From Wednesday the restrictions on short selling non-financials in Australia will be lifted.  Expectations are also high for a removal of the restrictions in Taiwan as well.  Maybe this is a turning point?

More signs of a real market?  The Observer reported this weekend of a potential bid for property developer Taylor Wimpey.  The shares are up 7% as of writing this post.  A "deal stock" on the horizon?  Hurray!

Hedge Funds Unite

Image via Wikipedia

Yesterday five of the most powerful hedge fund managers appeared before a US congressional hearing.  They faced the same people that grilled Dick Fuld of Lehman and there was some expectation that things could turn ugly.  However, that didn't happen and no doubt there were a number of reasons behind that outcome.

It was pointed out by those testifying that the crisis we are currently experiencing wasn't caused by hedge fund implosions.  Hedge funds that have done poorly have lost money and many have closed down, but this is essentially self-correcting - some survive, many die, but that is business.  Ken Griffin from Citadel has been saying for some time now that it was the regulated financial firms that have caused the systemic risk, not the hedge fund community.  It also helped that there was a marked difference from the hedge fund testimony as compared to that of Mr Fuld which antagonised many.  The politicians took a constructive approach to the discussions and avoided rhetoric and didn't engage in the blame game.  You have to respect that as this hasn't been the case for most of the last 18 months.

Speaking of Lehman, this afternoon up to 2,000 Lehman creditors will convene in the O2 arena in London.  The administrators, PriceWaterhouseCoopers will be giving an update on the financial fallout from Lehman's collapse. The picture (above, right) is of the O2. I have been there a number of times for different events, and it's a great venue, but I think it could turn very ugly - there will be a lot of unhappy people including hedge funds representatives that might not be so polite and measured as their US colleagues were yesterday!

Back to hedge fund performance - EurekaHedge reports that hedgies lost $100 billion in October which equates to an average loss of 3.3% for the month.  Let me point out again that while this is bad, it compares to a 19% fall in the MSCI World Index. 

Have we reached the bottom of the market?  The Dow Jones has hit and crossed the 8,000 level three times now and immediately climbed back through it again.  Maybe we are finally there!

Counterparty Risk

I am working on the risk articles that I mentioned yesterday, and if you recall, the top of the list was counterparty risk.  The basic premise is that if your counterparty is still in business, you are OK, if not, I don't really care how much collateral you have, there is a problem. 

Clearly I am a predictor of the future and just to demonstrate that we are not out of the woods as far as counterparty risk issues are concerned, there was more action on the corporate front as several more restructurings occurred.

American Express became a US bank holding company following int he footsteps of Morgan Stanley and Goldman Sachs.  Then Sweden made a splash return to the nationalisation scene with the takeover of Carnegie, the region's oldest investment bank.  As you may recall, Sweden was the pace setter for action in a crisis as they went through a banking crisis in the early 1990's.  They nationalised a huge swath of banks and served as a lesson for the current global situation. This takeover follows a period of turmoil at Carnegie that resulted in regulatory action earlier this year.

Finally, AIG renegotiated its package with the US government.  This deal gives AIG new room to maneuver in the restructuring of its global businesses.  I was a fan of the original deal as it seemed to give AIG a real incentive to move quickly and pay back the Feds.  However a deal that is so tight it becomes unworkable isn't good for anyone.

Finally, you have to read the article in this weekend's FT by Jennifer Hughes.  She covers events surrounding the collapse of Lehman in September, and it is a must read.

No predictions for the moment, however I was once again surprised that so many people took the Chinese support package announced yesterday as a reason for the market to rally.  When will people learn that there isn't enough money for governments to continually bail out markets.  The best that they can do is to hope to take the violent swings out of market activity, but their constant intervention continually plays on the minds of traders and investors and until they get out and stay out, we will have weird market movements.

Risk Analysis

Image via WikipediI am going to do a series of posts about the various elements of risk.  That's all anyone is talking about these days, and frankly, quite rightly so.  It is the subject that I get most questions about and what prompted the idea is a very good question that started in the Discussions area of SLTN. 

What does Risk mean to you?  I plan to address at least the following areas:

• Counterparty Risk
• Collateral Correlation
• Collateral Reinvestment
• Liquidation
• Market risk
• Operational Risk
• Legal and Regulatory Risk

Any other areas you would like to see covered?  Just drop me an email on roy@stocklendingtoday.com, or post a comment on the site.  Remember, if you are posting a comment, you can use a nickname.

It's about the Revenue, Stupid!

Did you see the commentary Janney Montgomery Scott?  This broker has cut earnings estimates for State Street, Bank of NY Mellon and Northern Trust.  Hardly a surprise, and it needs to be looked at in the context of years of impressive performance.   Regular readers may recall that in early September I ran a survey asking whether people were planning for a better year in 2009 than 2008 revenue-wise.  The majority of respondents thought next year would be even better than the past one.   I don't think I'd get the same result if I ran it again today.  Do you?

And it is not just the lenders that are taking a revenue hit.  Morgan Stanley is predicting a 45-55% drop in revenues from hedge funds for investment banks in 2009.