Paul Singer Warns of Trouble, and Is Eager to Say ‘Told You So’ (link)
In his view, the Fed’s current iteration of quantitative easing paired with trillions of dollars of stimulus to counter the pandemic are setting things up for a fall. Rampant inflation will shock policy makers, stock pickers and bond investors, alike.
“‘Trouble ahead’ is signaled by a rare combination of low-quality securities, staggering valuation metrics, overleveraged capital structures, a scarcity of honest profits, a desperate dearth of understanding evinced by the most active traders, and economic macro prospects.
Elliott made money every month in 2020, even in the March rout, gaining 12.7% for the year, thanks to “a combination of portfolio-protection trades related to interest rates and gold, together with our core activities.”
And even as the world begins to recover from the pandemic, Singer urged keeping expectations in check. Certain industries and activities will continue to be significantly challenged -- in some cases permanently, he said.
The recovery will be stymied by virus variants and policies “that sometimes seem governed by short-term political pressures rather than what is best for society, short and long term.”
Hedge Fund ProMeritum Bets on Oman, Angola to Guard Lossless Run (link)
Pavel Mamai, founder of ProMeritum, is buying the junk-rated Eurobonds of oil producers Oman and Angola, which helped to generate a 7.2% return last year, its sixth consecutive annual gain since its inception in 2015.
Mamai is joining the hunt for assets that are less sensitive to core rates as bonds sell off around the world on signs inflation is returning. Oman is getting serious reining in spending, while Angola is on track for budget surpluses and credit rating upgrades.
The government’s ongoing commitment to fiscal consolidation and debt sustainability should lead to budget surpluses and a faster pace of debt reduction. Possible credit upgrades “would allow a larger investor base to buy Angolan eurobonds and should become the final performance catalyst.”
Promeritum allocated a fifth of its money to South African government bonds last year when they were among the worst performers in emerging markets. The risk paid off -- the nation’s local debt was the best performer among peers in the second half of the year, with a more than 25% return.
Hedge Funds Seen Luring Up to $30 Billion in Recovery This Year (link)
Hedge funds are likely to attract as much as $30 billion from investors this year, marking the industry’s first annual net inflow since 2017, according to Barclays.
“The large, established hedge funds are still going to get the bulk of the money, but compared to 2020, there will be more allocations to managers outside of existing relationships” Roark Stahler, U.S. head of strategic consulting at Barclays.
The hedge-fund industry saw $30 billion in net withdrawals last year, once they had regained their bearings, many investors had trouble redeploying their capital as the new socially-distanced environment made conducting due diligence harder.
Investors this year are seeking to reduce cash and fixed-income holdings, and are “highly interested” in illiquid alternatives. The most popular hedge-fund strategies this year are sector-specific equity managers, market-neutral stock-pickers and discretionary macro funds, Barclays found.
Respondents said they expect to have about 60% of their staff back at the office by the end of June. Still, they’re unlikely to take in-person meetings with fund managers until the second half of 2021 at the earliest.
World’s Biggest Wealth Fund Draws Dot-Com Parallel With ESG (link)
Nicolai Tangen says "if you compare the situation now with the situation before the year 2000, then the consensus that technological companies will do well in the future but the valuation went a little high, so it came down again, but the technological development continued.”
The analogy suggests that stocks and bonds touting environmental, social and governance credentials might be in for a correction in the short term, but have significant potential in the longer term.
Last year various groups raised a record $490 billion selling green, social and sustainability bonds. A further $347 billion poured into ESG-focused investment funds, and more than 700 new funds were launched globally to capture the deluge of inflows.
As of the end of January, the fund hadn’t managed to invest a single cent in the renewable energy infrastructure space, for which it’s had a mandate since 2019, to avoid buying at inflated prices. The goal is to reach 1% of the total $1.3 trillion fund.
“Art and science”: Prime Capital’s flagship strategy thrives with ‘alpha-first’ approach to hedge fund manager selection (link)
The aim of the PCAM strategy is to create a concentrated portfolio of blue-chip hedge fund managers, positioned in a low-beta, market neutral, relative value space, producing for clients a “sleep well” investment portfolio.
“We combine the fund in a way that gives us a constant return from the convergence bucket, another smaller return from the value bucket, and then in the divergence bucket, there is a small return in normal environments – but it should have an uplift in a crisis scenario that helps stabilise the overall portfolio.”
“We divested from one of the traditional CTA managers and replaced it with some additional capacity we got from our existing managers. We were also able to add another additional new quant manager that we were happy with.
He adds: “We don’t want to over-diversify the fund, but if we then see an interesting manager, we ask whether they are better than what we have in the book. Do they bring additional diversification?"
Fund innovation and incubators in a digital world (link)
The BVI incubator fund incorporates a ‘20- 20-20 criteria’ – it allows a maximum of 20 sophisticated investors, each of whom must make a minimum investment of USD20,000 but the fund must not exceed a cap of USD20 million.
Incubator fund structure provides the ability to setup and run a cost-efficient legal entity for trading an investment strategy with limited on-going obligations. It works well for the growing fintech and crypto-asset fund type.
Hedge fund managers will be seeking jurisdictions that do not over-regulate but rather support and encourage the asset class – and the BVI is doing just that and its progressive FinTech and Sandbox regime is testament to this fact.
An incubator fund does not need to appoint an administrator, custodian, investment manager or auditor providing significant cost advantages. The Incubator Fund can operate for a period of two years before it needs to convert to a more sophisticated structure.
An incubator fund is required to provide a written description of its investment strategy and a document containing certain risk warnings to investors, but it is not required to have an offering document. Restricted to sophisticated private investors and so perfect for savvy hedge fund and crypto investors.