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Deutsche Bank quants explain hedge fund underperformance
Hedge Funds
<p>The market environment for hedge funds in 2015 has been “marked by an acute and prolonged de-risking episode,” a recent quant piece from Deutsche Bank notes. In fact the bank’s “volatility factor,” a measure that approximates high risk and low risk equity performance, reveals the most recent 2015 episode of de-risking was “deeper than that during (second half of) 2014, and its impact on fundamental equity managers was severe,” with its model hedge fund portfolio underperforming the general market by -4.8 percent since June.<br /> Hedge fund underperformance is not a new issue, a commonality in the recent quantitative easing period<br /> Separate analysis highlights a negative gross average monthly negative performance of -0.96 for the Barclay Hedge Fund Index. During this same period, June to October, the S&amp;P 500 delivered an average negative monthly performance of -0.146. This leads to an average monthly divergence between stocks and a hedge fund index of -0.814.</p> <p>The level of underperformance highlighted by Deutsche Bank might not be as significant as one thinks. Using the period of quantitative easing as a benchmark, this is visible when comparing the performance of the S&amp;P 500 Total Return Index to that of the Barclay Hedge Fund Index where investors can witness what is a very different level of performance. In 2014 the S&amp;P was up 13.69 percent versus the hedge fund index, up only 2.88 percent. The return differential resulted in an annual -10.81 percent underperformance by hedge funds, which is actually close to the annualized underperformance by hedge funds in the June to October period cited in the Deutsche Bank study. In other words, the recent underperformance by hedge funds, which are typically correlated to stocks nearly ¾ of the time, exhibited a significant lack of correlation on a price appreciation basis in 2014. The same thing happened in 2013, when the S&amp;P 500 Total Return Index was up 32.39 percent yet hedge funds were up only 11.12 percent, for a massive underperformance of -21.27 percent.</p> <p>In other words, at least when measured during the last several years of what has been called market numbing quantitative easing, the vast average of hedge funds have been significantly underperforming a simple investment in a the S&amp;P 500 index. While the Deutsche Bank report only focused on the June through October period, what they were really touching on is a much wider performance gap issue. The question is, with most hedge funds long only – and long only hedge funds being among the worst performers on the HSBC Hedge Weekly performance ranking – why were hedge funds underperforming by so much?<br /> Deutsche Bank says hedge fund underperformance triggered by volatility factor, which is different than VIX volatility<br /> The significant recent underperformance by stocks since June was triggered, in large part, by exposure to volatility. Just over half the June to October underperformance of Deutsche Bank’s model hedge fund portfolio to stocks, 2.6 percent over five months, is attributable to Deutsche Bank’s volatility factor exposure, the report said.</p> <p>It was almost a year ago that the Deutsche Bank Quantitative Strategy Research department, headed by Allen Wang, created the volatility factor formula, a ratio of “long high risk stocks / short low risk stocks.” In regards to the thesis for hedge fund underperformance, the validity of the measure is, in part, dependent on its record as an indicator of how actual stock market volatility impacts hedge fund performance. This would require testing of the Deutsche Bank volatility measure relative to hedge fund performance and actual CBOE VIX measured volatility.</p> <p>From Deutsche Bank’s perspective it is this volatility factor that “has been a major driver of systematic factor returns during 2015.”<br /> …Standard quantitative factors (styles) have, on average, tilted towards low volatility throughout the year; contributing to a large portion of their returns. Notably, momentum has a strong low volatility exposure which has c
Foundations and endowments suffer in Q3
Asset Management
<p>Foundations and endowments returned -5.23% in the third quarter, the worst performing quarter in four years.</p> <p>Trusts in the 1,500 plan Wilshire Trust universe had a median -4.53% return in the third quarter, down from -0.04% in the second quarter, reports Pensions &amp; Investments. Foundations and endowments were hit the hardest, while Taft-Hartley health and welfare plans performed the best of the group, returning a median -2.79%.</p> <p>Corporate defined benefit plans returned -3.62% and public defined benefit plans returned -4.81%. Taft-Hartley DB plans suffered with -4.81% returns.</p> <p>The second and third quarter of 2015 are the first consecutive negative quarters since 2008 and 2009.</p> <p>The fall in global equities hit all the plans last quarter. Foundations and endowments had average domestic equity allocations of 32.23% and international equity of 12.96%. These investors have had a median return of -1.37%  for the 12 months ending in September.</p> <p>Taft-Hartley health and welfare funds though are notoriously conservative, holding a medium U.S. bond allocation of 56.28%. These funds have also performed the best in the 12 months ending in September, with a median return of 0.43%.</p> <p>&nbsp;<br /> Photo: Emery Way </p>
Video: Goldman's Kostin says dividend-paying stocks will outperform in 2016
Capital Markets
<p>David Kostin, chief equity strategist at Goldman Sachs, says companies that pay big dividends and engage in stock buybacks will out perform in 2016. This is hardly a new trend, he tells CNBC's Sqawkbox.</p> <p>"Historically speaking, it's been a great strategy for the last 20 years. Seventy percent of the time in the last 20 years, the market has rewarded those companies that have returned cash — dividends and buybacks — as compared with those companies that are investing in [capital expenditures] or pursuing M&amp;A," Goldman's chief U.S. equity strategist told CNBC's "Squawk on the Street."</p>
Prudential Investment changes name with global look
Asset Management
<p>Prudential wants you to know that its investment management business is global.</p> <p>The $947 billion Prudential Investment Management is changing its name to PGIM, effective January 4. Prudential Investment Management currently operates in 16 countries, across a span of asset classes, and plans to expand its global presence.</p> <p>“The PGIM name represents our scale, and our conviction to deliver time-tested, long-term solutions and outcomes for institutional and retail investors,” says David Hunt, CEO of Prudential Investment Management.</p> <p>Prudential Fixed Income will use the PGIM name outside of the U.S., where it is currently known as Pramerica. Prudential Mortgage Capital Company will be known as PGIM Real Estate Finance, and Prudential Real Estate Investor will be called PGIM Real Estate.</p> <p>Prudential Investment Management will also be housed in a new headquarters in Newark, N.J., near the Prudential global corporate headquarters.</p> <p>&nbsp;</p> <p>&nbsp;<br /> Photo: istock <br /> &nbsp;</p>
Billionaire spends more than 10% of net worth on painting
Lifestyle
<p>Eccentric Chinese billionaire Liu Yiqian spent more than 10% of his net worth on a Modigliani painting Monday.</p> <p>Liu purchased Modigliani's Nu Couche, or Reclining Nude, at a Christie's auction for $170.4 million, the second highest price ever paid for art in an auction, reports BBC.</p> <p>Liu is a self-made man and former taxi driver now worth about $1.4 billion. After making his fortune trading stocks in the 1980s and 1990s, Liu became an ambitious art collector. He and his wife have opened two art galleries in Shanghai, one of which will display Nu Couche for its fifth anniversary, reports the New York Times.</p> <p>In the past, Liu has spent his money flippantly. Last year he drank from an ancient ceremonial cup he purchased for $36 million. Liu reportedly purchased both the cup and his new painting with an American Express credit card, earning himself millions of rewards points. Whatever he spends those points on will certainly be another attention grabber for Liu.<br /> Photo: Rodney<br /> &nbsp;</p>
AMG buys BlueCrest’s stake in Braga’s Systematica
Hedge Funds
<p>Affiliated Managers Group disclosed it has agreed to buy a majority stake of the equity held by Michael Platt’s BlueCrest Capital Management in Leda Braga’s Systematica Investments. Braga’s venture recently surpassed the assets of her former employer, overseeing $8.8 billion as of Oct. 1, compared with BlueCrest’s $7.9 billion.<br /> Systematica trims ties with BlueCrest<br /> Braga’s venture was spun out of Platt’s firm in January. Platt left JP Morgan Chase to start BlueCrest in 2000, and Braga joined him the following year. BlueCrest was one of Europe’s three biggest hedge funds in the aftermath of the financial crisis. The firm has faded in recent years and sustained billions of dollars in withdrawals after lackluster returns.</p> <p>British hedge fund manager Michael Platt’s firm was once managing $37 billion. In May, New Jersey’s public pension plan sought to redeem its full interest in BlueCrest Capital International, stating that the fund “underperformed expectations.” On the contrary, in May, bucking the price persistence trend, Braga cracked into the top 20 hedge funds.</p> <p>Last month, a person familiar with the matter disclosed that Braga’s BlueTrend fund returned 5.9% in the first nine months of the year. Platt’s biggest fund, AllBlue, invests in Systematica’s BlueTrend fund. AllBlue gained 2.9% this year through October, beating the 1% advance in the Bloomberg Global Aggregate Hedge Fund Index.</p> <p>As part of the deal unveiled Sunday, Platt’s BlueCrest will be selling most of its stake in Leda Braga’s Systematica to AMG. However, the terms of the deal were not disclosed. According to a filing with U.S. authorities, BlueCrest held 25% to 50% of Systematica’s equity, and hence the latest deal would mean the firm would be left with less than 25%.</p> <p>Via S&amp;P CapIQ<br /> AMG’s rapid expansion over the past decade<br /> At the end of September, Affiliated Management Group, Inc., had $619 billion in assets. The firm, which takes equity stakes in investment firms didn’t disclose the size of the stake it was buying. A person close to the firm indicated that the firm typically acquires stakes of between 25% and 30% in alternative-investment firms.</p> <p>AMG announced Sunday that it had agreed to acquire a majority of BlueCrest’s remaining stake in Systematica for an undisclosed amount. Braga and other senior executives will continue to control and hold most of Systematica’s equity. AMG also announced Sunday that it has agreed to buy equity stakes in Abax Investments.</p> <p>According to The Wall Street Journal, the latest deal for the stake in Systematica came about after AMG Chief Executive Sean Healey met Mr. Platt for dinner at 5 Hertford Street, a private club in London’s upmarket Mayfair district, in the spring. Braga said a key recommendation had come from Feldstein, chief executive of BlueMountain Capital Management LLC, who launched his firm out of BlueCrest.</p> <p>Braga indicated that working with AMG will help her make management decisions such as setting rewards for staff to encourage growth and cultivate future leadership.</p> <p>This article was originally published by ValueWalk. <br /> Photo: uberof202 ff<br /> &nbsp;</p>
Movie producer gets inside Buffett's 'Beautiful Mind'
Lifestyle
<p>Warren Buffett says his greatest triumph is tomorrow.</p> <p>The Oracle of Omaha had plenty of witty quips for movie producer Brian Grazer during an interview Friday, reports the New York Post. Grazer, the producer behind "A Beautiful Mind," conducts weekly "curiosity conversations" with successful strangers. For Buffett, Grazer did the interview in front of 1,500 NetJets shareholders, one of Berkshire Hathaway's companies.</p> <p>Buffett also told Grazer that he's "a book with legs" when it comes to reading. And for investing, "I know in 15 seconds if I can add value to a company...Then I have to see passion and love," Buffett said.</p> <p>&nbsp;<br /> Photo: David Shankbone</p>
John Hussman: Pyschological whiplash
Asset Management
<p>Investors have experienced a great deal of whiplash in recent months. After a rapid but relatively contained retreat in August and September, the stock market has rebounded to within 2% of its May record high. Only weeks ago, investors were concerned about economic deterioration. As of Friday, strength in nonfarm payrolls has suddenly convinced investors that a December rate hike by the Fed is all but certain.<br /> From an economic standpoint, my impression is that this whiplash is largely psychological, and has very little to do with any underlying change in economic fundamentals. Instead, it reflects a tendency to respond to all economic data as if it is coincident (reflecting the current state of the economy) rather than carefully distinguishing leading data — primarily new orders and order backlogs, from coincident data — primarily income and production, from lagging data — employment figures, particularly payrolls and the unemployment rate, which are essentially the most lagging data series in economics.<br /> The overall signal we draw from the economic data continues to lean much more toward deterioration than to strength. Friday’s data was undoubtedly a blowout number, at 271,000 new jobs, but it’s important to recognize that payroll data is a lagging, not leading, measure of economic activity. Indeed, extremely high payroll figures often immediately preceded recessions prior to 1990, though we haven’t seen that in recent economic cycles. What’s true most generally is that economic data proceeds in a sequence that moves from financial indicators, to new orders, to production and income, and finally to employment. As I noted in February:<br /> “The combination of widening credit spreads, deteriorating market internals, plunging commodity prices, and collapsing yields on Treasury debt continues to be most consistent with an abrupt slowing in global economic activity. Generally speaking, joint market action like this provides the earliest signal of potential economic strains, followed by the new orders and production components of regional purchasing managers indices and Fed surveys, followed by real sales, followed by real production, followed by real income, followed by new claims for unemployment, and confirmed much later by payroll employment. Stronger conclusions, particularly about the U.S. economy, will require more evidence, but from a global perspective, these pressures are already quite evident.”<br /> An evaluation of this sequence may provide a somewhat more tempered view of economic conditions than Friday’s employment figure, taken by itself, might suggest.<br /> First, recognize that in the context of divergent market internals across a broad range of individual stocks, the kind of whipsaw stock market behavior we’ve seen in recent months has historically been more characteristic of market topping processes than not. One way to measure this whipsaw movement is to examine cumulative absolute weekly percentage changes in the market over the most recent 10-week period. Those familiar with nonlinear analysis will recognize this as a sort of “fractal ruler”; much like measuring the length of a coastline by adding up all of the edges, which capture the irregular shoreline better than simply drawing a straight line. When significant market whipsaws have occurred along with recent overvalued, overbought, overbullish conditions and flagging participation from the broad market, steep market losses have often followed. We observed the same thing in 1973, 1987, 2000 and 2007. Still, a clear improvement in market internals would defer our immediate concerns.<br /> Read more at Advisor Perspectives.</p> <p>Photo: Wally Gobetz</p>
How to avoid the pharmaceuticals fallout with these three ETFs
Asset Management
<p>Investors that closely follow the healthcare sector are most likely familiar with the carnage at Valeant Pharmaceuticals International Inc. (NYSE: VRX). Shares of the controversial pharmaceuticals maker have lost nearly two-thirds of their value over the past 90 days, plaguing some hedge funds and exchange traded funds along the way.</p> <p>On Monday, shares of Mallinckrodt PLC (NYSE: MNK) slid more than 17.4, a decline, triggered by a tweet from Citron Research that read, "At these prices $MNK has signif more downside than $VRX-- far worse offender of the reimb sys - more to follow. VRX can't live in a vacuum."</p> <p>Clearly, Citron expects more downside for Mallinckrodt, another pharmaceuticals favorite among the hedge fund ...</p> <p>Full story available on Benzinga.com<br /> Photo: e-Magine Art</p> <p>&nbsp;</p>
Daily Scan: Asia caps the day mixed; European shares climb
Capital Markets
<p>Updated throughout the day</p> <p>November 10</p> <p>After a long and valiant fight to remain deep in the green, the Shanghai Composite finally succumbed to all the bad news reported by the nation and finished the day down 0.18%. Hong Kong’s Hang Seng Index meanwhile slumped a massive 1.43%, while over in Japan, bargain hunters and a weak yen led the Nikkei Average to gain a surprise 0.15%. As for the rest:</p> <p> Hang Seng China Enterprises Index: -1.82%<br /> Shenzhen Composite: +0.82%<br /> Straits Times Index: -0.42%</p> <p>Elsewhere in the world, European bourses are brushing off China’s weak inflation data to notch up some pretty decent gains. At pixel time, the U.K.’s FTSE 100 is up 0.27%, while Germany’s DAX 30 and France’s CAC 40 are up 0.39% and 0.44%, respectively. U.S. stock index futures meanwhile are narrowly higher with S&amp;P 500 contracts climbing 0.05%, DJIA futures nudging 0.06%, and Nasdaq contracts advancing 0.02%.</p> <p>Here’s what else you need to know:</p> <p>Cameron warns EU over U.K. terms. Prime Minister David Cameron has said that Britain will question its commitment to the European Union if his demands for changes to the U.K.’s membership are rebuffed. Wall Street Journal (paywall)</p> <p>China inflation figures miss estimates. Chinese consumer inflation climbed just 1.3% in October, slower than September’s 1.6% reading and lower than a Wall Street Journal survey of a 1.4% gain. Producer prices meanwhile slumped for the 44th-straight month. Wall Street Journal (paywall)</p> <p>Japan’s current account surplus shrinks. The land of the rising sun’s current account, a gauge of trade and financial flows, came in at just Y1.468 trillion ($11.9 billion) in September, 11% less than October’s showing. The figure was much less than the Y2.15 trillion reading analysts had expected. Financial Times (paywall)</p> <p>SCMP changes editor-in-chief amid staff exodus. In a move one employee called “staggering,” the South China Morning Post announced that it will be replacing Wang Xiangwei, the English-language paper’s editor-in-chief the past four years, with Tammy Tam beginning January 2016. The switch comes in the middle of a massive staff exodus which includes several award-winning journalists. HKFP</p> <p>Ericsson and Cisco form a $1 billion alliance. The Swedish mobile maker and U.S. teleco have formed a business and technology partnership that should generate additional revenues of $1 billion by 2016. The deal should strengthen the pair against China’s Huawei and Finland’s Nokia. Reuters</p> <p>Myanmar’s NLD confident of victory. Myanmar’s opposition National League for Democracy says it expects to win about 70% of seats. Party leader Aung San Suu Kyi said: “I think you all have the idea of the results.” BBC</p> <p>Israel’s Netanyahu still committed to a two-state solution. U.S. President Barack Obama and Israeli PM Benjamin Netanyahu said on Monday that they have not given up on the Middle East peace process despite the poor prospects of reaching a lasting agreement. Financial Times (paywall)</p> <p>Russia accused of state-sponsored doping at Olympics. The World Anti Doping Agency has accused Russia of operating a huge state doping programme that sabotaged the London 2012 Olympics, adding the country should be banned from athletics. Guardian</p> <p>Volkswagen gives $500 to car owners. The car manufacturer is handing over the money to VW car owners affected by the emissions cheating scandal, but owners say it’s too little too late. The $500 will come in the form of a gift card that can be used anywhere. Owners will also get a $500 card to be spent at VW or Audi dealerships, and free 24-hour roadside assistance for the next three years. CNN</p> <p>Brevan Howard cuts 50 support staff. The European hedge fund has laid off 50 people globally in back and middle office positions. The firm suffered its first annual loss in 2014, and the fund was down 0.7% in September. Reuters</p> <p>Wall Street bonuses likely to fall for the first time since 2011. A report by Johnson Associates predicts debt traders w