Also Noted: Spotlight On... Hedge funds love ETFs too News From the Fierce Network:
Today's Top News1. Asset managers face challenge of a lifetime
For asset managers, these are uncertain times. As QE3 winds down, we just might be on the verge of a new era in investing. Managing the transition from the old to the new era will not necessarily be easy. The looming change has the power to redefine the industry in terms of premiere funds and fund managers. We've already seen some strong indications of that. Consider Deepak Narula, who rocketed to fame as head of Metacapital Management, which was ranked the top performing hedge fund in 2012 with a gain of 41 percent. The firm's $1.5 billion flagship fund was unfortunately down 5.66 percent for the year through the middle of the year. Other asset management companies face similar challenges. MoneyBeat explored this recently and delivered some choice quotes. "Life is going to be much less simple than it used to be," one CEO was quoted. "We have to be experts at capturing the multiple carry trades wherever they are. We'll have to be experts at dynamic management in terms of asset allocation. We have to be experts at timing in and out of equity markets and not being in denial when there is clearly over valuation in the fixed income market. We'll have to be very good at alpha management. We'll have to be real asset managers." The biggest challenges of course will be in the fixed income markets. One CIO was quoted: "I think many bond managers have been totally in denial for the last three to four months." All in all, it will be interesting to see who rises to the challenge and who falls victim. As always, big changes will yield new winners and losers. The real talent will find a way. For more: Read more about: interest rates, Great Rotation 2. Good times and bad in private equity
Breakingviews notes that when it comes to buyouts and exits in the private equity industry right now, it's a tale of two cities. Relatively speaking, it's been a great time for exits, until just recently anyway. "Private equity firms have long contended that successful sales are what counts. On that measure, things are going well. Leon Black, the chief executive of Apollo Global Management, said this year that valuations were so favorable that Apollo was selling everything "not nailed down." Big deals done at the peak of the leveraged buyout boom are finding exits. "Warburg Pincus nearly hit a triple when it sold Bausch and Lomb for $8.7 billion last month. Even deals that once looked like dogs, like the $8.5 billion buyout of Home Depot Supply in 2007, are now in the money." To be sure, there are some deals that remain mired in muck, notable the Energy Future Holdings (formerly TXU) deal. But overall, the story is a good one. When it comes to buyouts, however, the dealmaking is going slower. "Some $62 billion worth of deals greater than $1 billion have been announced this year, according to Thomson Reuters. That's slightly more than all of last year. Yet the two biggest – a $27 billion purchase of the H.J. Heinz Company and $18 billion purchase of Dell Inc. – are atypical. The former was more Warren E. Buffett than private equity, and the latter is largely a mogul buying back his company." If you ignore those deals, "there have been only five transactions amounting to $16 billion. The industry has $187 billion of dry powder to do deals, according to Preqin. At typical leverage ratios, that could amount to more than $700 billion of deals. At this year's rate, it would take decades to put that money to work." So what to make of this? One interpretation is that the industry is downsizing. They are not, however, in a fire sale of their inventory. They are merely drawing down, and will hold much less going forward. This is the future of private equity funds: fewer deals, smaller deals, but hopefully strong exits. Traditional private equity firms will have no choice but to continue to diversify. For more:
Read more about: Leveraged Buyout, Exits 3. Cohen will not testify before grand jury
The latest development in the Steven Cohen saga is hardly a shocker: The embattled founder of SAC Capital has decided not to testify before a grand jury, instead invoking his constitutional right to stay mum, according to DealBook. No one expected Cohen, who has yet to be charged with any crimes in the long-running probe into his company, to actually testify. The bigger question is whether any of the other five SAC Capital executives who received subpoenas to testify before a grand jury will do so. The executives are Thomas Conheeney, president; Solomon Kumin, chief operating officer; Steven Kessler, chief compliance officer; Phillipp Villhauer, head of trading; and Anthony Vaccarino, a portfolio manager. At first glance, one would think that they would be crazy to testify. But the specifics of each executive's circumstances are not known. There could be some complicating factors if prosecutors have any leverage against any of them. That said, nothing has transpired as of late that would contradict the conventional wisdom on this matter, which holds that Cohen is in the clear in terms of criminal charges personally. If a strong witness were to step forward and agree to testify against him, that could change. But at this point, such a witness isn't likely to materialize. All that said, prosecutors seem bent on bringing charges against the company itself, which could well destroy the fund as we know it. Already, it has been hit hard by redemptions. The big drama is how prosecutors will go after the firm. Will it be for negligence? Will they use RICO? Will they get even more creative in terms of corporate liability? At the same time, the SEC is apparently still interested in bringing civil charges against Cohen. This is heating up quickly, and we should know more soon. For more: Read more about: insider trading, SAC Capital 4. Prepaid cards for wages stokes controversy
Banks have been able to impress shareholders and analysts as of late, in part, with their ability to slash expenses. But at some point, the focus will necessarily shift to growing revenues, which has proven more than challenging at big banks, especially consumer banks. Fees on retail accounts remain a critical source of revenue for banks, and all are under pressure to figure out how to boost fees from accounts. One of the more creative---and controversial---efforts concerns prepaid cards that are used to deliver wages to employees. More companies are opting for this method, including some big-name companies, like Wal-Mart. In 2012, $34 billion was loaded onto 4.6 million active payroll cards, according to the Aite Group, which says that numbers will reach $68.9 billion and 10.8 million cards by 2017. The problem is that the fees associated with these cards are fairly steep, especially for small accounts. "Those fees can quickly add up: one provider, for example, charges $1.75 to make a withdrawal from most A.T.M.'s, $2.95 for a paper statement and $6 to replace a card. Some users even have to pay $7 inactivity fees for not using their cards," according to the New York Times, which suggests that companies make it hard to opt out of these prepaid card programs. My sense is the CFPB will take up this issue with enthusiasm. One issue will likely be the alliances between banks and employers and the incentives the banks offer to enroll in these programs. The Times reviewed a contract that showed that the New York City Housing Authority "stands to receive a dollar for every employee it signs up to Citibank's payroll cards." All in all, consumer banks continued to be vexed by the fee situation. They obviously would like to maximize revenue---shareholders demand nothing less---but wringing more fees out of small accounts especially is tricky. The issue for banks is to better communicate the value of the fee, that is, the value of the service that is being offered. If that value appears to be scant or something of a scam, the fee will be hard to defend before regulators. For more: Read more about: fees, CFPB 5. Active fund sales force invests in passive funds
There's something to be said for eating you own dog food, a favorite phrase from the software industry of yore. The idea was that a company had to use their own software extensively in live testing before it could feel good about selling it to others. When it comes to the fund industry, the Financial Times offers an interesting take on the willingness of firms who sell active funds to eat their own product. It notes a poll by sister publication Ignites of 1,001 fund staff, "many of whom make their living promoting active products." The survey reveals that "two-thirds have a sizeable amount of their personal savings in passive funds. This includes 45 percent who say they have a 'significant' portion in passive products. Only one in five say they avoid passive funds altogether." The findings should not be surprising, "given that three-quarters of active managers never actually beat the market – a statistic those in the fund business know all too well. It does, however, leave a bitter taste in the mouth." The fund management industry is "one huge sales and marketing machine with little evidence of any value creation," says one former asset management CEO. "It seems they are good at looking after their own money but less good at looking after other people's. Layers of unnecessary cost are being passed on to investors dressed up as 'alpha potential' when the stark reality – seemingly well understood by the industry – is that you are better off in low-cost index funds." Brokers and consultants, as they face bitter competition in gathering assets from clients, might see this as an opportunity. If they were to personally invest in the products they are selling, that would speak volumes to potential clients. The target would no doubt welcome sales folks who put their money where there mouths are. That said, the flip side to all this is the sort of deal the salesman gets compared with the deal that the end-user gets. The fee structure will not necessarily be the same. Now if the broker were to disclose that, it would make him or her look that much better. For more: Read more about: passive investing Also NotedSPOTLIGHT ON... Hedge funds love ETFs too Does it seem weird that hedge funds seem to be in love with ETFs? It sort of depends on what the fund is all about. If it's a stock-picking sort of fund, then yes it seems to be embracing average index performance when it ought to be about beating the indexes. But for hedge funds that want to get in and out of entire sectors quickly, they make perfect sense. Article Company News:
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