Wednesday, September 14, 2016

Delivering Alpha 2016?

Patti Domm of CNBC reports, Bond yields spike as delivering alpha investors voice negative views:
Comments from major investors at the Delivering Alpha conference added fuel to an already sour mood in markets and concerns that the world's central banks just can't get it right.

"With the rates that currently exist in global bond markets, the term safe haven applied to G-7 bonds is just plain wrong. These are not safe havens. There is a tremendous amount of risk in owning 10-, 20-, 30-year bonds at these rates," said Elliott Management President Paul Singer.

"So sell long-term bonds is my outright recommendation of an asset class," he said. "And the reason I called it the biggest bubble in the world is because the bond market is $60 trillion, roughly. And it's at prices and yields never before seen and containing a tremendous never-before-seen asymmetry between potential further reward and risk."

Investors also discussed the world's central banks and the fact that many view them as hitting a wall in terms of their ability to stimulate the global economy. The Federal Reserve has been slowly moving toward a rate hike, as it tries to swim against the tide of negative yields and massive easing programs by other central banks.

"Did Singer help push it? Yeah. He said the exact same thing in August. The difference is even though (Fed Governor Lael) Brainard got all the press this weekend ... the difference is (ECB President Mario) Draghi on Thursday said we have to re-evaluate what we're doing. You had Singer. You had Jamie Dimon yesterday," said Andrew Brenner, global head of emerging markets, fixed income at National Alliance. JPMorgan CEO Dimon on Monday said it's time for the Fed to raise rates.

The CNBC/Institutional Investor Delivering Alpha conference also coincided with a 30-year auction that traders described as weak. Rates moved higher after the auction, with the 30-year yield rising to 2.478 percent. The 10-year yield also rose, reaching 1.75 percent, the highest level since early June. Bond yields move inversely to prices.

Draghi on Thursday surprised markets when he did not discuss the prospect of taking the further easing steps markets were expecting.

"Look at what the Fed is doing and global central banks. I think they're beginning to rethink the efficacy of these ultra-low interest rates," said Bill Miller, chief investment officer of LMM. He told the conference that higher rates would not be an impediment to capital expenditures. "They are an impediment to the system. So I think just the rethinking of that policy is something that's likely to lead the curve to shift up."

His recommendation was to short the U.S. 10-year note.

Stocks sold off sharply Tuesday, with the Dow down more than 200 points in afternoon trading, reversing a large gain from the previous day. Shares rallied Monday after Brainard said the Fed should be patient about hiking interest rates, implying that the U.S. central bank would not raise rates when it meets next week. Equities sold off sharply on Friday after some hawkish Fed comments and after the ECB did not press further easing.

Singer also discussed the popular risk parity trade, where investors bet that stocks and bonds will both go up together in a low rate environment. The unwind of that trade has been worrying the markets.

"Today, we're just seeing a continuation of the post-Draghi bludgeoning," said Ward McCarthy, chief financial economist at Jefferies. "My take on it is it's post Draghi redux. There's anxiety that the day will come when QE ends. That's why you had such a correlation between stocks and bonds. The reaction would be very different if it really was Fed anxiety."

Justin Lederer, rate strategist at Cantor Fitzgerald, said the Treasury market also hit some key technical levels that added to the pressure. "There's a lot going on today. You started the day with just a continuation of (European government bonds) going down. Now we have the bond and equity trade. You couple everything together and I wouldn't put one thing behind today," he said.

Lederer said the 30-year auction, which fared poorly, was also a factor. "To see this type of move, it's definitely something supply related going on," he said. "Then you have a lot of people talking about the Fed, talking about rates. ... We're at a crossroads here."

Strategists say the markets had been too complacent, and the recent volatility around global rates is not unexpected.

"(Bridgewater's Ray) Dalio came out earlier today and said the Fed shouldn't be raising rates," said Lederer. "What is the BOJ going to come out and do at their meeting next week?" Dalio appeared at the conference Tuesday morning.

Separately, Nikkei reported during the afternoon that the Bank of Japan plans to take interest rates further into negative territory ahead of its meeting next week.

The yen instantly weakened against the dollar, and the yield on the Japanese 10-year moved further into negative territory.
Svea Herbst-Bayliss and Lawrence Delevingne of Reuters also report, Big money touts esoteric bets over traditional stocks, bonds:
Gold, emerging market currencies, real estate in Europe and buying market insurance are some of the non-traditional bets hedge fund managers are making to earn returns at a time many investors are struggling and traditional stock and bond market bets look risky.

The money managers' comments came at the CNBC Institutional Investor Delivering Alpha Conference in New York, an annual event that features many of the investment industry's best known names.

Mark Carhart, who runs $2.5 billion Kepos Capital, said he likes such foreign currencies as the Turkish lira, Brazilian real and the Indian rupee. Carhart warned that a traditional portfolio of 60 percent stocks and 40 percent bonds was dangerous by itself.

Paul Singer of $27 billion Elliott Associates said gold is still relatively inexpensive and should be more widely owned in portfolios, especially when longer term bonds offer little reward for substantial risk.

Gold is often a hedge against inflation especially when investors worry that central bankers may not be able to appropriately handle a rise in inflation.

And Boaz Weinstein of $1.7 billion Saba Capital said it is prudent to buy volatility protection, essentially insurance against large market swings.

One of the conference's major themes was how to make money as interest rates remain low but growth is similarly low and investment returns been more muted than in the past years.

"The job is to stay long term focused. There are still people sitting in cash afraid of what happened in 2008," said Mary Erdoes, chief executive officer of J.P. Morgan Asset Management.

The Standard & Poor's 500 index has climbed 4 percent since January and the average hedge fund has climbed 3.5 percent this year, research firm Hedge Fund Research reported.

Hedge funds have seen billions of dollars in capital pulled since the beginning of the year as pension funds and other institutional investors reacted to losses as well as high fees.

But even amid the more downbeat mood compared to past years, investors said they did not expect a wholesale exodus from hedge funds.

"It is an unfair comparison for hedge funds to be compared to the Standard & Poor's 500," said Dawn Fitzpatrick of UBS Asset Management. "Their role in a portfolio is as a diversifier."

Fitzpatrick and other investors appealed to clients to stick around, saying that patience is necessary now. "That is really hard right now," she acknowledged.
It's that time of the year again, right before the dreaded month of October, where billionaire hedge fund managers charging their clients alpha fees for leveraged beta gather in New York City to discuss why central banks are wreaking havoc on the global economy (and their returns) and why we should all be scared of the scary bond market.

Alright, let me be serious here, after all, the people reading my blog are very serious and influential asset managers and it's a very tough environment for all active managers, not just hedge funds.

But I have to admit the problem I have with these conferences is you have a series of gurus telling us what they think but we don't know if what they recommend matches the risks they're actually taking in their portfolios (this is why I prefer monitoring top funds' quarterly activity even if it's lagged and imperfect).

First, let me be blunt, I don't take warnings of cracks in the bond market seriously. In fact, I am on record stating the notion of a 'bond bubble' is downright silly which is why I routinely expose clowns warning of such a bubble. And as I keep warning you, in a deflationary environment, good old nominal bonds, not gold, will be the ultimate diversifier.

I know, interest rates are at historic lows and this can't go on forever, but it can go on for a lot longer than many astute investors think, especially if the deflation tsunami I warned of at the beginning of the year strikes us.

Sure, we can argue that global bonds have entered the Twilight Zone and "distortions" are driving yields lower and into negative territory, but I still take the bond market's ominous warning very seriously.

This is why I agree with Bridgewater's Ray Dalio when he disagreed with Jamie Dimon that it's time to raise rates:
Billionaire hedge fund manager Ray Dalio said he disagrees with Jamie Dimon’s view that it’s time for the Federal Reserve to raise interest rates, saying such a move would be risky.

Dimon, chief executive officer of JPMorgan Chase & Co., said yesterday that the Federal Reserve should increase interest rates sooner rather than later to maintain credibility. Dalio, speaking at the the CNBC Institutional Investor Delivering Alpha Conference on Tuesday in New York, said economic risks are currently much more to the downside.

“At this stage the risks are so asymmetrical -- like there’s no doubt that you can slow the economy, the world economy," he said, adding that monetary policy would be unable to effectively counter a slowdown. “We’ve never been in a world together that has been like this."

Dalio, the head of the world’s largest hedge fund manager Bridgewater Associates, has warned for some time that the economy is at the end of a long-term debt cycle, characterized by a lack of spending despite interest rates near zero or even negative. He said in an interview in March that consumers will have to be encouraged to spend, which could include sending cash directly to them.

Fed policy makers will gather in Washington Sept. 20-21, and recent comments from voting members have sent mixed signals about whether they’ll lift rates or wait at least until the December meeting. Speaking Monday in Chicago, Fed Governor Lael Brainard said “the case to tighten policy pre-emptively is less compelling” in an environment where declining unemployment has been slow to spur faster inflation. Boston Fed President Eric Rosengren, a voting member this year on the Federal Open Market Committee, argued Friday there was a reasonable case for gradual tightening.

‘Good Thing’

“Let’s just raise rates,” Dimon said Monday during a wide-ranging discussion at the Economic Club of Washington. “The Fed has to maintain credibility. I think it’s time to raise rates. Normality is a good thing, not a bad thing. The return to normal is a good thing.”

Dalio reiterated his view that the Fed is too focused on the short-term business cycle and should pay more attention to the long-term debt cycle. He said the current situation in the global economy is analogous to the late 1930s and early ’40s -- also in terms of the wealth gap and the rise of populists.

Dalio said Japan and Europe are closer to having exhausted their ability to stimulate the economy, while the U.S. and China have a little more room. While China will likely have to go through a restructuring of its debt, economy, and capital markets, the nation’s leadership is “highly capable,” said Dalio, who added that he has a positive outlook on the country.

"The important thing is how they’re dealing with it," he said. “So this is manageable -- this is not a debt in a foreign currency."
I guess Ray Dalio doesn't ascribe to George Soros's views on China (he needs to be more diplomatic if he wants the Chinese to invest in his fund) but he's absolutely right, the Fed shouldn't raise rates in this environment because if it does, this will only bring the prospects of global stagnation/ deflation that much closer.

Having said this, discussing the Fed with a buddy of mine who runs a one-man currency hedge fund in Toronto, he brought up a good point, "if you look at how the BOJ, ECB, Bank of England and Bank of Canada didn't move on policy, maybe the Fed is going to surprise everyone and hike rates in September and December, after all, these central bankers all talk to each other."

He also told me it's very tough making money in currencies even if you have range-bound views. "Even if you have access to counterparties willing to take the other side of your trade (ie. you're a big  player), they will only execute it at a guaranteed profit. More and more banks are acting as agents where in the past they were willing take risk on their books and this adds to costs and volatility."

He thinks the Fed should raise rates and worries about its $4.5 trillion balance sheet but Ben Bernanke doesn't seem too concerned and the Fed is in no hurry to reduce it.

One thing my friend and I discussed at length was secular stagnation and lack of employment opportunities for millions of people. He isn't against helicopter money but he also thinks we need to mandate a shorter work week so "more people can work and spend money."

I'm not sure about helicopter money or a shorter work week but one area we agree on is that lower interest rates have been a boon mostly to the financial elite and growing inequality is a huge problem for capitalism.

Something has to be done because if we continue on this path, you will see growing class of debt serfs and increasing social tensions all over the world.

He told me "with rates at zero, money is cheap but banks aren't lending to small businesses." I told him why should they? They can continue collecting fees from hedge funds and private equity funds that set up funds to lend money to small businesses and then charge their clients 2 & 20 for doing this.

Of course, I'm being cynical here but the reality is something is broken in the traditional transmission mechanism and Dalio is (partially) right, we are witnessing the limits of monetary policy (however, it's not as dire as he states).

Policymakers need to start focusing more on fiscal stimulus but they seem incapable of agreeing on how to go about this (umm, it's all about infrastructure, stupid!).

I don't know, Ted Carmichael just published a comment on the breakdown of faith in unconventional monetary policy where he too sounds worried that we've reached a crossroad here:
We are witnessing a breakdown of faith, outside central banks, in unconventional monetary policy (UMP). In recent weeks, the attack on UMP has intensified from a wide array of analysts including current and former monetary officials as well as highly regarded financial market commentators.

Pushing further into unconventional monetary policies, say by moving towards "helicopter money", also known as central bank financed fiscal stimulus, might provide some short-term gain (as has resulted from other less drastic forms of UMP), it is also likely to result in even more long term pain.
While I can empathize with his sentiments, and those of others, I happen to think the Fed is on the right track and prevented a huge depression but he's right, there are limits to monetary policy and only so much central banks can do with unconventional monetary policy.

What are long-term investors like pensions suppose to do? Well, they can read the wise insights of Jim Keohane, Leo de Bever and others on my blog but I have to tell you, there's no magic bullet in a low growth environment where ultra low and negative rates are here to stay.

I've long warned all investors to prepare for lower returns and think it's going to get harder and harder for large hedge funds and private equity funds to deliver alpha in a ZIRP and NIRP world.

In this environment, I believe large, well-governed defined-benefit pensions with a long-term focus have a structural advantage over traditional and alternative active managers who are pressured to deliver returns on a short-term basis.

Lastly, I believe in premium research which is why I want to bring to your attention Gerard MacDonell's blog, Bein Bhiorach, where he seems to be ranting all day long but covers a lot of excellent material (read his recent comment on whether Bridgewater's risk parity is toast).

A long time ago, Gerard and I worked together at BCA Research, but he moved on to bigger and better things like being Steve Cohen's economist at SAC Capital. He's a very bright guy but I must warn you, if you sign up for his free blog comments, be prepared for all his political rants too.

Another former BCA colleague of mine, François Trahan, also moved on to bigger and better things. He is now a strategist at Cornerstone Macro where he and his colleagues produce top-notch research.

He and Stephen Gregory just came out with a report, Which Countries/Markets Are At Risk … Who’s The Weak Link?, which is excellent. François was kind enough to allow me to publish his opener on my blog:
Ask nearly any investor (long only or hedge fund) and they will tell you it has been a difficult few years in the market. There are a plethora of reasons for this, but the central theme is the transition from the “Great Moderation” to the “Era Of Uncertainty.” This year, some of the blame has fallen on the divergence of the market (cyclical) from the structural issues in the global economy (China slowdown, Japan stagnation …). We recently presented our 4Q outlook which revolved around a peaking in PMIs and a recoupling of cyclical and structural forces. Regrettably … this recoupling doesn’t mean easy sailing for investors. A similar (though muted) backdrop in ’14 & ’15 were two of the worst years ever for active management.

Being risk aware will likely be the difference between success and failure over the next potential decade … just like it has been over the last three years. As such, today’s report focuses on “who’s most at risk” from a country perspective. We focused a significant portion of our call last week “Just As You Were Getting Comfortable With Cyclicality Things Are About To Change Yet Again” to the interconnectivity between a slowdown in the U.S. and the rest of the world. In today’s report, we put forth a framework to help investors gauge which countries are most at risk by looking at both top down and bottom up tools.
Again, I urge you to contact the folks at Cornerstone Macro and subscribe to their investment research (it's not cheap but it's well worth it).

And yet another former colleague of mine from BCA Research and the Caisse, Brian Romanchuk, puts out great blog comments on his blog, Bond Economics. You should all read his latest comment, On Fed Hysteria, it's excellent.

What else? David Rowen of Phocion Investments Services who was recently named Regional Director for the Hedge Fund Association of Canada wanted me to bring to your attention that Hedgeopolis will be held in New York on October 20-21 at Metropolitan West.

Dave says it's a great event to expand your network and business opportunities. For more info click HERE. A short video can be found HERE.

And Geneviève Blouin of Altervest wanted me to inform my readers that the 1st Emerging Manager Capital Introduction event is taking place in Montreal on October 5th. You can read more information on this conference here and it's free for asset allocators.

I was invited to attend but I made no promises and told Geneviève, I understand the need to promote home grown talent but just like everyone else, my time is precious. If you want me to help you, the least you can do is subscribe and/or donate something to this blog at the top right-hand side (I know, times are tough for everyone but I'm not running a charity, pay out-of-pocket expenses to attend conferences which I don't always enjoy, and it frustrates me to no end when people ask me to cover them for free).

This reminds me, another conference I was invited to was the 2016 US Trade Mission to Toronto for Alternative Assets Managers. The Toronto Mission will be held on Tuesday September 20, 2016 from 8:30 am-12:30 pm at the Shangri-La Hotel, 188 University Avenue, Toronto. Brian Beams sent me this message:
Please note that there is no charge for Canadian investors to attend the Toronto Mission and we will also provide you with accommodation overnight in Toronto on Monday September 19, but we request that you register as soon as possible to attend the event and to secure your accommodation. Please click here to register. Post-registration, a confirmation and follow-up information will be emailed to you.
I attended last year's conference in Montreal and it was interesting but exhausting doing all those one-on-one "speed-dating" meetings with US hedge fund and private equity fund managers. I told them if they wanted me to cover it properly, they need to subscribe to my blog and put a dedicated YouTube channel where managers discuss their strategies.

I'll quit here because I sound like an arrogant, insufferable, cranky and greedy jerk (get this way when I'm hungry, ever see that Snickers commercial?). At least I did my civic duty and promoted everyone's conference on my blog. -:)

Below, CNBC's Kate Kelly reports investment titans had warnings for investors at the 2016 Delivering Alpha Conference in New York City.

Also, CNBC's Andrew Ross Sorkin highlights the rate hike debate at the Delivering Alpha conference.

Lastly, earlier this week Minneapolis Fed President Neel Kashkari, said he's watching inflation more closely and weighed in on how immigration reform can be a source of economic growth.

Great insights here, Kashkari doesn't refer to the risks of global deflation explicitly but you can feel he's very concerned.

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