Fundmastery Blog

Kurt Brouwer October 25th, 2008

Hedge funds are suffering withdrawals as investors rush to the sidelines.  For some hedge funds this is particularly troublesome since they used borrowed money to leverage their portfolios and redemptions force them to unwind massive positions that were purchased with borrowed money.  This Bloomberg piece gives the details [emphasis added]:

Hedge Fund Withdrawals Stress Market (Bloomberg, October 25, 2008, Saijel Kishan and Katherine Burton)

Hedge funds are aggravating the worst market selloff in 50 years as they dump assets to meet investor redemptions and keep lenders at bay.

U.S. hedge-fund managers may lose 15 percent of assets to withdrawals by year-end while their European rivals shed as much as 25 percent, Huw van Steenis, a Morgan Stanley analyst in London, wrote yesterday in a report to clients. Combined with investment losses, industry assets may shrink to $1.3 trillion, a 32 percent drop from the peak in June.

With the average hedge fund down 18 percent this year, as measured by the HFRX Global Index, managers are selling assets to repay departing investors and meet demands from lenders for more collateral. Others including Paulson & Co. and Winton Capital Management LLC are hoarding cash to soothe nervous clients and wait for signs the worst is over. When stocks rally, hedge funds take advantage to unload what they can.

“I have never seen a market as full of panic as I’ve seen in the last seven or eight weeks,” Kenneth Griffin, founder of Citadel Investment Group LLC, a Chicago-based hedge-fund firm, said yesterday.

…Griffin, 40, who started Citadel in 1990, has posted the biggest losses of his career in 2008 after increasing wagers on loans and bonds before the markets plunged.

…The HFRX Global Index fell 7.76 percent this month through Oct. 22, according to Hedge Fund Research Inc. in Chicago. Hedge funds lost 5.4 percent last month, the most since the implosion of hedge fund Long-Term Capital Management LP a decade ago.

Passport Management LLC’s Global Strategy fund fell 27 percent this month through Oct. 15, and 34 percent for the year, as investments in commodity stocks slumped, according to an investor letter. The $4.5 billion hedge-fund firm is run by John Burbank III in San Francisco.

…Platinum Asset Management LP, a Rye Brook, New York-based firm, lost as much as 29 percent this month through Oct. 15, bringing its year-to-date decline to 38 percent, according to investors.

Investors withdrew a record $43 billion from hedge funds last month, according to TrimTabs Investment Research in Sausalito, California…

The financial markets have been pummeled with waves of selling in the aftermath of the Lehman bankruptcy and now this selling by hedge funds.  I don’t know when the selling trend will be exhausted, but eventually sellers will have done all the dumping they plan to do.  When that happens, the markets should stabilize.

• Hedge Funds , Investing , Mutual Funds , Personal Finance
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Kurt Brouwer October 25th, 2008

The dollar continues its strength versus most currencies (other than the Japanese yen) as investors seek the safety and stability of U.S. dollar-denominated securities.  This represents a remarkable turnaround for the dollar, which was was not receiving much love as recently as June.  Now, that has changed in dramatic fashion as this Bloomberg piece [emphasis added] indicates:

Dollar Gains Most Since 1992 On Concern Global Slump Deepening (Bloomberg, October 25, 2008, Ye Xie)

The dollar gained the most in 16 years against the currencies of six major U.S. trading partners as a global economic slowdown spurred demand for the greenback as a haven from losses in emerging markets.

“The foreign-exchange market is basically saying we are in a global recession and perhaps a very, very deep one,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said in an interview on Bloomberg Radio.  “Any sense of rationality and fundamentals is thrown out the window.”

Japan’s yen also benefited as investors fled high-risk assets and used the proceeds to pay back low-cost loans taken out in the currency. The yen climbed to a 13-year high against the dollar this week and surged to its strongest level against the euro in six years. The pound fell below $1.53 in its biggest weekly drop since investor George Soros drove sterling out of Europe’s system of linked exchange rates in 1992.

The dollar appreciated 6 percent to $1.2623 per euro this week, from $1.3410 on Oct. 17. The currency touched $1.2497 per euro yesterday, the strongest since October 2006. The yen rallied 7.8 percent to 94.32 per dollar from 101.69, and touched 90.93 yesterday, its highest level since August 1995. Against the euro, the yen climbed 12.7 percent to 118.96 from 136.21. It touched 113.81 yesterday, the strongest since May 2002.

This week’s decline in the euro was its biggest against the dollar and the yen since the 15-nation currency’s inception in January 1999. The yen’s gain versus the dollar was the biggest since October 1998.

…”We are in a financial crisis,” said Richard Clarida, a global strategist at Newport Beach, California-based Pacific Investment Management Co., which oversees $830 billion in assets, including the world’s biggest bond fund. “The flight to quality is boosting the dollar and the yen.”

Emerging-market currencies tumbled as Argentina seized private pension funds, and Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the International Monetary Fund. Brazil’s real dropped 8.2 percent to 2.3075 against the dollar, the South African rand decreased 10.4 percent to 11.18 and the Russian ruble fell 3.2 percent to 27.1991…

One of the most fascinating aspects of this financial crunch is how rapidly changes are occurring.  It takes $1.25 to buy one Euro now and it was not long ago that it took $1.60.  This rapid rise in the dollar will probably begin hurting U.S. exports, but it should help make the cost of imported goods much more affordable for U.S. consumers.  For more on this, please see Dollar Soars Versus Euro and Dollar Rallies Against Euro — Flight to Quality.

• Business , Economy , Geopolitics , Money
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Kurt Brouwer October 22nd, 2008

Source:  Carpe Diem

Not much positive news in the financial press this week, but one bright spot is the U.S. dollar which has steadily strengthened versus the Euro and other major currencies.

Why is this happening?  In my opinion, investors all over the world are seeing good value in dollar-denominated investments such as U.S. Treasuries and other government-backed bonds (see Bonds Markets Pricing In Armageddon).

U.S. stocks also look pretty cheap (Warren Buffett: I May Soon Be 100% Invested In U.S. Stocks), not to mention real estate particularly in states such as Florida and California that have been hit hard.

• Economy , Geopolitics , Money
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Kurt Brouwer October 20th, 2008

‘Armageddon Prices Fail To Lure Buyers Amid Selling (Bloomberg, October 17, 2008, Pierre Paulden and Caroline Salas)

Credit markets have fallen so far that they are providing a “once in a lifetime opportunity,” and investors are still selling.

Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor’s. Yields on corporate bonds show investors expect 5.6 percent of the market to go bust, the highest default rate since the Great Depression, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California.

While central banks injected $3 trillion into the global economy, credit markets are tumbling because banks are clamping down on lending, forcing investors to unload assets they bought with borrowed money. The Federal Reserve said Aug. 11 that its quarterly survey shows most “domestic institutions reported having tightened their lending standards and terms.”

“There has been widespread liquidation of assets that has nothing to do with fundamentals,” said Scott D’Orsi, a partner at Boston-based Feingold O’Keeffe Capital, a hedge fund which has $1.3 billion in assets. “Investors in bank debt are being presented with a vast number of extraordinary opportunities; opportunities that I would characterize as once in a lifetime.”

The selling is being compounded by hedge funds and mutual funds dumping holdings to meet redemptions, which may push prices even lower, according to analysts at UBS AG…

Most of the gloom in the financial markets has focused on either real estate or stocks, both of which have fallen sharply this year.  But, the bond markets have suffered considerably as well.  Other than U.S. Treasury securities, pretty much all bonds and other fixed income securities are under severe selling pressure right now. This decline in real estate, stocks and bonds is one very important reason why this downturn feels so much worse than many previous downturns.

• Economy , Geopolitics , Hedge Funds , Investing , Mutual Funds , Personal Finance
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Kurt Brouwer October 18th, 2008

We have discussed the ballooning deficit before so that’s not the story here.  The real story is that tax receipts are actually up despite everything that has happened over the past year.  If tax receipts are up, why do we have such as big deficit then? The answer of course is excessive government spending.

Now, in fairness, it is normal for the government to spend more in a recession, but this type of increase — with more to come no doubt — is quite surprising. Now we know what our Congressional representatives have been doing all year.

Chart Source: Bizzyblog

Data Source: U.S. Monthly Treasury Statement, September, 2008; U.S. Daily Treasury Statement, September 30, 2008)

• Geopolitics , Retirement , income taxes
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