Staff lack skills to deal with complex products
Fund managers have struggled to recruit and retain appropriate talent to match the increasing demand for and sophistication of the use of complex financial instruments according to a research report by KPMG: Beyond the credit crisis: the impact and lessons learnt for investment managers.
In fact, the research found that while the use of complex financial instruments is rising (57 percent of traditional fund management firms surveyed said they use derivatives in their portfolios), 50 percent of fund manager respondents admitted to having no in-house specialist with relevant experience of the complex financial instruments in which they have invested.
Darina Barrett, head of investment management at KPMG Ireland said: ‘Staff skill sets have struggled to keep up with the growing sophistication of the industry. These firms cannot afford to continue ‘flying blind’. Migrating experienced people from the investment banks to investment management firms could be one way of addressing this issue.’
Credit crunch losses will be in $1 trillion range
‘Our view is that this credit crunch is still evolving. We expect that when the credit crunch is over, there will be losses in the $1 trillion range. Total write-offs so far from the banks are in the $400 billion range, so we expect more write downs from the banks.’ says Joe Leitch of Rubicon Fund Management one of the participants at the Opalesque roundtable, an expert panel of Hedge Funds managers and investors who met in London the first week of July. The panel of experts looked at investment opportunities arising out of the current market conditions.
Mark Salem of Mount Capital said the two forces of emerging markets growth and credit crisis is creating a unique environment for investors. ‘We are in the middle of two major global adjustments. The first is the aftermath of the credit bubble, and the second is the introduction of almost three billion potential new consumers into the global economy. We think both have much further to play out.’
‘The first dislocation is caused by excess: excess money, excess borrowing, and the second, the opposite: pure shortage. Shortage of materials, shortage of infrastructure, shortages of resources. I think within these two powerful drivers, the dislocations will continue. Regarding investment strategies, those that rely on leverage or exotic instruments are going to remain troubled. I don’t think the credit crisis is over,’ says Salem.
‘From a capital introductions point of view, since the credit crunch we have seen a marked move of interest towards more liquid strategies, away from the less liquid mortgage backed and credit strategies, but also from equity based strategies. There is particular interest in commodity, macro CTAs and volatility managers. That is partly because they tend to perform well in these periods – in fact as a group they have performed extremely well - but also because of the liquidity. They can be in and out of their positions on a minute-by-minute basis, and investors see that as a great advantage.’ says Duncan Crawford of Newedge.
‘The commodity story is clearly also a very interesting one, being in the first major bull run for 30 years, there is considerable demand for commodity managers, but relatively little supply. For the foreseeable future I believe the preference for these strategies will continue,’ Crawford says.
‘I agree with much that has been said. The dislocations create opportunities in many areas, we see a lot of idiosyncratic opportunities, which means it is very manager specific… it is about finding managers who really can navigate their way through these markets, who can exploit the inefficiencies, who are properly hedged, etc,’ says Stephen Oxley of PAAMCO Europe (Pacific Alternative Asset Management Company.)
Hedge Fund strategies: winners and losers in May
All hedge fund strategies except short selling posted positive returns that were considerably higher than their historical average in the month of May. The month of May was characterised by positive stock market returns and market volatility fell to slightly below 18 per cent, its lowest value since last June.
With the solid performance of the stock markets the best performing strategy was long/short equity with a return of 2.56 per cent. The lowest return was posted by short selling, with a return of -1.68 per cent. The fixed-income market performed negatively, with a return of -1.17% for the Lehman Global Bond Index. Commodity prices continued to reach record highs, climbing again by around 9 per cent, following the 8 per cent in April.
Emerging markets ‘mercantilism’
Concerns over the way authorities have dealt with monetary policies in the emerging markets is one of the key concerns in July’s Signpost, a research report published by Barclay’s Wealth.
Oil prices and inflation are unlikely to fall back sharply says the report. A chief concern is monetary policy in the emerging markets, ‘It has been clear for some time that, in many such countries, keeping currencies cheap - what some call ‘mercantilism’ - has prevented their central banks from allowing overall monetary conditions from rising as fast as they should have when faced with an (upside) inflation risk.’ The report says, that this tendency ‘has gone hand in hand with a reluctance to raise official interest rates in too much of the developing world and, in some cases, a tendency to let fiscal policy ease in the face of higher food and oil prices - even when faced with an already large fiscal deficit.’
This may, the report argues, have prevented the impact being felt by the poorer elements of society but this will come at a cost: ‘The failure to let market forces rip comes at the cost of letting demand rise above supply, requiring further monetary tightening to curb overall price pressures.’
This strategy is only delaying the inevitable the report argues, ‘The pain of adjustment cannot be avoided in its entirety. And the longer the problem is ignored, the bigger the ultimate cost of getting things back on an even keel.’
Fund stats show inflows into financial sector funds
EPFR global fund data showed global-tracked financial sector funds continued to benefit from rock bottom valuations, hopes for further consolidation and speculation that more sovereign wealth fund money will move into the sector during the first week of July. A fifth straight week of positive flows took year-to-date inflows for this group over the $7 billion mark despite owning by far the worst performance numbers of the nine major sector fund group.
The two fund groups with the best YTD performance, commodities and energy sector funds, both had good weeks as they took in a net $555 million and $1.08 billion respectively against a backdrop of higher oil, corn, iron and copper prices & investors did commit fresh money to Japan Equity Funds for a ninth straight week.
Outflows from emerging markets equity funds hit 23-week highs, investors pulled another $2.2 billion from Europe equity funds and global bond funds experienced net redemptions for the 21st consecutive week. |
