TheChek News Flow

- Says aid for low and middle income earners is needed to revive Abenomics

The oil market rout has made some investors so bearish they are buying contracts that pay out if prices drop below $40 a barrel — a level last traded during the bleakest chapters of the financial crisis.

Extreme market scenarios are playing out in put options for crude, which give holders the right to sell oil above a set price by a certain date.

The number of options to sell US crude at $40 a barrel by December 2015 was equivalent to 880,000 barrels, after more than quadrupling in the past two weeks, according to CME Group exchange data. Similar options with a $35 a barrel strike price climbed to 669,000 barrels from none.

The option buying took place as West Texas Intermediate crude tumbled almost 40 per cent from its June high to hit $66.74 a barrel on Thursday, hastened by Opec’s recent decision to stay the course on supply.

“It’s a punt, a shot at the worst-case scenario for the oil price,” said Raymond Carbone, president of broker Paramount Options in New York. “You’re a genius if you’re right. And if you’re wrong, it won’t ruin your lifestyle.”

US benchmark WTI futures last settled below $40 a barrel in February 2009.

The appearance of the bearish positions does not mean the market will go that low again. Brokers and bankers said the trades were probably low-risk, low-cost “lottery tickets” for a prospective windfall.

Still, the inability of commodity markets to neatly match rising supplies with lukewarm demand raises the chance of further price declines until drillers cut back.

Potential factors which could drive the oil market towards $35-$40 a barrel include a warm winter in the northern hemisphere that would curb heating fuel demand, or high rates of refinery maintenance in the US Gulf of Mexico oil hub, which would temporarily slow demand for crude, said Jan Stuart, global energy economist at Credit Suisse.

“It’s no longer terribly far-fetched to see a scenario that could create, briefly, such a low price,” Mr Stuart said. Credit Suisse forecasts WTI at $75 a barrel a year from now.

Industry executives said it was highly unlikely that an oil producer bought the put options, as it would be paying a premium to lock in a loss. Instead they pointed to a speculator such as a hedge fund.

Whoever bought the options has already realised a gain: prices of both the $35 and $40 options contracts have doubled since late November.

In aggregate, money managers still held three bullish positions for every bearish one in WTI futures and options, according to the Commodity Futures Trading Commission.

The commission took its latest snapshot on November 25, two days before the Opec decision.

FT Article

“I recommend the BlackRed event-driven hedge fund.”

“BlackRed? Don’t you mean BlackRock?”

“No, BlackRed. It’s relatively new but follows a time-honoured strategy. All terribly clever.”

“Really? How does it work?”

“Well, like most event-driven hedge funds, it uses a proprietary screening methodology to evaluate a range of investment opportunities ahead of corporate transactional events – such as mergers and refinancings – that may include arbitraging various debt securities, as well as taking equity positions to gain selective exposure to acquisitions, consolidations, restructurings, bankruptcies and liquidations. Its managers continually scour the market for potential valuation anomalies surrounding these events. Then they make a high-conviction asset allocation call and generally place 100 per cent of investors’ capital on Noir.”

“Noir?”

“Oui. Or rather, yes. But not always. In certain market conditions, they might allocate cash to Impair.”

“As in impaired credit?”

“No, Impair. You know: French for 1, 3, 5, 7 etc, up to 35. You probably call it ‘odd’.”

“I certainly do.”

“Would you rather they put it on 19-36?”

“Hang on. Are you trying to tell me they just bet people’s money at a roulette table?”

“Oh, no, no, no. Sometimes they use a revolving credit facility.”

“Revolving?”

“Well, more like spinning – although that brings some tail risk.”

“Tail risk?”

“Mmm – the coin could come down heads.”

Some investors might wish real-life, event-driven hedge funds offered this risk/return profile. Their actual bets this year – on politically sensitive pharma deals and US mortgage settlements – have proved scarcely more profitable than putting everything on black.

According to Bloomberg, “billionaire John Paulson posted a 14 per cent loss in his firm’s event-driven hedge fund” in October alone – after events at drugmaker Shire and lenders Fannie Mae and Freddie Mac took a turn for the worse. Shire’s shares lost a quarter of their value after AbbVie pulled out of a takeover that would have cut its US tax bill; and holdings in Fannie and Freddie more than halved when a US court rejected shareholder payout claims. These losing bets took the total hit for investors in Paulson’s fund to 25 per cent in 10 months.

Nor was this an isolated run of bad luck. This year, several high-profile funds, including Bill Ackman’s Pershing Square and Richard Perry’s Perry Capital, also placed their chips on Fannie, Freddie and Shire. Tyrus Capital – a $1.4bn event-driven hedge fund based, appropriately enough, in Monte Carlo – lost 10 per cent of its value on the Shire bet alone.

Nor is this unusual. Earlier in the year, so many event-driven hedge funds placed disastrous bets on takeovers of Time Warner and T-Mobile that traders described their attempts at “merger arbitrage” as “#arbageddon”.

By October 31, the average event-driven hedge fund was on a -3.6 per cent losing streak for 2014, as measured by the Hedge Fund Research index – and getting closer to 2011’s annual loss of 4.9 per cent.

Wealth managers who choose hedge funds for clients point out that, in other years, gambling on mergers has paid off. That same index recorded a 13.8 per cent gain last year, and 6 per cent in 2012. You win some, you lose some, they suggest.

Kirsten Boldarin, a director of Stonehage Investment Partners, says: “All strategies can suffer extended fallow periods where an approach doesn’t add value, despite the manager exhibiting long-term competence.”

Pau Morilla-Giner, chief investment officer at London & Capital, reckons investors in hedge funds just need to hedge their own bets. “Equity-focused hedge funds represent just one section of the hedge fund industry and we advise that they are combined with other strategies to better diversify,” he says.

Investors, however, might ask themselves two questions.

First, why are we bankrolling so many managers to play out dodgy hunches? In the third quarter, Hedge Fund Research found that $11.4bn of new capital flowed into event-driven strategies, taking the total invested to $756bn – more than a quarter of all hedge fund assets.

Second, why are we paying managers – including “the billionaire John Paulson” – up to 2 per cent of all their losing bets and 20 per cent of all winnings? Forbes estimates that this fee structure allowed the world’s 25 best-paid hedge fund managers to earn $24.3bn last year.

Some institutions have already decided “rien ne va plus!” Calpers, the largest US pension fund, has taken $4bn off the table, claiming that hedge funds are too complex and costly.

In the meantime, this column can offer a cost-effective insurance policy for all concerned readers: $1,000 to correctly predict the outcome of any corporate event. Or your money back.

* Regulator AMF seen unlikely to use sealed bid process yet

* Seen continuing with accelerated auction procedure

* Club Med tussle is France's longest takeover battle

PARIS, Dec 4 (Reuters) - France's financial regulator is speeding up the auction for Club Mediterranee in an effort to end the uncertainty for shareholders, but is likely to hold back from asking for sealed bids for now due to legal risks of a possible tie, lawyers said.

There have been six offers from two rival bidders for the French holiday company. The first dates back to May 2013, and the latest was on Dec. 1.

Including a long period of legal wrangling that froze the process, the battle between Chinese billionaire Guo Guangchang and Italian tycoon Andrea Bonomi is the longest in French stock market history.

Regulator AMF's rules, aimed at making sure the interests of shareholders are served, allow it to intervene after 10 weeks have elapsed. It has two tools at its disposal -- shortening the period one party has to make a counterbid, and calling for "final counterbids" on a given date, with the highest winning.

"This threat has often been brandished but I don't think AMF will want to use the final counterbids procedure given legal risks," said Aline Poncelet, partner at law firm Paul Hastings.

Uncertainty over the outcome is weighing on the business of Club Med, which is already struggling with losses and a weak economy in Europe, its management has said.

Guo and his Fosun group on Monday offered 23.50 euros a share, topping Bonomi by 50 cents, and valuing the all-inclusive holiday pioneer at 897 million euros ($1.1 billion).

Using its accelerator tool for the first time on Nov. 13, the AMF gave Fosun only 12 working days to decide whether to bid again, down from 20 normally. Bonomi now has a matching 12 days, until Dec. 17, to sweeten his offer.

If Bonomi responds, legal experts expect the AMF to stick with its accelerated process, possibly cutting the counterbid period further. Its rules show it can go as low as three days.

Lawyers say one reason the AMF is reluctant to call for sealed bids is the risk of two offers at the same price. Bidders may then have to disclose additional and often sensitive information on their business plans to convince minority shareholders to tender their shares, they say.

"The process becomes a bit of a lottery, a bit angst-creating," said another lawyer, who asked to remain anonymous.

Poncelet said there should also be a natural end to the auction, once offerors see the price go to a level where their business plan sums no longer add up.

"There is no need to use the last auction process," she said.

Aside from the damage the uncertainty may yet cause to their investment, shareholders have done well from the battle to date. Club Med shares are up 70 percent since the saga began.

An AMF spokeswoman said that the regulator was "at this stage" still looking at one offer at a time.

In a marathon meeting with major shareholders earlier this week, Mr Colao sought to dampen claims he will respond to BT’s efforts to acquire a mobile network by swooping for fixed-line assets across Europe such as Liberty Global.

According to a telecoms analyst present at the summit Mr Colao said he would “happily” look at an acquisition of Liberty Global’s German cable network, if controlling shareholder John Malone wished to sell. Many of Liberty Global’s other assets, such as its networks in Switzerland and Belgium, were not relevant to Vodafone, he added.

Investors balked at speculation a takeover was in the works this week, sending Vodafone shares down 3pc on Monday. Analysts have estimated the cable group would cost Vodafone around £40bn.

“It is clear that banks are positioning themselves and that more than anything is creating noise,” said Nick Delfas, an analyst at Redburn, the broker, in a note to clients.

Mr Colao’s soothing comments were made over the course of a four-hour meeting days after the claims emerged, apparently from the United States.

Such a deal would be too expensive for Vodafone while Liberty Global believes its networks can compete in the mobile market via wholesale deals, said Mr Delfas. Virgin Media’s mobile customers, for instance, are served by reselling access to the EE network.

Mr Colao predicted that Liberty Global will also eventually offer access to its networks on a wholesale basis, a move that in the UK would mean Vodafone, Sky and TalkTalk could offer broadband via Virgin Media’s cables rather than using BT’s.

Mr Delfas said: “Vodafone thinks John Malone’s price would just be too high, while he believes that he can build a mobile business with hardly any capital commitment.

“Vodafone is highly rational about [mergers and acquisitions], does not need to do anything, and indeed Liberty may find it needs to own mobile just as BT appears to be discovering.”

According to Deutsche Bank research, the thought of Vodafone being forced into a takeover of Liberty Global to defend itself against BT was “surreal”, as the UK is expected to account for only 1pc of its earnings before interest and tax next year.

BT is in takeover talks with the owners of both EE and O2. Mr Colao told investors that a deal would be good news for Vodafone, because it would mean BT is less likely to spark a price war in the mobile market.

Under earlier plans, the former state monopoly was planning to enter the fray via a wholesale agreement with EE and radically undercut rivals.

In the speculation that has gripped the telecoms sector since BT’s talks emerged last week, Vodafone has been linked with Sky and TalkTalk, as well as Liberty Global.

Mr Delfas said that both those combinations were also unlikely.

TalkTalk’s value-seeking customer base and low margins would not match Vodafone’s efforts to target the top end of the market and increase its margins. Sky customers are wealthier, but its business remains heavily reliant on satellite broadcasting, a content distribution method that is seen as increasingly outdated as superfast broadband rolls out and consumers turn to more on-demand services.