FT : Investors forgive weak hedge fund returns

Institutions plan to send more money to funds this year

Hedge fund investors must be forgiving types. Inquests on 2013 are under way, showing that the funds endured yet another year in which they failed to come anywhere close to the returns available on simple equity index tracker funds, which has been the story throughout the rally since 2009.
And yet big institutions are planning to send them more money this year.


Indeed, a survey by Barclays’ capital solutions group, covering 220 investors with $490bn invested in hedge funds, found that only a minority felt that funds had underperformed their expectations, and that more than 90 per cent planned to send more money to hedge funds this year.
This is great news for hedge fund managers bearing lacklustre results. But life is not all easy for them. They are now obliged to compete on price. According to Chicago’s Hedge Fund Research, the classic “2 and 20” fee structure – with managers taking an annual fee of 2 per cent of assets, along with 20 per cent of profits – is beginning to come under control. Funds that launched last year charged an average of 1.38 per cent for management (the lowest since 2001), and a 17.17 per cent “incentive” fee, the lowest since 2003.
In another sign of concern over charges, funds of hedge funds, which charge a fee for their own management on top of the fees charged by the underlying funds, are shrinking. The number of funds of funds has steadily reduced since 2007, while HFR estimates that some $20bn was pulled from the sector in the fourth quarter alone. But fees remain breathtakingly high.


Poor management?
The bald facts are these. Hedge funds massively outperformed during the bursting of the dotcom bubble more than a decade ago, largely avoiding any losses. They continued to outperform during the rally of almost five years that followed it. This brought money from a whole new field of institutional investors into the sector. For pension fund managers, hedge funds appeared to be the ideal diversifiers.
During the credit crisis, things were tougher. They beat the market during the crash year of 2008, but still suffered losses: an average of 19 per cent according to HFR, with equity hedge funds dropping 26.7 per cent. Since then hedge funds generally, and specialist equity hedge funds have lagged the S&P 500 every year.
Why so poor? Three broad explanations were offered to Barclays. One is that there are too many hedge funds now. Many strategies have a limited capacity. If too many try to do the same thing, all chances of gains are eliminated. Some 47 per cent of investors named this problem.
Others (40 per cent) blamed macro factors. Market turns over the past five years have been driven by political factors that are hard for hedge funds to predict. And 28 per cent said it was simply a bad time to be running a hedge fund strategy: when the market does well, the ability to sell stocks short – a key advantage for hedge funds – is not much help.
The most popular explanation, named by 54 per cent, was that hedge fund managers were not good at their job, failing to take on risk at the right time, and showing poor market timing. That may have been because they were trying to show transparency in the wake of the Madoff scandal, and to make their offering more convenient for institutions.
One insurer complained there were too many hedge funds, particularly in “strategies that are easier to enter (and thus, fail at)” like long-short equity strategies. One family office complained that “hedge funds became preoccupied with proving they could provide transparency and liquidity”. This often came “at the cost of risk-taking, which ultimately means that returns suffered”.
Normalising markets
Despite all of this, Barclays found that only 9 per cent of those unhappy with their hedge funds’ performance intended to cut allocations this year. For the time being, hedge fund managers are being given the benefit of a very large doubt.
This does come at a cost to them. Institutions may be raising the amount of money they give to hedge funds, but they are cutting the total number of funds they hold, rewarding size. Many now want hedge funds to organise their own separate managed mandates. And of course they are bargaining harder on fees.
Where will the money go? Barclays, which thinks the sector could realistically attract another $2tn, finds that trend-following futures funds and multi-strategy funds are out of favour. The most popular strategies are equity “long-short” – which rewards good stockpickers, and “event-driven” – making money around special events such as mergers and acquisitions.
This looks like a bet that 2014 will see the much-anticipated “stockpicker’s market”. It is a popular prediction that 2014 will see more muted equity gains, and a return of the wider dispersion of returns that allow stockpickers to outperform. Such a view rests on the notion that monetary conditions will tighten, while the US economy recovers.
If that happens, then hedge funds could attract yet more money. They will have far fewer excuses if they fail to beat the market. For the time being, the big institutions who have helped the sector swell to a record size are prepared to forgive them for the past five years.

>>> Fitch expects stable ratings for most issuers within the homebuilding sector

Fitch expects stable ratings for most issuers within the homebuilding sector in 2014; projects single-family starts to improve 20% in 2014 and multifamily volume +9%

Fitch forecasts new home sales to advance about 20% to 518,000 while existing home volume increases 2% to 5.16 million.

--> Homebuilders outperforming in early trade - TPH +2.8%, BZH +2.3%, RYL +1.9%, TOL +1.4%, MHO +1.4%, MTH +1.3%, KBH +1.1%, DHI +1.1%, LEN +1%, MDC +1.1%, PHM +0.9%, SPF +0.8%, ITB +0.8%, HOV +0.7%

(Barron's) Investing in Illiquidity --> KKR, BX, CG could be interesting name to

(Barron's) Investing in Illiquidity --> KKR, BX, CG could be interesting name to look at, long term OP equities...no real risk on financing for these names...
Have a look

Investing in Illiquidity

The next big investment opportunity might not be stocks. Citi Private Bank’s chief investment officer Steven Wieting says that post-financial crisis investors have accepted that the world isn’t ending but still crave investments that can be exited quickly. Patient investors with a longer time horizon can play this lingering anxiety by buying less liquid investment vehicles— like private equity firms and real estate— that are still sitting in the bargain bin. Among the opportunities are European corporate debt and investing in smaller North American energy firms.

With all the noise about folks moving up the risk curve, and the general shift from cash and fixed income to equities, it turns out a good portion of investors globally are still frozen in time. A recent Citi Private Bank survey of 50 family offices from over 20 countries found an average allocation of only 25% to equities and an astonishing 40% in cash. Unbeknownst to these wealthy investors across the globe, their excessively conservative portfolios produced mediocre results, a paltry 6% return last year compared to the MSCI World Index’s 20.3% return. Citi Private Bank’s gains, for a portfolio with 51% in equities and 5% to cash, came to 11%.


While Wieting is not predicting another equities gusher this year, he still thinks U.S. large-cap equities will grow by an additional 9% to 10%, with dividends reinvested. Generally, however, upward-trending markets like the U.S. and Japan are nearing their historic averages and maturity from a valuation standpoint, he says, while emerging markets remain unattractive. The commodity super-cycle – that realized ten years of double-digit annual growth in emerging markets– is coming to an end. European equities are the most attractive of the lot and Citi expects them to grow 13% next year.

But even more opportunities abound for investors willing to man up and brave the illiquidity of alternatives. Wieting estimates that over the next ten years, private equity and real estate vehicles will produce annualized returns of 11.9%, almost double the 6.7% return he is estimating for developed market large-cap equities.

Why are alternatives so attractive? It’s partially because of post-financial crisis investor psychology, Wieting says. To some extent investors are warming to risk but alternatives remain a no-go zone. “There has been a thawing of risk tolerance,” he explains, “but if you tell investors that we can offer you a higher return – but that we can’t tell you exactly what length of time you need to commit to – there is suddenly much less interest.”

All too familiar in their minds are the precipitous declines from the financial crisis, when most alternative strategies fell in lockstep with the broader market, declining up to 40% in 2009 alone. Unable to exit private equity or certain real estate vehicles due to the five to ten year lock-ups – or, if so, only at distressed give-away prices – investors couldn’t scramble up the cash they suddenly needed to pay their bills. They never want to experience that again.

Wieting thinks that while this psychology persists, the time to buy alternative investments is now. The fear of illiquidity is overblown, particularly since the economy is chugging along steadily again, and the disconnect means bargains are to be found.

How? Before locking your money up for ten years or so, do the necessary due diligence to select the right manager. Data from alternatives research and consultancy firm Preqin, suggests that 65% of private equity and real estate funds with top or second quartile performance go on to manage a top or second quartile successor fund. So a strong track record, though not indicative of future returns, is important.

The next factor to consider is market opportunity. One investment theme Wieting likes is non-performing loans, such as residential and commercial real estate, that are languishing on the balance sheet of European banks. See our recent coverage, “The Sweet Smell of Euro Trash.”

Wieting also is helping his clients lend directly to Europe’s cash-starved corporations. Euro Zone banks are under deeper scrutiny to meet the demands of regulators and capital requirements, and are furiously cutting and pruning their businesses, while generally tidying up their balance sheets. Deustche Bank’s recently reported losses are just the latest chapter entry in this unfolding story.

The thing to bear in mind: Since December 2010, Europe’s 16 largest banks have cut exposure to corporate credit by 9%, or nearly $600 billion, which provides an opening for Citi and other international lenders. More opportunities are coming online. The securitization products, known as collateralized loan obligations, that allowed the banks to slice-and-dice and offload tranches of European loans, are facing a cut-back as well. That reduction in capacity will force yet more limitations on what the European banks can underwrite.

With these methods of financing drying up, liquidity-starved corporations will increasingly turn to private debt managers, who, in turn, will extract attractive terms for clients. Firms like Alcentra, a sub-investment grade debt specialist owned by BNY Mellon, and Marc Lasry’s hedge fund Avenue Capital Group, are among the recent market entrants.

Wieting also has a thesis that takes advantage of the North American energy revolution powered by hydraulic fracking. Wieting thinks the debt of the smaller energy companies, having trouble accessing public capital markets, are attractive holdings. A related and relevant report by PwC, projects that investments in U.S. shale infrastructure alone will require $5 trillion over the next 20 years.

But caution. There is an entire continuum of risk and return to choose from among these energy companies. Midstream energy transporters are lower risk and yield lower returns, since the business is fee driven via long-term contracts; gas storage companies, meanwhile, are exposed to demand volatility and price swings, hence the heftier payoffs for their investors. The smart money is learning the trade. Earlier this month, the fabled private equity shop KKR opened an office in Canada, announcing it expects to invest between $500 million and several billion dollars in energy-related companies over the next five years. Early moving competitors, like Arc Financial and Kern Partners, already have billion dollar portfolios in the energy sphere.

Last year, conservative investors finally dipped their toes into the equity markets, some would say a little too late. Folks who are quicker to embrace illiquidity, the next thawing in our post-crisis “normalizing” process, should be rewarded for their decision

(Time) Facebook Is About to Lose 80% of Its Users, Study Says

Facebook Is About to Lose 80% of Its Users, Study Says Link {http://ti.me/LTBWMR}

Social media is like a disease that spreads, and then dies

Facebook’s growth will eventually come to a quick end, much like an infectious disease that spreads rapidly and suddenly dies, say Princeton researchers who are using diseases to model the life cycles of social media.
Disease models can be used to understand the mass adoption and subsequent flight from online social networks, researchers at Princeton’s Department of Mechanical and Aerospace Engineering say in a study released Jan. 17. The study has not been peer-reviewed. Updating traditional models on disease spread to assume that “recovery” requires contact with a nondiseased member — i.e., a nonuser of Facebook (“recovered” member of the population) — researchers predicted that Facebook would see a rapid decline, causing the site to lose 80% of its peak user base between 2015 and 2017.
Basically, Facebook users will lose interest in Facebook over time as their peers lose interest — if the model is correct. ”Ideas, like diseases, have been shown to spread infectiously between people before eventually dying out, and have been successfully described with epidemiological models,” write the researchers.


Full Study attached - if you want more details

>>> Allergan, Inc Discloses issuance of patent on Jan 21 from the USPTO - filing

Allergan, Inc Discloses issuance of patent on Jan 21 from the USPTO - filing
- On January 21, 2014, the United States Patent and Trademark Office (the USPTO) issued U.S. patent number 8,633,162 (the 162 Patent), covering a method of use relating to the Restasisproduct. On January 21, 2014, the Company submitted the 162 Patent for listing in the Orange Book. The 162 Patent will expire in August 2024.

- On January 21, 2014, Allergan, Inc. (the Company) received a notice letter dated January 14, 2014 (the Notice Letter) from Watson Laboratories, Inc. (Watson) stating that Watson has filed an Abbreviated New Drug Application containing a Paragraph IV patent certification with the U.S. Food and Drug Administration (the FDA) seeking approval to market a generic version of the Companys Restasis(cyclosporine ophthalmic emulsion) 0.05% product. The Notice Letter states that the Paragraph IV patent certification was made with respect to U.S. patent number 8,629,111 (the 111 Patent), covering the Companys specific formulation of the Restasisproduct, which is listed in the FDAs Approved Drug Products With Therapeutic Equivalence Evaluations, commonly known as the Orange Book. The 111 Patent will expire in August 2024. The Company is currently evaluating the Notice Letter and intends to vigorously enforce its intellectual property rights relating to the Restasisproduct, including the 111 Patent.