FT : Hedge funds post best start to year since before financial crisis

Hedge funds post best start to year since before financial crisis
Market shake-up has created ‘fertile’ environment for managers to make bets

Hedge funds have navigated the GameStop short squeeze and the collapse of family office Archegos Capital to post their best first quarter of performance since before the global financial crisis.

Funds generated returns of just under 1 per cent last month to take gains in the first three months of the year to 4.8 per cent, the best first quarter since 2006, according to data group Eurekahedge. Recent data from HFR, meanwhile, show funds made 6.1 per cent in the first three months of the year, the strongest first-quarter gain since 2000.

Hedge fund managers, who often bet on rising and falling prices of individual securities rather than following broader indices, have profited this year from a rebound in the cheap, beaten-down so-called “value” stocks and areas of the credit market that many of them favour. Some have also been able to profit from bouts of volatility, such as the surge in GameStop shares, which turbocharged some of their holdings and provided opportunities to bet against overpriced stocks.

“We’re going into a market environment that is going to be more fertile for most active trading strategies, whereas for most of the past decade buying and holding the index was the best thing to do,” said Aaron Smith, founder of hedge fund Pecora Capital, whose Liquid Equity Alpha strategy has gained around 10.8 per cent this year.

The gains are a marked contrast to the first three months of 2020, when funds slumped by around 11.6 per cent as the onset of the pandemic sent equity and other risky markets tumbling. However, funds later recovered strongly to post their best year of returns since 2009.

This year, managers have been helped by a tailwind in stocks and, despite high-profile losses at Melvin Capital and family office Archegos Capital, have largely survived short bursts of market volatility.

It's a “good market for active management”, said Pictet Wealth Management chief investment officer César Perez Ruiz, pointing to a fall in correlations between stocks. When stocks move in tandem, it makes it more difficult for money managers to pick winners and losers.

Among some of the biggest winners is technology specialist Lee Ainslie’s Maverick Capital, which late last year switched into value stocks. Maverick has also profited from a longstanding holding in SoftBank-backed ecommerce firm Coupang, which floated last month, and a timely position in GameStop. It has gained around 36 per cent. New York-based Senvest, which began buying GameStop shares in September, has gained 67 per cent.

Also profiting is Crispin Odey’s Odey European fund, which rose nearly 60 per cent, having lost around 30 per cent last year, according to numbers sent to investors.

Odey’s James Hanbury has gained 7.3 per cent in his LF Brook Absolute Return fund, helped by positions in stocks such as pub group JD Wetherspoon and Wagamama owner The Restaurant Group. Such stocks have been helped by the UK’s progress on the rollout of the coronavirus vaccine, which has raised hopes of an economic rebound.

“We continue to believe that growth and inflation will come through higher than expectations,” wrote Hanbury, whose fund is betting on value and cyclical stocks, in a letter to investors seen by the Financial Times.

FT : Silver Lake, Egon Durban and the courtship of Middle Eastern royalty

Silver Lake, Egon Durban and the courtship of Middle Eastern royalty
The meeting of minds between SoftBank’s Masayoshi Son and Saudi Arabia’s Mohammed bin Salman created the first big tie-up between a group investing in technology and an authoritarian regime. 

Now, it is becoming increasingly clear that Silver Lake boss Egon Durban is intent on recreating a similar sort of alliance for his private equity firm with the emirate of Abu Dhabi.

On Wednesday, Silver Lake announced an $800m investment into a business that shows just how close the US tech investment firm is becoming with Abu Dhabi’s ruling elite and how enmeshed Durban is becoming with them.

The deal will see Silver Lake take a stake in Group 42, an Abu Dhabi-based company set up in 2018 that bills itself as a provider of artificial intelligence and cloud computing.

It featured in a January long-read by our colleagues Andrew England and Simeon Kerr who explained G42 was born out of the state security role held by Sheikh Tahnoon bin Zayed al-Nahyan. (He’s the UAE’s national security adviser, and the brother of Sheikh Mohammed bin Zayed, Abu Dhabi’s crown prince and the UAE’s de facto leader.)

Along with being chair of G42, Sheikh Tahnoon manages a sprawling portfolio that straddles national security and the often opaque corporate sector in the UAE, per Andrew and Simeon’s feature. 

So that may explain why G42, which is described as an AI provider, has found itself playing an active role in the UAE’s response to coronavirus and even started manufacturing the main Chinese vaccine domestically.

“G42 has quickly become a globally respected technology leader, poised to expand its technology portfolio and extend its leadership in AI and digital transformation,” Durban said in a statement. He will be joining the company’s board. 

The move is the latest in Durban’s multiyear courtship of Abu Dhabi, a relationship born out of his close friendship with US talent agent Ari Emanuel, who runs the Endeavor agency. 

That friendship led to a deal between Silver Lake and the Abu Dhabi-owned parent company of Manchester City Football Club in 2019, where the US group acquired a stake. The deal was followed up last year with Abu Dhabi state fund Mubadala acquiring a stake in Silver Lake and agreeing to put $2bn in a new investment strategy run by the firm. 

FT : Orcel’s ‘dream job’ won’t be without its politics

Orcel’s ‘dream job’ won’t be without its politics
By his own description, Andrea Orcel isn’t one to just “let things go”.

The hard-charging, kick-boxing Italian banker doesn’t shy away from a fight. When Santander poached him from UBS to name him chief executive of the Spanish bank in 2019, only to withdraw the offer weeks later, Orcel hit back in court for damages totalling €100m. That legal battle is still ongoing.

So it shouldn’t be a surprise that Orcel, a man who runs uphill to cram a notional 60-minute workout into 30 minutes of gruelling intensity, is likely to bring the same tenacity as chief executive of UniCredit — if all goes as expected at the Italian bank’s annual general meeting on Thursday.

It’s a milestone for Orcel, who told allies it was his “dream job”, 23 years after orchestrating the $25bn deal that formed the lender, Italy’s second-largest, when he worked as an M&A banker at Merrill Lynch.

After his falling out with Santander chair Ana Botín left him unemployed for the first time in decades, the departure of Jean Pierre Mustier from UniCredit could not have come at a better time.

The Frenchman’s stance on domestic mergers and acquisitions and his cost-cutting initiatives clashed with UniCredit’s Italian board and its incoming chair, the former Italian finance minister Pier Carlo Padoan.

On top of Padoan’s to-do list is considering a UniCredit takeover of Monte dei Paschi di Siena, the world’s oldest bank, which has been state-owned since it was bailed out in 2016. Italian politicians hope to return MPS to the private sector, and Orcel’s speciality is banking deals. 

That’s not to say those transactions are always successful. He famously advised Royal Bank of Scotland on its disastrous €72bn takeover of the Dutch bank ABN Amro in 2007, a deal so bad he apologised for it (it led to the collapse of RBS).


Orcel will need to tread carefully with shareholders, who not only oppose the board’s plan to buy MPS, but have been urged by advisory Glass Lewis to vote against his €7.5m pay package. 

Beyond dealmaking, Orcel must find a way to lift UniCredit’s price to book value of 0.32, half that of its domestic competitor Intesa Sanpaolo. And as he hunts to lift profits, he must be careful that any cost-cutting measures don’t land him in the crosshairs of Italy’s powerful banking unions.

But Orcel is a man who has historically done things his way. So his new subordinates, accustomed to a more laissez-faire culture at UniCredit, better gulp down their espressos and prepare for his daily 6am phone calls.

FT : Surging inflows into ETFs hit $1tn in record-breaking 12-month streak

Surging inflows into ETFs hit $1tn in record-breaking 12-month streak
Demand for the funds accelerated in the first quarter on growing optimism for an economic recovery

A trillion dollars in new cash has surged into exchange traded funds over the past 12 months in a powerful demonstration of growing confidence in the global economy’s recovery from the coronavirus pandemic.

Global net investor inflows into exchange traded funds and products reached $359.2bn in the first three months of 2021, the busiest quarter on record, according to the data provider ETFGI.

That lifted net global ETF inflows since the end of March 2020 to just over $1tn.

“We have never previously seen ETF inflows reach $1tn in a twelve-month period. More investors are using ETFs to put their money to work in equity markets as the increasing pace of coronavirus vaccination programmes and continuing stimulus initiatives have led to a welcome improvement in the outlook for the global economy,” said Deborah Fuhr, the founder of ETFGI.

The rebound for stock markets began in late March 2020 and the S&P 500, the main US benchmark, has since rallied by 80 per cent to an all-time high of more than 4,100 points.

Matthew Bartolini, head of Americas ETF research at State Street Global Advisors, said that the US stock market began a “risk-on hot streak” in November after the uncertainty surrounding the presidential election ended and a timeline for vaccinations was established.

“The flows into ETFs so far in 2021 show that investors are putting serious money to work to partake in this risk-on rally,” said Bartolini.

Demand for value-orientated US equity ETF has surged with inflows reaching $25.5bn this year while US small cap ETFs have registered inflows of about $20bn.

“These are strong signs of cyclical positioning by investors,” he added.

Equity markets across advanced economies have followed Wall Street’s lead, unleashing a flood of new business for ETF providers.

Net inflows into US and Canadian equity ETFs reached $143bn in the first quarter of 2021, up from $30.4bn in the same period last year. Global equity ETFs gathered $46.7bn, more than four times the inflows of $10.5bn registered in the first quarter of 2020. Asia-Pacific equity ETF flows almost doubled to $19.3bn from $9.9bn, according to ETFGI.

BlackRock and Vanguard have continued to dominate the battle among ETF providers for investors’ cash over the past 12 months, resulting in an upswing in mergers and acquisitions activity as smaller competitors try to avoid being crushed by the world’s two largest asset managers.

Vanguard attracted ETF inflows of $96.2bn in the first three months of 2021, up from $50bn in the first quarter of last year when financial markets were retreating due to coronavirus fears. About $4.3bn of Vanguard’s US ETF inflows so far this year have come via an arrangement that allows clients to convert an existing mutual fund holding into an ETF.

BlackRock’s iShares ETF unit gathered inflows of $71.4bn in the first quarter, compared with just $13.6bn registered in the first three months of 2020.

State Street, the third-largest ETF manager globally, gathered first quarter inflows of $23.9bn after seeing net outflows of $2.8bn in the first three months of 2020.

Invesco, JPMorgan, DWS, Amundi and UBS also registered strong ETF business growth in the first three months of this year after suffering withdrawals in the first quarter of 2020 during the correction in equity markets triggered by the pandemic.

Ark Investments ranks as the fifth fastest growing ETF provider so far this year with first quarter inflows of $17bn. Huge investor appetite for Ark’s actively managed technology themed funds has helped the New York-based boutique established by Cathie Wood to attract significantly larger inflows than many more established competitors.

Governments worldwide have implemented unprecedented monetary and fiscal measures to limit the damage caused by the pandemic, resulting in a tidal wave of liquidity that has lifted financial markets globally.

The strong gains for equities over the past 12 months ratcheted up against the backdrop of a deepening global health crisis have triggered fears that unstable price bubbles could be developing in stock markets, particularly in the US.

But just 7 per cent of fund managers think that the US stock market is in a bubble, according to a widely followed Bank of America survey which canvassed 200 institutional investors that together oversee assets of $553bn. The net “overweight” position in equities among fund managers remained close to its all-time high in March even after the rally across developed stock markets over the past 12 months, according to the survey published earlier this week.

Vanguard said this month that the US stock market “may be overvalued, though not severely”.

The S&P 500 is trading on a price to trailing earnings multiple close to 25 times, near the top of its historic valuation range.

BlackRock is recommending that clients should “overweight” equities in the US, UK, Asia excluding Japan and emerging markets.

“We expect equities and other risk assets to be supported by a more muted response in government bond yields to stronger economic growth and higher inflation than in the past as central banks lean against any sharp rises in long-term interest rates,” said Wei Li, global chief investment strategist at the BlackRock Investment Institute.

Other equity strategists have cautioned that exuberant fund inflows suggest that equity risks are being underestimated by investors.

Binky Chadha, chief global strategist at Deutsche Bank, warned last week that a correction of up to 10 per cent was possible for US equities as economic growth measures would peak over the next three months.

Tobias Levkovich, chief US equity strategist at Citigroup, said that investor sentiment measures and equity valuations were now “very worrisome”.

“Huge fiscal stimulus and supportive central banks have created the notion of there being no need to be risk averse,” said Levkovich.

>>> US After Hours Summary: DELL +7.9% higher on plans to spin-off of rest of VM

After Hours Summary: DELL +7.9% higher on plans to spin-off of rest of VMW; AEO +6.1% higher on bullish guidance; CSGP to acquire Homes.com

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: APXT +16.2% (provides guidance for AvePoint), AEO +6.1% (guides Q1 revs above consensus), CMPR +5.7% (guides MarQ revs above single analyst est), HROW +1.8%, TGNA +0.9% (guides Q1 revs above consensus), SJR +0.1%

Companies trading higher in after hours in reaction to news: DELL +7.9% (DELL announces planned spin-off of 81% equity ownership of VMW), ROCC +2.4% (announces combination agreement with Reservoir Holdings), NVAX +2.2% (to participate in a Phase 2 trial which combines COVID vaccines), REI +1.8% (provides update on drilling program), ADS +1.4% (names new CFO), VMW +1.2% (DELL announces planned spin-off of 81% equity ownership of VMW), MRNA +0.8% (met with Nexus Pharma re vaccine manufacturing, according to Reuters), ZG +0.8% (in sympathy with CSGP acquiring Homes.com), ABCL +0.7% (enters into strategic multi-target discovery collaboration with Empirico), SHOO +0.5% (acquires 49.9% share that it did not already own of its European JV), COST +0.2% (increases dividend), BMY +0.2% (receives EC approval for Opdivo), PRSP +0.2% (awarded $71 mln US Space Force contract), ALLE +0.1% (files mixed securities shelf offering), RDFN +0.1% (in sympathy with CSGP acquiring Homes.com)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: ETH -2.8% (guides MarQ EPS above dual-analyst est), LCII -0.1%

Companies trading lower in after hours in reaction to news: MAXN -7.3% (stock offering), GBX -4.5% (convertible notes offering), JNJ -0.6% (CDC panel postpones decision on JNJ vaccine, not ready to vote yet, according to CNBC), THS -0.2% (COO stepping down), AXS -0.2% (announces preliminary Q1 net loss estimate for catastrophes), BDX -0.1% (receives FDA 510(k) clearance for Pristine Long-Term Hemodialysis Catheter), RNR -0.1% (estimates net negative impact of $180 mln from Winter Storm Uri), URI -0.1% (acquires Franklin Equipment), LVS -0.1% (launches ad campaign to bring casinos to Texas, according to Texas Tribune)

>>> US Close Dow +0.16% S&P -0.41% Nasdaq -0.99% Russell -0.84%

Closing Stock Market Summary

The S&P 500 declined 0.4% on Wednesday, as investors appeared to take profits in the heavily-weighted growth stocks amid the highly-anticipated public debut of Coinbase (COIN 328.28, -52.72, -13.8%). The benchmark index, however, started the day slightly higher in record territory following Q1 earnings reports from several of the big banks. 

The Nasdaq Composite underperformed with a 1.0% decline. The Dow Jones Industrial Average (+0.2%) and Russell 2000 (+0.8%), which are more exposed to reopening stocks, outperformed in positive territory but closed off session highs. Like the S&P 500, the Dow set an intraday all-time high. 

To start, JPMorgan Chase (JPM 151.21, -2.88, -1.9%), Goldman Sachs (GS 335.35, +7.67, +2.3%), and Wells Fargo (WFC 42.03, +2.24, +5.6%) each beat top and bottom-line estimates and provided encouraging commentary about business/economic conditions. GS and WFC rallied on the news, but JPM went the other way, as some questioned the quality of its EPS beat due to its large release for loan loss reserves. 

The overall tone of their reports was well-received by other banks and reopening stocks within the S&P 500 financials (+0.7%), energy (+2.9%), materials (+0.7%), and industrials (+0.1%) sectors. Energy stocks got an added boost from a 5% gain in crude prices ($63.18, +3.00, +5.0%) amid bullish inventory data from the EIA. 

While the reopening trade was back on to begin the day, the mega-cap/growth/technology stocks never got going. The information technology (-1.2%), consumer discretionary (-1.2%), and communication services (-0.9%) sectors, where the recently-hot mega-caps reside, were the weakest performers. 

Buying interest in growth stocks was lacking prior to the Coinbase open, which was preceded by a lot of excitement from analysts and the media; sellers followed through in response to the disappointing intraday price action in COIN. Coinbase opened at $381/share after earning a reference price of $250, but shares ended the session 14% off the opening price. 

The Fed's Beige Book for April, which was released at 2:00 p.m. ET or about 35 minutes after the Coinbase open, was another reported catalyst during the afternoon. Many Districts reported moderate price increases, and some said prices rose more robustly, although any inflation concerns weren't manifested in the Treasury market, which strengthened a bit in response. 

The 10-yr yield settled the session two basis points higher at 1.64% after trading slightly higher prior to the Beige Book's release. The 2-yr yield decreased one basis to 0.15%. The U.S. Dollar Index decreased 0.2% to 91.64.

Separately, Fed Chair Powell told the Economic Club of Washington that the Fed is likely to first taper asset purchases after substantial progress on its goals has been reached, then hold its balance sheet constant for a while, and then finally start to gradually raise interest rates -- a similar approach as it did coming out of the financial crisis. 

Reviewing Wednesday's economic data:

  • Import prices increased 1.2% in March while import prices excluding oil increased 0.8%. Export prices increased 2.1% in March while export prices excluding agriculture increased 2.0%.
  • The MBA Mortgage Applications Index decreased 3.7% following a 5.1% decline in the prior week.

Looking ahead to Thursday, investors will receive the Retail Sales report for March, Industrial Production and Capacity Utilization for March, the weekly Initial and Continuing Claims report, the Philadelphia Fed Index for April, the Empire State Manufacturing Survey for April, the NAHB Housing Market Index for April, Business Inventories for February, and Net Long-Term TIC Flows for February.

  • Russell 2000 +13.8% YTD
  • Dow Jones Industrial Average +10.2% YTD
  • S&P 500 +9.8% YTD
  • Nasdaq Composite +7.5% YTD

FT : Restaurant payment app secures Europe’s largest seed-funding round

Restaurant payment app secures Europe’s largest seed-funding round
VC firm New Wave backs service that allows customers to scan code on their table to settle bill

A hospitality payment app created by the founders of Big Mamma restaurants has raised Europe’s largest seed-funding round in a sign of confidence in the industry as lockdowns begin to ease.

Sunday, which promises to cut the commission restaurateurs pay on customer bills by at least half, has raised €20m in a seed-funding round from investors including New Wave, a venture capital firm backed by French telecoms billionaire Xavier Niel, and Philippe Laffont’s Coatue Management.

More than 1,000 restaurants and hotels have signed up to the app, including Corbin & King, owners of the Wolseley and Delaunay in London, Four Charles Prime Rib in New York and the Hoxton chain, which runs nine hotels across Europe and the US. It involves customers scanning a QR code on their table to pay the bill without having to catch the attention of waiting staff or take time over credit card machines.

Victor Lugger, co-founder of Sunday, said that when the system was trialled across his Big Mamma group’s 14 Italian restaurants on reopening after lockdowns last year, 80 per cent of customers chose to scan the code and the average spend per head increased 10 per cent “because you have more time for another coffee or limoncello”.

It also saved 15 minutes per table on average, allowing restaurants a quicker turnround between customers.

“Before Covid I would never have put a QR code on my table. It seemed gross and then suddenly it became normal,” said Lugger, who founded Big Mamma restaurants in 2015.

The app could be a boon to struggling restaurants as they begin to open up, in some cases for the first time this year, after months of lockdowns across Europe. Restaurant payment systems have been little changed for the past 30 years — but Sunday cuts the costs for operators to 0.5 per cent per transaction, compared with the usual 1-2 per cent charged by banks.

“Payment has always been the dirty aspect of eating out . . . and sadly often too slow and frustrating,” said Jeremy King, Corbin & King’s chief executive.

Despite restaurants being “tormented” during the pandemic, he added that the crisis had benefited the industry by “advancing technology and systems in one year that would normally have taken five or 10 years to achieve”.

Restaurants in the UK have been able to reopen this week for al fresco dining, but Lugger noted this meant just 65 of the group’s 440 seats in London could be used and that it did not make a profit.

He added that the QR code system was “not the endgame” and said he planned to develop Sunday to work off near-field communications, a contactless technology that links two devices.

The company intends to open four offices in London, Paris, Madrid and Atlanta, and double its headcount to about 90 staff over the next six weeks.