TheChek News Flow

Sector delivered its best performance in over a decade during rocky year for financial markets

Hedge fund assets hit a record last year as the industry delivered its best performance in over a decade during the most tumultuous year for markets since the 2008 financial crisis. 

Assets surged $290bn during the final three months of the year, marking the biggest-ever quarterly jump and bringing total assets under management to a record $3.6tn, according to data provider HFRI.

Against a backdrop of rising markets, strong performance helped to boost hedge fund assets. The HFRI Fund Weighted Composite index, which tracks a range of strategies, gained 11.6 per cent in 2020, its best return since 2009. Meanwhile, investors ploughed a net $16bn into the industry during the second half of the year, HFR said. 

The strong returns and inflows come as a source of relief for an industry that has struggled to justify its place in investor portfolios following years of lacklustre performance while charging high fees. 

Over the past decade, hedge funds have been forced to compete with the emergence of much cheaper tracker funds as well as a growing interest in other so-called alternatives strategies such as private equity and private debt. In conversations with their investors, managers insisted that they were handicapped by the longest bull run in history and record-low interest rates but would outperform during a downturn. 

The benchmark S&P 500 still beat the average hedge fund last year, returning 18.4 per cent. The robust stock market recovery helped equity-focused funds outperform other strategies and exceed $1tn in assets. 

While hedge funds on the whole delivered strong returns, the coronavirus crisis wrongfooted some of the industry’s biggest players. 

Renaissance Technologies, the secretive hedge fund founded by Jim Simmons, had one of its worst years. Its Institutional Equities Fund lost close to 20 per cent, while its Institutional Diversified Alpha declined by 31 per cent, investors said. The fund’s assets declined by $15bn to $60bn, according to people close to the firm, due partly to outflows.

Bridgewater Associates, another stalwart of the industry, also had a difficult year, though it managed to claw back some of its losses during the second half of 2020. Its flagship Pure Alpha fund was down by more than 10 per cent at the end of December.

Euan Blair’s education start-up valued at $200m

Multiverse, which helps young people win apprenticeships, raises new funding from General Catalyst and Google

An education start-up co-founded by Euan Blair, son of the former British prime minister Tony Blair, has raised $44m from investors, valuing the business at around $200m including the new money.

Multiverse, previously known as White Hat, said it provides young people with an alternative to university by matchmaking them with apprenticeships at companies and providing coaching and training.

Its Series B round was led by General Catalyst, and included Google Ventures, Audacious Ventures, Latitude and SemperVirens, as well as Index Ventures and Lightspeed Venture Partners, both of which contributed to Multiverse’s previous $16m fundraising last year.

It now plans to open a New York office and hire a further 200 staff to expand.

Mr Blair, 37, Multiverse chief executive, was a child when his father was elected as Britain’s prime minister, and promised ahead of his second term that his three priorities would be “education, education, education”.

But Mr Blair said the model of going to university and then receiving sporadic corporate training was “fundamentally broken” and often fails “to give people the skills they need”.

His start-up has been boosted by the apprenticeship levy in the UK, which forces large companies to set aside money for on-the-job training. Multiverse said it has more than 300 clients in Europe, including Facebook, Morgan Stanley, KPMG and Skanska, and last year alone tripled the number of apprentices it trains to more than 2,000.

Joel Cutler, managing director and co-founder of General Catalyst, said: “Euan and his team at Multiverse are building a path for ambitious people to land quality, career-enhancing jobs at some of the most recognisable companies in the world.

“They've achieved so much already in the UK and we're looking forward to partnering with them as they expand their mission stateside.” 

Retreat marks one of the first by a large financial institution amid unrest in territory

US hedge fund Elliott Management is closing its Hong Kong office, becoming one of the first large financial institutions to shutter operations in the territory since it entered a period of civil unrest and political tension in 2019.

The activist fund, which was founded in 1977 by billionaire Paul Singer and has launched dozens of campaigns globally, has had a presence in Hong Kong for 15 years. It will move staff based in Hong Kong to its offices in London and Tokyo, which will become its only base in Asia.

A memo sent to investors said: “Consistent with Elliott’s longer term planning processes, we will be closing down trading and investment activities in the Hong Kong office and, effective January 1, 2021, transferring principal responsibility for existing Asian (ex-Japan) investment positions and for new situational trading and investments in Asia to the London office.”

Elliott’s largest campaigns in Asia include a $2.5bn investment in Japanese technology conglomerate SoftBank, and an ongoing six-year battle with Bank of East Asia, which is controlled by the Hong Kong Li family. These will now be overseen by teams in London and Tokyo, according to a person close to the fund.

Its departure comes six months after China imposed national security laws on Hong Kong, increasing its power over the territory in a move that has since been condemned by the US and Europe.

Other funds contacted by the Financial Times have described plans to shift individual staff or parts of their operations to other cities in Asia, citing concerns that the business environment in Hong Kong is becoming increasingly unpredictable.

However, a person close to Elliott said the decision to wind down operations in Hong Kong was first taken in early 2018 and was not driven by more recent political or legal changes in the region. The fund has reduced headcount in the territory from about 100 to fewer than 20 people in the past two years, the person said.

The new Chinese regime in Hong Kong, which targets subversion of state power or “interference” by foreign countries, has raised concerns about Hong Kong’s future as a global financial centre. This includes fears the clampdown could lead to a flight of capital and talent to rival Asian business hubs in Singapore and Tokyo.

Elliott’s decision to move staff from Hong Kong to Tokyo coincides with an ongoing boom in shareholder activism in Japan, and the high-profile successes of several prominent campaigns. In recent months activists have felt emboldened and attempted new tactics: Toshiba was last week forced to take steps to hold an unprecedented double extraordinary general meeting of shareholders later this year after demands from two separate investors.

Then in a historic $1.2bn deal sealed on Monday, real estate giant Mitsui Fudosan completed a tender offer for Tokyo Dome, operator of one of the most famous sporting landmarks in Japan. The deal emerged from a campaign run by Hong Kong-based activist Oasis, which had demanded a wholesale shakeout of Tokyo Dome’s management.

Elliott’s activism in Japan has meanwhile been comparatively low key, but it has involved prominent targets that include conglomerate Hitachi and real estate developer Unizo. A year ago, Elliott built a significant position in SoftBank, which it used to put pressure on the company’s founder, Masayoshi Son, to buy back shares and seek other strategies to raise the company’s valuation.

Tech giant will host cloud services for GM’s autonomous-vehicle subsidiary; Financing brings Cruise’s valuation to $30 billion

Microsoft Corp. MSFT -0.17% is investing in General Motors Co. GM -3.03% ’s driverless-car startup Cruise as part of a strategic tie-up, another sign of renewed interest in the autonomous-technology space after a relatively quiet period.

Microsoft is among a group of companies that will invest more than $2 billion in San Francisco-based Cruise, which has been majority owned by GM since early 2016. The financing brings Cruise’s valuation to $30 billion, Cruise said Tuesday, up from an estimated $19 billion in spring 2019.

GM is adding to its Cruise investment as part of the funding round and will retain a majority stake, a Cruise spokesman said. The investment also includes current stakeholder Honda Motor Co. and other institutional investors that Cruise declined to name.

Under terms of Tuesday’s deal, Cruise will use Microsoft’s Azure cloud-computing service to help it roll out autonomous-vehicle services. Cruise for years has been testing driverless cars in San Francisco and plans an eventual robot-taxi service. It is also is exploring commercial delivery.

Driverless cars are expected to throw off troves of data for autonomous-service operators to capture, store and eventually monetize, analysts say. Even on today’s cars, auto makers and tech companies are mobilizing to harness data from the growing number of vehicles with internet connections.

In a statement, Cruise Chief Executive Dan Ammann said Microsoft’s involvement will help Cruise commercialize its technology. Microsoft Chief Executive Satya Nadella said the tech giant wants to help autonomous cars go mainstream.

GM also said Microsoft would be its preferred cloud provider and help it streamline supply chains and roll out new digital services to customers.

The investment is Cruise’s first significant infusion in more than 18 months. The company pulled in about $7 billion in 2018 and 2019 from big investors including Japan’s SoftBank Group and Honda.

Cruise missed its target of introducing an autonomous ride-hailing service to paying customers by the end of 2019 and hasn’t set a new timetable. It has signaled recently that it is getting closer to commercializing its technology, though, including the hiring this month of Delta Air Lines Inc.’s former operations chief to oversee aspects like customer service and fleet management.

There are signs that investor appetite for autonomous-driving companies has grown following a lull amid challenges in transforming the technology into viable business plans.

Startup Aurora Innovation Inc. had a valuation of around $10 billion following its recent acquisition of Uber Technologies Inc.’s autonomous unit, up from about $2.5 billion in 2019. The market value of Luminar Technologies Inc., which makes laser-based sensing technology for self-driving cars, has rocketed to around $10 billion following its initial public offering last month.

Waymo LLC, the autonomous-vehicle division of Google parent Alphabet Inc., raised at least $3 billion last year and recently began providing rides to the general public in the Phoenix area.

RBC Capital analyst Joseph Spak said in a recent research note that the pace of deals and technical milestones in the autonomous-vehicle sector are drawing investor interest after “a tough few years.”

Best explanation for how stocks have moved so far this year is the raw price of the stock, an almost meaningless number

Sometimes it’s hard to argue that market capitalism has any chance of correctly allocating money to the companies that can use it best. Case in point: Stock-market performance this year has been driven by the raw share price, with lower-priced stocks doing better and higher-priced worse.

Forget a careful evaluation of future cash flow, valuation, brand power, management skill or even political sensitivity. I repeat: The best explanation for how stocks have moved so far this year is the price of the stock, an almost meaningless number.

Stocks priced below $1 have performed the best, followed by those between $1 and $2, and so on up almost perfectly. The worst performers have share prices above $100. It looks remarkably like investors are treating a low-price share as an indicator that the stock is a bargain, and a higher price as a sign that it is worse value for money.

The share price on its own carries virtually no useful information: It depends entirely on how many shares the company has issued. A company can split a high priced stock to create more at a lower price, without making any difference to the intrinsic worth of the company. Equally, it can consolidate its shares to reduce the number, increasing the share price but again without any effect on how much the company should be worth.

The fact that the stock price at the start of the year is a near-perfect determinant of how a stock has performed is depressing, but at least in part explainable.

The depressing part is the unknown extent to which it is due to the rising popularity of trading by individual investors, who are more likely to be new to the stock market and regard a low-price share as cheap, even though it should be irrelevant to a company’s prospects.

The explainable part is that the pattern could partly be the result of the widespread willingness to pile on risk, because rules on penny stocks and delisting make certain types of stocks riskier.

Penny stocks are those that, despite the name, persistently trade below $5, and for which brokers have to provide warnings, with some exceptions. This makes them less attractive to investors. Below $1 they run the risk of being delisted by Nasdaq and NYSE, making them much harder to trade.

The result is that a very low stock price is taken as a sign of a poor-quality stock, even though it could just do a reverse stock split to consolidate its shares and push up the price again. Usually being poor quality works against a stock, but there has been a general dash for trash across the market since the prospect of more stimulus began to be priced in ahead of the November election, with riskier stocks doing better.

Because regulations and stock-exchange rules mean a very low price is an indicator of trouble at a company, the rush into the junkiest stocks helps those with a very low price, too.

It shouldn’t make any difference once stocks are out of the danger zone, though—and yet it does. Logic fails, and this is worrisome. Stocks continue to do worse as the price rises, with the most expensive being the worst performers of all.

There used to be an explanation for why very expensive stocks—such as the A shares of Warren Buffett’s Berkshire Hathaway, which trade at $350,320—might lag: Private investors couldn’t even afford one of them. But even these are no longer out of the reach of the ordinary investor, thanks to fractional share programs run by many brokers.

It’s not a good sign that the stock market is being driven by a combination of investors misinterpreting what the stock price means and a rush to buy rubbish. The first makes the market function badly, as no one should be allocating capital based on the price alone. The second is a classic sign of too much risk taking, raising the danger that the rally ends badly.

My only reassurance is that this has happened before, if not in such an extreme way. A rush into the junkiest small stocks available is common at the start of the year, according to a 2015 study by AQR, which found low-quality stocks—measured by factors such as profitability, growth and credit rating—strongly outperformed higher-quality stocks in January, and especially so for smaller companies.

The pattern of lower-priced stocks doing better is neater in 2021 than in past years, perhaps because 2020 brought a flood of new stock traders armed with stimulus checks.

There is a reason to take more risk, as vaccine rollouts promise a return to a functioning economy; President-elect Joe Biden promises another round of stimulus, some of which will find its way into stocks; and the Federal Reserve promises not even to think about raising interest rates.

But I’m concerned. Stocks that fit popular themes such as solar and electric vehicles are already wildly overvalued, while signs of optimism abound in the wider market. Add in prices driven up fast purely by the arbitrary measure of how many dollars they cost and there’s good reason to worry.

Potential land mines await those seeking to raze and redevelop a space that spans dozens of football fields

Many developers look at failing malls and envision modern office campuses, bustling warehouses or residential buildings. But some are finding that converting these shopping centers isn’t so easy.

Repurposing a mall is expensive. New owners typically need to shell out hundreds of millions of dollars on construction and labor, developers and brokers say.

Razing and redeveloping a space that spans dozens of football fields is filled with potential land mines. The new investor may own the mall but not the department stores or parcels in the parking lot, which means an owner needs their approval. Owners will also need to seek rezoning and entitlements permits that can take years, during which economic conditions can deteriorate.

Consequently, many recent conversion efforts have gone awry, forcing the owner to sell the property at a discount. In other cases, local government authorities have lost patience and bought the owners out.

Brookfield Property Partners LP has made converting all or part of malls one of its prime real-estate strategies. In 2018, the firm bought the two-thirds of mall operator GGP Inc. it didn’t already own, valuing GGP’s property portfolio at around $15 billion. The acquisition reflected Brookfield’s confidence in the mall-conversion strategy, but the real-estate investor has often struggled to make this approach work.

Brookfield last week handed over its North Point Mall in Alpharetta, Ga., to a lender, despite having secured rezoning approvals to add hundreds of residential units to the site in 2019. Yet with the two-story property losing tenants in recent years, its value has sunk below its loan balance of roughly $200 million—thereby making little economic sense for Brookfield to continue repaying the loan and investing in the mall’s redevelopment.

The property firm in July canceled plans for the redevelopment of a former Vermont mall after securing permits to tear down the property. Brookfield said at that time that the long-term nature of the development’s next phase didn’t fit with its funds mandate. Analysts said that office and retail tenants are turning more cautious about signing new leases, which made redevelopment projects like this less of a sure bet.

An investor’s ambitious plan to turn the struggling Gwinnett Place Mall outside Atlanta into a 20,000-seat cricket stadium didn’t work out, either. The 1.7 million-square-foot mall thrived in the 1980s and ’90s but later suffered from competition by neighboring malls and went into foreclosure in 2012.

Moonbeam Capital Investments LLC purchased the mall in 2013 for $13.5 million. The firm, which specializes in buying nonperforming loans backed by commercial properties, planned to build apartments and offices after demolishing a department store at the mall. But Moonbeam ran out of money and didn’t proceed, according to a person familiar with the matter.

In 2019, an investor proposed buying the site and turning it into a cricket stadium, hoping to appeal to the region’s large Indian population and its enthusiasm for the British sport. The investor, Philadelphia-based businessman Jignesh Pandya, hoped a stadium would be a part of a proposed U.S. cricket league. But the sale fell apart when the two sides couldn’t agree on terms, according to a person familiar with the matter.

In December, county officials agreed to purchase the mall from Moonbeam for $23 million rather than see this valuable site go unused by the community. It couldn’t be determined if Moonbeam, which didn’t respond to requests for comment, made money on the sale after including investment costs.

Not all conversions fail. Some dying malls have become warehouses, prized by logistics companies since they are located near major highways and have ample parking fields. In rare instances, tired shopping centers draw technology firms seeking a site for their headquarters or an office campus.

Local governments often step in to buy the mall to prevent further decay and make the site more palatable for future investors. While local authorities rarely pay top dollar for failing malls, some sellers have broken even or squeezed out a profit if they picked up the malls cheaply after the 2009 recession.

In Norfolk, Va., the Norfolk Economic Development Authority purchased Military Circle Mall and called for investors to submit plans for the site. The city said this month it has shortlisted four groups, including one with entertainment companies and the musician Pharrell Williams.

Car industry lobby is hoping political pressure can be used to accelerate production in Asia

Germany’s carmakers have turned to Angela Merkel’s government in an effort to help ease a massive shortage in semiconductors that threatens to cripple production in one of the country’s biggest industries.

An unexpected recovery in global demand for cars towards the end of last year led to a sudden surge in demand for crucial chips, which semiconductor manufacturers, whose largest customers are smartphone and tablet producers, were unable to meet.

The German industry is hoping that political intervention could help move car suppliers up the chipmakers’ list of priority customers, particularly in Asia. However, carmakers are currently outside the top 10 on that list, according to industry insiders, with technology giants such as Samsung and Huawei taking precedence.

Volkswagen, the world’s largest carmaker, has been forced to furlough tens of thousands of workers, and the group has said it will make at least 100,000 fewer cars in the first few months of the year as a result.

Mercedes-maker Daimler has also had to cut back production, while Ford has closed its German plant in Saarlouis until the middle of February.

“Intensive global efforts are being made to improve the supply of semiconductors to the automotive industry,” the German car lobby, the VDA, said in a statement on Tuesday. It added that it was “in contact with the German government on this issue”.

The move by the VDA comes after its American counterpart sought assistance from the US government and Joe Biden’s incoming administration. Discussions have also taken place between Japan’s Automobile Manufacturers Association and government officials.

The German government did not immediately respond to a request for comment.

The semiconductor bottlenecks could last for several weeks, according to analysts, as semiconductor supplies take between three and sixth months to ramp-up.

Up to 2.2m fewer cars could be produced globally this year as a result, according to a report by Frank Biller, an investment analyst at Germany’s LBBW bank. Modern vehicles contain several dozen chips, powering everything from parking sensors to entertainment systems.

The crisis comes at a time when car executives were enjoying a strong rebound in car sales, particularly in China. If not for the shortages in semiconductor supplies, Volkswagen would have been hiring extra staff to meet the increased demand, according to people familiar with the matter.

However the Wolfsburg-based group has said that it expects to make up for the lost production capacity in the second half of the year.

International energy body says fresh restrictions will delay expected recovery in crude market

Global oil demand will be lower in 2021 than previously expected, the International Energy Agency said on Tuesday, as renewed lockdowns to contain the pandemic hit consumption.

The IEA said oil demand would be 600,000 barrels a day lower than previously forecast in the first quarter of 2021 and 300,000 b/d lower for the year as a whole, although it still expects a strong recovery in the second half of the year as vaccinations accelerate.

“It will take more time for oil demand to recover fully as renewed lockdowns in a number of countries weigh on fuel sales,” the IEA said in its closely watched monthly report.

“[But] the global vaccine rollout is putting fundamentals on a stronger trajectory for the year.”

Since collapsing early last year as lockdowns and travel bans slashed oil demand, crude prices have been recovering with Brent crude oil, the international benchmark, climbing back above $55 a barrel.

But prices are still $10-$15 a barrel lower than they were before the pandemic despite Opec and allies like Russia enacting record supply cuts to help prop up the market and expectations demand will be stronger in 2021.

The IEA said that while it was lowering its forecast, global oil demand is still expected to rise by 5.5m b/d in 2021 as a whole to 96.6m b/d after falling by 8.8m b/d in 2020. But it is not expected to recover to pre-pandemic levels of around 100m b/d until 2022 at the earliest.

“Vaccination campaigns take time,” the IEA said. “We assume that the [they] will start to have an impact on mobility and transport fuel demand in the second half of 2021.”

The IEA said it still saw the potential for global oil inventories to decline substantially this year as Opec and its allies have increased the size of agreed production cuts designed to help balance the market and bolster prices. Saudi Arabia announced it would remove an extra 1m b/d of production earlier this month.

The so-called Opec+ group, which has worked together since 2016, may need to start raising production later this year, while under-investment in the industry has led some traders to bet that supply gaps could open up in the coming years.

“Assuming Opec+ achieves 100 per cent compliance with the latest agreement, global oil stocks could draw by 1.1m b/d, or 100m barrels in the first quarter with the potential for much steeper declines during the second half of the year as demand strengthens,” the IEA said.

World oil supply is expected to rise by 1.2m b/d in 2021 after a record fall of 6.6m b/d last year.