FT : Hedge fund Element to return $2bn after profiting in pandemic

Hedge fund Element to return $2bn after profiting in pandemic
Move by billionaire Jeffrey Talpins comes as many funds limit client access to protect returns

Element Capital, one of the world’s biggest macro hedge funds, plans to return around $2bn of cash to clients, in the latest sign that some top-performing funds are limiting their size after a year of strong gains during the coronavirus crisis.

New York-based Element, which was set up by billionaire Jeffrey Talpins and which manages $18bn in assets, wrote to investors this week to say it plans to return the money early this year because it wants to focus on performance rather than gathering assets. It will be the second time the firm has returned money in little more than a year, after returning around $3.6bn at the end of 2019.

The fund, which made a prescient bet on the efficacy of the coronavirus vaccine late last year, has emerged as one of the hedge fund winners from the pandemic, gaining 18.8 per cent during a wild 2020 for markets, according to a person who had seen the numbers.

Hedge funds have become increasingly wary in recent years of growing their assets too much, after seeing the performance of a number of large funds suffer. Extra assets can mean higher management fees for the fund’s managers, but becoming too large is increasingly seen as hindering performance because it can make it harder for managers to sell out of positions quickly and easier for rivals to identify their trades.

Some in the industry point to Brevan Howard, once seen as the gold standard of macro investing for its record of making money every year, as suffering from excess size, after reaching around $40bn in 2013. It subsequently lost money in three out of the following four years, and assets plunged as low as $6bn.

Winton founder David Harding, whose hedge fund firm has suffered from poor returns and a slump in assets, recently wrote to clients to say that having fewer assets “may even turn out to be an advantage”. 

A number of top-performing funds are limiting investor access or slimming down. Izzy Englander’s Millennium Management has returned cash to investors, while in December Caxton Associates told investors it would shut its Global fund, which gained 42 per cent last year, to new money.

Element, which has been shut to new money since 2018, profited last year from the sharp rebound in markets, writing to clients on March 23, the same day the S&P 500 bottomed, to say equities looked attractive given the large amount of monetary and fiscal stimulus.

The fund made money from bets against European stocks, as markets sold off in September. It then wrote to clients on October 26 to predict that the BioNTech/Pfizer vaccine would stun investors with a 75-to-90 per cent efficacy, and to say it had become more bullish, according to an investor letter seen by the Financial Times.

Two weeks later the companies announced the vaccine had been found to be more than 90 per cent effective, prompting a fierce rally in many stocks.

FT : Self-driving cars are dangerous in the wrong hands

Self-driving cars are dangerous in the wrong hands
The unfulfilled promise of vehicle autonomy means that drivers have to learn new skills

Approaching a red light the other day, I half-expected my car to stop by itself. A split second later, I realised it would not and put my foot on the brake. That is the problem of driving a car that has half a mind.

We have long been promised that fully self-driving cars are about to take to our roads, but the technology remains out of reach. “It’s an extraordinary grind . . . a bigger challenge than launching a rocket and putting it in orbit around the Earth,” John Krafcik, chief executive of Google’s sister company Waymo, told the Financial Times this week.

Instead, there are vehicles such as my new Volvo, equipped with “pilot assist” — software that keeps it cruising at safe speeds and steers it on highways. When your car can slow down and halt behind the vehicle ahead, but ignores a red light on an empty road, it gets confusing.

Semi-autonomy is enjoyable: it can be a relief to let the machine bear more of the responsibility for highway driving. But this was intended to be a first step along the path to full autonomy — the future imagined by Volvo in a video is of a woman reading a book, then nodding off safely, in a speeding vehicle.

That future is not arriving any time soon. Uber last month abandoned its efforts to build a fleet of self-driving robotaxis, folding its operations into the Amazon-backed rival Aurora. In 2016, Travis Kalanick, Uber’s co-founder, described autonomy as “basically existential for us”, but the company no longer thinks so.

Battery-powered electric vehicles and self-driving cars were once treated as joint phenomena — Elon Musk put “Autopilot” software in every Tesla and made grand claims about it. But their paths are diverging as electric car sales grow rapidly, while autonomy stalls.

This leaves drivers in an ambiguous and potentially dangerous position, with cars that often appear to be capable of driving themselves, but still need to be supervised closely. One study dubbed this “co-driving”. Out on the road, the discipline is quite different to the traditional kind.

The good part first, for those who have not experienced it. Driving on an uncrowded highway in my car is pleasing: it maintains the right speed, slowing and accelerating smoothly in sympathy with cars in front. It steers around gentle bends, tracking its progress with a camera and radar sensor.

This has the potential to make our roads safer. Even if you co-drive correctly, with hands on the wheel and eyes on the road, it is more restful than driving yourself. That reduces fatigue, one of the main causes of highway accidents. The car also has a useful ability to avoid collisions in an emergency.

The bad part is ambiguity over who or what is in charge at any time. A series of crashes made carmakers more cautious about giving customers false confidence about semi-autonomy. But drivers still have to remain alert and realise when to take back control.

My vehicle signals when it needs help with dashboard alerts and a subtle shake of the steering wheel. After a while, one gets accustomed to the prompts and better at predicting when to override the software, which is easy enough. But it is a new skill, and not one that learners are yet taught.

It also requires the willingness to learn. One danger with semi-autonomous driving is risk compensation: the phenomenon of people taking greater risks when they feel safer. Safety innovations such as Volvo’s invention of three-point seat belts in 1959 have reduced driving fatalities (in 2019 there were one-third of the 1975 number per mile driven in the US). But the roads remain perilous, with 36,000 dying in US crashes that year.

It is easy to observe drivers bending the rules in semi-autonomous cars — there are YouTube videos of men zooming along in Volvos with hands only sometimes on the wheel. The “safety driver” in an Uber autonomous test vehicle that killed a pedestrian in 2018 was later found to have been streaming a television show on her phone.

The danger is getting stuck in the middle, as more cars are equipped with software that must be overseen by fallible humans, while the promise of full autonomy recedes. Volvo itself hopes to carry on advancing — it plans to launch new cars in 2022 capable of driving themselves on some highways without constant monitoring.

The company also wants to equip its cars to intervene when the driver makes a mistake, rather than the other way round. “We really think this is the next big thing in safety,” says Odgard Andersson, chief executive of Volvo’s self-driving software arm, Zenseact. I hope so too, but it requires a leap in the technology.

That has been promised before, so a lot depends on companies such as Waymo and Volvo making it happen. For now, I will keep co-driving with due care and attention.

FT : Car manufacturing hit by global semiconductor shortage

Car manufacturing hit by global semiconductor shortage
Volkswagen, Daimler, GM and Renault vie with consumer electronics groups for scarce chips

The world’s largest carmakers are facing a potentially crippling shortage of semiconductors, as chipmakers reserve supply for tech groups producing smartphones, tablets and gaming devices.

Volkswagen said last month that the bottlenecks meant it would produce 100,000 fewer cars in the first quarter of the year at sites in Europe, North America and China, because its parts makers Continental and Bosch have struggled to secure supplies from their contractors.

Honda, Japan’s third-largest carmaker, also said on Friday it plans to cut production for certain car models in the coming months due to a chips shortage caused by a post-pandemic surge in consumer electronics demand.

Bosch, the world’s largest car-parts supplier, said it was receiving “significantly fewer” chips for the components it manufactures, while Dax-listed Continental said there was “extreme volatility” in motor supply chains. France’s Valeo also said it was seeing shortages in the market.

The rapid growth of the electric-car market has increased the motor industry’s demand for semiconductors, which power everything from battery management, to driver assistance systems and in-car entertainment.

“After the industry shutdown in the early phase of the crisis and the resulting abrupt drop in demand, automobile manufacturers across all regions increased their production volumes much faster than expected by market experts,” Continental said, which resulted in a rush on semiconductors. 

“With lead times of six to nine months, the semiconductor industry has not been able to scale up fast enough to meet this unexpected growth in automotive demand,” it added, saying overbooking at silicon foundries was part of the problem.

Renault, Daimler and General Motors are also among the companies grappling with a looming shortage.

According to industry insiders, some carmakers could see production reduced by 10-20 per cent a week from February if fears over shortages are realised.

“The problem is that we are lower down the chain than companies like Apple and HP,” said one executive. “The auto sector doesn’t pay as much for its semiconductors.”

Ola Kallenius, Daimler chief executive, said the whole chip production industry “was thrown into a little bit of a flux” in 2020, and that was “affecting many or most [manufacturers’] in some shape or form”.

“I’m very happy that we have a flexible production system because we are going to need that,” he added. “We are doing what we can to mitigate the situation.”

Mr Kallenius said that it was “too early to tell” what the effects would be on the number of models manufactured in the coming months.

Both Volkswagen and Continental said the bottlenecks were expected to continue well into 2021. VW’s bestselling Golf model is particularly affected, the company confirmed.

BMW said it was “monitoring the issue closely” but there were no interruptions in production to date.

The industry’s largest chip suppliers include Infineon, NXP, Texas Instruments, Renesas and Nvidia.

Germany-based Infineon said it was adjusting its manufacturing capabilities to meet stronger demand, but that its “long-term growth expectations in the automotive sector haven’t changed significantly”, despite the faster-than-expected recovery in the sector.

NXP’s chief executive Kurt Sievers told German media late last year that it was seeing a sudden surge in orders from automotive clients that was causing supply bottlenecks. However, with around half of NXP’s business related to the automotive industry, the challenge was that orders typically take three months to deliver, rather than capacity being given over to other clients. Some customers ordered “too late”, Mr Sievers told FAZ, which had put “significant strain” on its supply chain. 

Renesas said it has managed to address a sharp rebound in demand for automotive chips by boosting production. But industry officials say there is a shortage in certain chips outsourced to Taiwanese suppliers as well as bottlenecks caused by a sharp rise in materials costs.

>>> US Close Dow +0.69% S&P +1.48% Nasdaq +2.56% Russell +1.89%

Closing Stock Market Summary

Each of the major indices closed at record highs on Thursday in a momentum trade led by the technology stocks. The Nasdaq Composite outperformed with an impressive 2.6% gain, followed by solid gains in the Russell 2000 (+1.9%), S&P 500 (+1.5%), and Dow Jones Industrial Average (+0.7%). 

Risk sentiment broadened out to nine of the 11 S&P 500 sectors. The information technology (+2.7%), consumer discretionary (+1.8%), energy (+1.5%), and financials (+1.5%) sectors were the best-performing sectors; conversely, the utilities (-1.3%) and consumer staples (-0.3%) sectors closed lower. 

Investors bought yesterday's dip in the broader technology space and continued to bid up shares of Tesla (TSLA 816.04, +60.06, +7.9%), which was upgraded to Sector Perform from Underperform at RBC Capital Mkts after the firm conceded it was wrong about the stock. 

In addition, the oft-repeated recovery narrative was on display after Democrats flipped both Senate seats in Georgia yesterday, giving them slim majority in the Senate, and the ISM Non-Manufacturing Index rose to a better-than-expected 57.2% in December (Briefing.com consensus 54.7%) from 55.9% in November.

The projected Democratic majority in the Senate contributed to the continued selling pressure in longer-dated Treasuries amid the possibility for more fiscal stimulus. These respective yields moved higher.

The 10-yr yield increased three basis points to 1.07%, while the 2-yr yield was flat at 0.14%. The U.S. Dollar Index increased 0.3% to 89.84. WTI crude futures increased 0.5%, or $0.24, to $50.81/bbl.

In other corporate news, shares of Walgreens Boots Alliance (WBA 45.26, +2.23, +5.2%) rose 5% after beating top and bottom-line estimates, while DXC Technology (DXC 28.91, +2.46, +9.3%) received an acquisition proposal from French IT firm Atos for reportedly more than $10 billion. 

Reviewing Thursday's economic data:

  • The ISM Non-Manufacturing Index rose to 57.2% in December (consensus 54.7%) from 55.9% in November. The dividing line between expansion and contraction is 50.0%. The December reading reflects a faster pace of expansion than the prior month, and it is the seventh consecutive reading above 50.0%.
    • The key takeaway from the report is that the Employment Index, which dipped below 50.0%, blemished an otherwise solid snapshot of the services sector in December.
  • Initial claims for the week ending January 2 decreased by 3,000 to 787,000 (consensus 752,000). Continuing claims for the week ending December 26 decreased by 126,000 to 5.072 million.
    • The key takeaway from the report is that initial claims are still coming in at a stubbornly high level, which sends a poor signal about the state of the labor market.
  • The U.S. trade deficit widened to $68.1 billion in November (consensus -$67.1 billion) from an unrevised $63.1 billion in October.
    • The key takeaway from the report is that it showed another increase in exports and imports, indicating an uptick in global trade.

Looking ahead, investors will receive the Employment Situation Report for December, Consumer Credit for November, and Wholesale Inventories for November on Friday.

  • Russell 2000 +6.2% YTD
  • Dow Jones Industrial Average +1.4% YTD
  • Nasdaq Composite +1.4% YTD
  • S&P 500 +1.3% YTD

>>> US After Hours Summary: SRPT -49.7% falls on data for SRP-9001; BA -0.7% tic

After Hours Summary: SRPT -49.7% falls on data for SRP-9001; BA -0.7% ticks lower as DOJ fines BA over $2.5 bln; MRUS +30.6% jumps after it receives FDA Fast Track designation; FFIV +5.5% higher on guidance and deal to acquire Volterra

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: WDFC +13.8%, OEC +13.6% (raises Q4 adjusted EBITDA guidance), FFIV +5.5% (also to acquire privately held Volterra; reiterates commitment to return $1 bln to shareholders over next two years), ACCD +2.1%, MU +1%

Companies trading higher in after hours in reaction to news: MRUS +30.6% (receives FDA Fast Track designation for Zenocutuzumab), MICT +16.1% (moves core operations to Hong Kong; announces departure of CFO), DRTT +13.8% (enters into C$35 mln financing of convertible debentures), ACEV +12.3% (to combine with Achronix Semi), CATM +12.1% (receives higher takeover bid at $39/sh), LFAC +2.6% (closes business combination with Landsea Homes), MXL +2.1% (WAV664 Wi-Fi SoC selected for Wi-Fi Alliance Wi-Fi 6E certification test bed), ONCT +1.9% (collaboration with Karolinska Institutet), TSLA +1.8% (extends momentum from Thursday +8% move), SCOR +1.8% (announces strategic investment by Charter, Qurate Retail and Cerberus), NVAX +0.6% (finalizes deal with Australia to deliver 51 mln doses of vaccine), ALEC +0.3% (provides 2021 portfolio update), EPR +0.2% (provides business updates for Q4), SPWR +0.2% (to close manufacturing facility)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: VLDR -7.1% (guides Q4 revs below consensus, cites COVID-19 related disruptions), DCT -1.1%, SIRI -0.2% (issues slight upside revenue guidance for FY21)

Companies trading lower in after hours in reaction to news: SRPT -49.7% (reports data for SRP-9001 for the treatment of Duchenne; primary endpoint did not achieve statistical significance), SLDB -24.5% (in sympathy with clinical data release from SRPT), BNGO -11.4% (stock offering), CERC -7.2% (stock offering), UBER -4.2% (union announces effort in Chicago to drive up wages, according to FreightWaves.com), SYRS -2% (stock offering), LYFT -0.8% (union announces effort in Chicago to drive up wages, according to FreightWaves.com), BA -0.7% (DOJ fines BA over $2.5 bln, charges it with fraud conspiracy related to 737 MAX crashes, according to CNBC), GH -0.2% (amends supply agreement with ILMN, extends thru January 2033), LH -0.1% (receives CDC contract to provide genomic sequencing of SARS-CoV-2 samples), NWN -0.1% (co and BioCarbN form renewable natural gas partnership with TSN), HMC -0.1% (to reduce vehicle production due to supply shortage of semis, according to NikkeiAsia)