China's 'flash boys' hedge funds eye end to hiatus
HONG KONG/SHANGHAI (Reuters) - China’s data-driven “flash boys” - hedge fund managers who for years have been handicapped by government curbs on tools to short-sell stocks - are dusting off high-speed trading products as Beijing revives the country’s financial derivatives market.
China’s financial futures exchange last month relaxed trading rules on stock index futures and vowed to boost liquidity of that market, while the country’s two largest stock exchanges said they aimed to launch new stock index option products this year.
That is music to the ears of a breed of fund managers nicknamed “flash boys”, whose quantitative strategies rely on historical data, algorithms and derivatives to profit from short-term price movements, sometimes within a second.
Such techniques differ from conventional strategies, in which portfolio managers make bets based on their views of a company or market.
“The widespread usage of derivatives will make returns more stable ... increase liquidity, and new strategies may emerge,” said Wang Feng, a former Wall Street trader and co-founder of Alpha Squared Capital, a Hangzhou-based hedge fund. “The industry will enter era 2.0. The most difficult time may have passed already.”
LEAN YEARS
Derivatives could be deployed to insure against unexpected losses or simply to bet on shares to fall, a so-called short strategy. The latter function was blamed for exacerbating the equity rout of 2015 and 2016, leading to more stringent rules. That led to poorer liquidity in such instruments and ultimately higher costs for hedge funds, sharply reducing their popularity.
Shen Yi, a former Goldman Sachs trader who set up his own fund house in Shanghai, saw his assets under management halve from a pinnacle of $1.6 billion around 2015 as government curbs on index futures trading bit.
“In the last two years, you see quant funds shrink and shrink and shrink,” he said. But with the rule relaxation, “I would say we will go back to the peak time very soon”.
A liquid derivatives market is particularly essential to many quantitative trading strategies. In “market neutral” strategies, for instance, investors match long and short positions in different stocks, seeking to profit from stock selections while maintaining constant, steady returns regardless of whether the overall market is rising or falling.
In China, where shorting individual stocks is highly restricted, hedge funds instead use stock index futures to build short positions.
“The next two to three years will be a bull market for quant funds. We’re getting ready for that,” said Chen Bin, founding partner of quant fund manager SHQX Asset Management in Shanghai, who increased headcount by a quarter last year to 40 in expectation of business expansion.
The derivatives defrost is good news even for mutual fund managers, who typically focus on long-only products that bet on rising prices.
“A broadened derivatives market gives fund companies more choices in designing fund products,” said, Fang Weili, deputy CEO of Huatai-PineBridge Investments in Shanghai.
Banks increase their bets on the struggling hedge fund sector
Clients have taken a pummelling, but lenders are still jostling to win their business
Big banks are throwing extra resources into prime broking, betting on their embattled hedge fund clients to provide a much-needed revenue boost as other areas falter.
Despite hedge funds taking a pummelling over the past three months in choppy market conditions, executives in the banks’ prime broking divisions that handle their trading and lend them money still expect the smartest managers to outperform.
At the same time, the banks’ other significant sources of revenue, such as advising companies on mergers and acquisitions or trading fixed income, currencies and commodities, are more market-dependent.
The final three months of last year was the quietest period for mergers and acquisitions in more than a year, in a sign that market turbulence was giving dealmakers pause. Fixed income trading revenues are also falling, while companies are shying away from doing initial public offerings.
Jason Sippel, head of global equities and prime services at JPMorgan Chase, said that even if the market conditions for hedge funds worsened, the bank still wanted to grow in the space.
“Our management team has given us marching orders to take market share in equities, that is mission one,” he said. “Scale is critically important.”
One of an investment bank’s most capital-intensive activities, prime broking has been in and out of fashion with banks since the 2008 financial crisis, especially among European players who initially retreated before piling back in two years ago.
Post-crisis regulations require banks to have more capital for their prime brokerage activities, which has depressed their return on equity and made the area less attractive overall.
The high capital demands reflect the inherent risk of lending hedge funds money which is then put into equities, derivatives and other assets whose values can fluctuate wildly. Banks make hedge funds deposit “margins” to cover potential losses, but if asset prices fall too quickly, those margins can be inadequate.
As European banks retreated, US rivals have consolidated their grip on the market, with Morgan Stanley, JPMorgan and Goldman Sachs dominating the top spots. Now Citigroup, which was traditionally strong with foreign exchange and fixed income strategies, is also rapidly expanding in the hopes of winning market share from a wider range of hedge funds.
In Europe, Barclays’ prime business is also expanding, while BNP Paribas is quietly adding resources in the hopes of winning more business. Deutsche Bank promised to cut back prime under its latest restructuring, having already lost some top hedge fund clients when it faced worries about its own future. But Germany’s biggest lender is nonetheless still hoping to woo back clients.
The potential dangers to banks from prime broking — where most risk stems from counterparties rather than market direction — were laid bare in mid-December when it emerged that Citi faced losses of up to $180m on an Asian hedge fund’s foreign exchange trade that went bad.
The bullishness of the big banks on prime was rewarded in the first half of 2018, when prime broking revenues across the world’s 12 biggest investment banks rose more than 15 per cent, according to data from industry monitor Coalition.
But the world has changed since then. Hedge funds suffered their worst year in seven years. Hedge Fund Research’s index of all strategies is down 4.07 per cent for 2018.
Industry veterans including Jabre Capital and Highfields Capital Management, which once managed as much as $5bn and $12bn respectively, have shut down. Others are bracing for a potential wave of investors asking to redeem their money in the first quarter if performance continues to decline.
Money has already started to leave hedge funds as investors grow jittery about returns, as well. Investors pulled $6.43bn from hedge funds in November — the industry’s third consecutive month of outflows — leading to a contraction in the overall assets managed as performance also fell, according to eVestment.
“The concern for our business model would be if our clients were battening down the hatches and not doing anything,” said the head of prime brokerage at a top investment bank. “We don’t see that happening.”
JPMorgan, which leapfrogged Goldman last year to claim second spot after Morgan Stanley on the influential ranking from industry monitor Coalition, expects further growth and has made no secret of aspiring to the top spot.
Despite the recent turmoil, Dean Backer, head of prime brokerage at Goldman, said he did not expect to see significant consolidation in the hedge fund industry, primarily because if money is potentially redeemed from a fund, it is most likely to be reinvested in other hedge funds. Still, some closures will be inevitable, he said.
“There is a lot of talent in the industry, however, it’s crowded,” he said. “There are a lot of players.” For Goldman, gaining a greater share of quant funds that trade primarily using computer algorithms “is a core growth and strategic focus”.
Jon Cossey, who heads prime brokerage at JPMorgan, said: “The marketplace has dramatically changed in the last three or four years, particularly with some pretty aggressive restructuring at European banks.”
“We don’t view a rise in competition or the pricing pressure that comes with it as a bad thing because we are very much in a business where we believe in the value of scale,” he added.
Okan Pekin, Citi’s global head of prime, futures and securities services, said that “negative performance, coupled with net redemptions, have increased pressure on hedge fund managers”.
His comment was made before Citi’s forex loss became public. The division that was involved in the ill-fated Asian hedge fund trade was part of Citi’s fixed income unit rather than Mr Pekin’s remit at the time, but it has since been brought back into the main prime brokerage division, according to an internal memo.
“That said, funds and prime brokerage providers are taking a more long-term view on a $3.2tn [hedge fund] industry that is still growing in terms of assets under management,” he added.
While hedge funds have endured a challenging period recently, they are so far not pushing for lower costs from their banks, said the head of one prime brokerage. In times of stress, the executive said, funds are more focused on their investment strategies rather than negotiating fees or adding new providers.
George Kuznetsov, Coalition’s head of research, said competition, not market volatility, was the “biggest threat” to prime broking. “Sooner or later with the amount of balance sheet banks are committing to the business we should see that impacting on margins as well. It will be interesting to see how the top line will get impacted,” he said.
Takeda will consider selling non-core assets including Nycomed
10 JAN 2019
Takeda Pharmaceutical Company Limited’s [TYO:4502] Chief Executive Christophe Weber has said the Japanese group’s Nycomedbusiness is one of the “non-core” businesses that it may consider selling, the Financial Times reported.
Weber, speaking at a healthcare conference in San Francisco, said Takeda has several hundred non-core brands that could be sold, according to the report.
Takeda is looking to sell USD 10bn (JPY 1.079tn) of assets to reduce its net debt of USD 48bn, having this week completed its GBP 46bn (USD 50.90bn) acquisition of Ireland-based rival Shire, the item said.
Takeda’s other non-core brands include the blood pressure treatment Azilva, the diabetics medicine Nesina and the gout treatment Uloric, according to the report.
Takeda will concentrate on the core areas of oncology, neuroscience, rare diseases, gastrointestinal conditions and plasma-based therapies, the report continued.
The Japanese group acquired Nycomed for USD 13.7bn in 2011 in an attempt to grow its business in emerging markets, the item noted. Nycomed’s brands include the lung condition treatment Dazax and several over-the-counter (OTC) medicines, the report added.
One analyst cited by the newspaper said Takeda will probably sell Nycomed’s Russian OTC arm.
However, a Reuters report on 7 January said Weber ruled out the possibility of selling Takeda’s OTC business in the near future. Webers said Takeda is unlikely to sell the OTC business even if it is under pressure to bolster its balance sheet, according to the report.
Link to original source
>>> Up* AB InBev Upgraded to Buy at Bank Degroof Petercam; PT 80 Euros* Aker BP Upgraded to Equal-weight at Barclays; PT 295 Kroner* BASF Upgraded to Overweight at JPMorgan; PT Set to 74 Euros* BBA Aviation Upgraded to Buy at Jefferies; PT 2.90 Pounds* Constellation Brands Upgraded to Neutral at Guggenheim* Cranswick Upgraded to Buy at Liberum* Eutelsat Raised to Overweight at Morgan Stanley; PT 21.50 Euros* Evonik Upgraded to Neutral at JPMorgan; Price Target 24.50 Euros* Hypoport Upgraded to Buy at Berenberg* Intl Petroleum Raised to Equal-weight at Barclays; PT 40 Kronor* Lanxess Upgraded to Overweight at JPMorgan; PT Set to 55 Euros>>> Down* Air Liquide Cut to Underweight at JPMorgan; PT 100.50 Euros* Burberry Downgraded to Hold at Berenberg* Clariant Cut to Underweight at JPMorgan; PT Set to 19 Francs* EnQuest Downgraded to Underweight at Barclays; PT 16 Pence* Gym Group Downgraded to Equal-weight at Barclays; PT 2.65 Pounds* Polymetal Cut to Hold at Renaissance Capital; PT 8.60 Pounds* Safran Downgraded to Neutral at JPMorgan; PT 115 Euros* Swedbank Upgraded to Buy at Deutsche Bank* Ted Baker Downgraded to Neutral at Goldman; PT 21.50 Pounds* Tod's Downgraded to Sell at Berenberg* Tullow Downgraded to Equal-weight at Barclays; PT 2.25 Pounds* UBS Downgraded to Hold at SocGen; PT 13 Francs* Umicore Downgraded to Neutral at JPMorgan; PT Set to 44 Euros* Wacker Chemie Downgraded to Underweight at JPMorgan; PT 78 Euros>>> Initiation* Aker BP Rated New Buy at Kepler Cheuvreux; PT 275 Kroner* Avast Rated New Neutral at JPMorgan; PT 3.10 Pounds* Ceva Logistics Rated New Underperform at MainFirst; PT 25 Francs* CRH Rated New Outperform at MainFirst; PT 30 Euros* DNO Rated New Buy at Kepler Cheuvreux; PT 21 Kroner* Genmab Rated New Buy at DNB Markets; PT 1,540 Kroner* HeidelbergCement Rated New Neutral at MainFirst; PT 61 Euros* LafargeHolcim Rated New Neutral at MainFirst; PT 45 Francs* Lundin Petroleum Rated New Buy at Kepler Cheuvreux* Saint-Gobain Rated New Outperform at MainFirst; PT 36.50 Euros* SSE Reinstated at Credit Suisse With Outperform; PT 12.25 Pounds>>> Call
The post-Christmas rally in global equities took a break on Thursday in Asia in the absence of any concrete details on U.S.-China trade negotiations. The yen and Treasuries ticked higher.
Stocks fell in Japan and futures pointed to lower starts in the U.S. and Europe, while Chinese equities fluctuated. The offshore yuan climbed to the strongest since August as the U.S. and China laid the ground for resolving trade issues, though S&P 500 Index contracts declined as some investors expressed disappointment at negotiations that seem likely to continue indefinitely. The dollar was steady and crude pulled back after climbing above $52 a barrel and entering a bull market.
US After Hours BBBY +16%, KBH +5%, UNP +2%, WDFC -2% following earnings/guidance
Nikkei -1.29% Hang Seng -0.01% CSI -0.19% Shanghai -0.36% Shenzen -0.27%
Eur$ 1.1554 CNH 6.7907 CNY 6.7872 JPY 107.87 GBP 1.2777 CHF 0.9730 RUB 66.84 TRY 5.5008 WTI$ 51.77 -1.13%
S&P -0.51% EuroStoxx -0.55% FTSE -0.52% Dax -0.62% SMI -0.39%
Macro :
- JPMorgan Sees $1.3b in Argentina MSCI Inflows as Stock Catalyst
- Profit Forecasts Are Cut Like It’s 2009. Don’t Worry About It
- Italy's Salvini Goes Recruiting for Nationalist Fight Against EU
Keep an eye on :
- ABBN SW : ABB to Cut Head Count, $500M/Year in Costs, CEO Says: WSJ
- ABN NA : ABN Amro to Sell EU2 Billion Loan Portfolio to NWB Bank
- AGN US : Allergan to look for tuck-in buys in the USD 1bn to USD 2bn range, CEO says
- AIR FP : Airbus Achieves 747 Net Aircraft Orders, 800 Deliveries in 2018
- AIR FP : Airbus’s Faury Says ‘Closing Gap’ With Boeing on Deliveries
- CARD LN : Card Factory Sees FY Adjusted Ebitda GBP89 Mln To GBP91 Mln
- ACA FP : Credit Agricole Takes EU70m Hit on Italy Unit in 4Q
- BBA LN : BBA Aviation is Oversold, Time to Buy Shares: Jefferies
- BALYO FP : Balyo Signs 7-Year Commercial Pact With Amazon
- BAS GY : BASF Picks Site for New $10 Billion Chemical Complex in China
- BAS GY : BASF Signs Framework Pact on Second Chinese Verbund Site
- BFSA GY : Befesa’s Biggest Shareholder to Sell About 8.8% Stake
- BMW GY : BMW Korea Fined 14.5b Won Over False Emissions Papers: Yonhap
- BOSN SW : Bossard Fourth Quarter Sales CHF212.1 Mln
- EN FP : Bouygues Telecom in exclusives talks to acquire Nerim (small)
- EN FP : Bouygues Unit Wins EU167M Croatia Istria Motorway Contract
- CRG IM : EU400m Would Secure Carige: Administrator Modiano Tells Stampa
- DBK GY : Bafin Tells Deutsche Bank to Reassess Data on Risky Clients: HB
- ENI IM : Italy Seeks to Suspend Ionian Sea Licences for Oil Drilling
- ETL FP : Eutelsat Too Cheap, Lacks Growth But Improving: Morgan Stanley
- FCA IM : *FIAT CHRYSLER SAID TO PAY CIVIL PENALTY LESS THAN $500 MILLION
- FNAC FP : Fnac Darty Sees EU45m Hit on Sales From Yellow Vest Protests
- GET FP : Getlink Dec. Passenger Shuttle Traffic Rises 1%
- HFG LN : Hilton Food Says Trading Outlook Remains Positive
- HYQ GY : Buy Hypoport, Europace May Gain 50% Market Share, Berenberg Says
- JUP LN : Jupiter Assets Under Management GBP42.67 Bln
- KER FP : Gucci Growth in 4Q Should Reassure Kering Investors, RBC Says
- KORI FP : Korian Expands With Acquisitions in Spain, Germany, France
- MC FP : Luxury M&A Main Upside Risk as Kering, LVMH Top Picks: Berenberg
- EMG LN : Kuwait Fund Sues Man Group to Seek $156 Million, Stock Falls
- MKS LN : Marks & Spencer 3Q Food Comparable Sales Beat Est.
- MAU FP : New Venezuela PDVSA Contracts Are ’Fake,’ Congress Says
- NHY NO : Hydro Says Timing to Resume Full Alunorte Output Still Uncertain
- OSR GY : Osram to Buy Back Shares With Maximum Value EU225 Mln by Nov. 10
- OSR GY : Osram CEO Tells German Paper ‘Dark Clouds’ Ahead After Tough Qtr
- PGHN SW : Gordon Brown to Be Adviser for PE Firm Partners Group: WSJ
- PMO LN : Premier Oil Full Year Avg Production 80,500 Boe/D
- PROX BB : Proximus to Lay Off 1,900 Workers; to Hire 1,250: Belga
- RNO FP : Carlos Ghosn Has Been Dutch Tax Resident Since 2012: Liberation
- RNO FP : Nissan Has Briefed French Government on Own Ghosn Probe: Yomiuri
- RNO FP : Tokyo Court Rejects Ghosn Appeal Over Detention
- RNO FP : Ghosn Comes Down With High Fever, Halting Interrogation: Kyodo
- RIO LN : Rio Tinto Says Parts of Cape Lambert Port Closed After Fire
- SAN FP : Sanofi: Cablivi Phase 3 Trial Met Primary Endpoint
- SAN SM : Santander Launches EU620M Debt Fund for Company Growth
- SEBA SS : SEB Joins Other Swedish Banks in Raising Mortgage Rates
- G24 GY : Scout24 Buyout Talks With PE Firms Have Stalled: DealReporter
- SW FP : Sodexo 1Q Solid, Puts Caterer on Track for FY Target: Bernstein
- SW FP : Sodexo 1Q Rev. Rises 6.8% to EU5.67B; Confirms Annual Objectives
- SQ US : Square Deepens E-Commerce Push With Payments Processing in Apps
- SZU GY : Suedzucker Confirms FY Forecast as 9m Revenue, Op. Profit Drop
- TKWY NA : Takeaway Fourth Quarter Orders 29.9 Mln
- TTK GY : Takkt to ’Reposition’ Hubert Group as Large Deal Set to End
- FTI FP : TechnipFMC Names Doug Pferdehirt Chairman Replacing Pilenko
- TSCO LN : *TESCO CHRISTMAS UK LFL SALES +2.2%, EST. +1.1%
- UBER IPO : Uber and Lyft IPO Timing Is Said to Be Left in Limbo by Shutdown
- UBSG SW : UBS May Face Big Writedowns on Credit Assets: Societe Generale
- UBSG SW : UBS Is Said to Require Orcel to Wait Until April for New CEO Gig
- FR FP : French Govt Seeks Companies Interested in Car Batteries
- VAN BB : Van de Velde Reports EU205.2M Annual Turnover vs EU209.0M Y/Y
- VIV FP : Canal Plus Plans Subscription VOD Svc to Counter Netflix: Echos
- VOD LN : Vodafone Seeks to Cut About 1,000 Jobs in Spain: Independiente
- VOW3 GY : VW Board Is Said to Mull Broader Ford Tie-Up Before Detroit Show
- VOW3 GY : VW Is Said to Set Up China Venture for Charging Electric Cars
>>> Up
* AB InBev Upgraded to Buy at Bank Degroof Petercam; PT 80 Euros
* BASF Upgraded to Overweight at JPMorgan; PT Set to 74 Euros
* BBA Aviation Upgraded to Buy at Jefferies; PT 2.90 Pounds
* Constellation Brands Upgraded to Neutral at Guggenheim
* Cranswick Upgraded to Buy at Liberum
* Eutelsat Raised to Overweight at Morgan Stanley; PT 21.50 Euros
* Evonik Upgraded to Neutral at JPMorgan; Price Target 24.50 Euros
* Hypoport Upgraded to Buy at Berenberg
* Lanxess Upgraded to Overweight at JPMorgan; PT Set to 55 Euros
>>> Down
* Air Liquide Cut to Underweight at JPMorgan; PT 100.50 Euros
* Burberry Downgraded to Hold at Berenberg
* Clariant Cut to Underweight at JPMorgan; PT Set to 19 Francs
* EnQuest Downgraded to Underweight at Barclays; PT 16 Pence
* Polymetal Cut to Hold at Renaissance Capital; PT 8.60 Pounds
* Safran Downgraded to Neutral at JPMorgan; PT 115 Euros
* Ted Baker Downgraded to Neutral at Goldman; PT 21.50 Pounds
* Tod's Downgraded to Sell at Berenberg
* Tullow Downgraded to Equal-weight at Barclays; PT 2.25 Pounds
* UBS Downgraded to Hold at SocGen; PT 13 Francs
* Umicore Downgraded to Neutral at JPMorgan; PT Set to 44 Euros
* Wacker Chemie Downgraded to Underweight at JPMorgan; PT 78 Euros
>>> Initiation
* Aker BP Rated New Buy at Kepler Cheuvreux; PT 275 Kroner
* Avast Rated New Neutral at JPMorgan; PT 3.10 Pounds
* Ceva Logistics Rated New Underperform at MainFirst; PT 25 Francs
* CRH Rated New Outperform at MainFirst; PT 30 Euros
* DNO Rated New Buy at Kepler Cheuvreux; PT 21 Kroner
* HeidelbergCement Rated New Neutral at MainFirst; PT 61 Euros
* LafargeHolcim Rated New Neutral at MainFirst; PT 45 Francs
* Lundin Petroleum Rated New Buy at Kepler Cheuvreux
* Saint-Gobain Rated New Outperform at MainFirst; PT 36.50 Euros
>>> Call