TheChek News Flow

Hedge funds suffered their worst month in October in seven years as equity strategies were hit by a sell-off in technology stocks.

Hedge Fund Research’s index that tracks all strategies was down about 3 per cent, its worst monthly decline since September 2011, the data provider said. That brings the index’s performance to negative 1 per cent for the year.

HFR’s equity hedge fund index fell 4.25 per cent in October — its worst performance in nearly three years — while the index that tracks funds that invest in technology stocks fared the worst, with a decline of 4.7 per cent.

Those strategies weren’t even the worst performers for the month. That title went to HFR’s index that tracked funds that invest in energy stocks, which was down just over 8 per cent for October. Meanwhile, the activist index was down 5.43 per cent, and the macro active trading index was down 6.5 per cent.

“Financial market volatility spiked in October as global equity markets experienced a violent reversal, with many entering correction territory in only several weeks, contributing to the worst month of performance for the hedge fund industry in seven years,” said Kenneth Heinz, the president of HFR.

Dispersion between the best- and worst-performing hedge funds also widened, with the top tenth returning 6.6 per cent and the bottom 10 per cent falling 13.7 per cent, HFR found. Only a quarter of hedge funds were positive for the month.

“Anticipating the market volatility which began in September and accelerated in October will continue into 2019, strategies positioned for this transitional market environment are likely to lead performance through year end,” Mr Heinz said.

UK brokers/Mifid II: tombstoning

Research houses have been chasing an elusive quarry as pricing nosedives

Just like Wile E Coyote, UK brokers have been chasing an elusive quarry. Research payments from portfolio managers are required under the latest incarnation of UK securities regulation, Mifid II. Some brokers, such as Berenberg, prepared by hiring high-stepping staff in hopes of attracting research revenues. But research pricing has fallen by as much as four-fifths even as the market for initial public offerings has slowed.

The German private bank has found itself running furiously in mid-air with the canyon yawning below. On Tuesday, it cut about a tenth of its London staff of 350, mostly in research. Imperilled City analysts who saw it as a hirer of last resort should think again. Rumours abound of other culls.

Operating profits halved at Redburn, a well-known independent research house, in the financial year to March, according to filings. Cenkos reported sharply lower profits recently. At least the latter and Berenberg have banked some corporate finance profits. Even so, the European IPO market looks sickly. So far this year a third of IPOs have been postponed, notes Morgan Stanley. Well over half of the floats that went ahead were priced in the bottom third of the range, or even below the minimum.

Brokers and fund management have watched in horror as research pricing has nosedived. One can understand the initial optimism, given their skill in advising and underwriting European corporates. But it was a no-brainer that charging for analyst time would diminish demand for it.

Not only have research prices fallen, by around 80 per cent for online-only packages from bulge bracket outfits. So has analyst coverage. The average number of researchers covering a typical FTSE 250 mid-sized company has dropped 13 per cent since 2016 according to Hardman & Co.

Chasing business is part of the game for brokers. But that game moves faster than ever. Like that cartoon coyote, UK brokers can expect to eat lots more dust as they lope through the desert.

Asda-Sainsbury merger would hurt competition and small retailers — BBG

The proposed takeover of Asda by Sainsbury will reduce competition, hurt smaller retailers, limit innovation and increase copying, according to a lobby group.

In its submission to the Competition and Markets Authority inquiry on the transaction, the British Brands Group said the combined market share of Sainsbury and Asda for branded goods was significantly higher than their share of the overall grocery market because Aldi, Lidl and Marks and Spencer sell mostly own-label products. It estimated that, were the deal to proceed, Tesco and Sainsbury-Asda would control 70 per cent of the procurement market.

It added that suppliers were already under heavy price pressure because of changes in grocery market structure — resulting in “cost cutting, rationalisation and factory closures” — and that further margin pressure would “by necessity” lead to more reductions in investment.

When the takeover was announced in April, Sainsbury’s and Asda committed to reduce the price of some everyday items by 10 per cent as they aligned group buying prices. They argued the margins of the large multinational companies that dominate their supply base by value could easily absorb such reductions.

The BBG, which does not disclose its membership publicly but which is dominated by small and mid-sized suppliers, said the two companies buy in different ways which would make harmonising buying prices difficult. It also said any manufacturer delisted by Sainsbury-Asda could potentially become unhealthily reliant on Tesco, the other major player in what could become an effective duopoly. The Groceries Code Adjudicator’s current remit affords it little scope to police the impact of the combination.

The CMA is expected to present its preliminary findings in January and a final report in March. Although its formal remit covers only the impact on consumers, it has come under political pressure to consider the effects on suppliers as well.

U.S. oil benchmark falls 0.8% to $61.10 to enter bear market

*U.S. oil benchmark falls 0.8% to $61.10 to enter bear market

*20% drop from recent high ends WTI’s longest bull market since 2008

*Oil prices fall on rising U.S. inventories, worries of oversupply

(This article will be updated)

Oil prices rose Thursday morning in a small rebound after data showing expanding inventories in America sent prices lower in the previous session. Record monthly imports of crude into China helped support prices, analysts said.

Brent crude, the global oil benchmark, was trading up 0.2% at $72.20 a barrel midmorning on London’s Intercontinental Exchange. However, it was still down almost 17% from its four-year high of $86.74 a barrel hit in October, putting it close to a bear market, which is generally defined as a decline of 20% from the recent peak.

West Texas Intermediate futures, the U.S. oil standard, were trading up 0.02%, at $61.68 a barrel on the New York Mercantile Exchange.

- The financial stability environment in the euro area overall remains favourable, but it has become somewhat more challenging in recent months.

- While we are now at the point where we anticipate

Personal data at risk of being accessed by intruders, warn cyber experts

Cyber security experts found security flaws in the software of DJI, the world’s largest commercial drone maker, which put data collected by drones and usage patterns of individual drones at risk of being accessed by intruders.

Check Point, the California-based security company, and DJI said the bug had been fixed, but the announcement may re-ignite discussions in the US over potential risks of using drones from the China-based manufacturer.

In a pattern similar to the US government’s warnings about Chinese telecoms gear makers Huawei and ZTE, the US Army in August last year ordered an immediate end to using any DJI drones, citing classified internal research on technology threats and user vulnerabilities of DJI products.

DJI, headquartered in Shenzhen, is best known for photography and video drones used by professionals and consumers, but has also started branching out into corporate solutions. 

Check Point said a probe of DJI’s infrastructure found this year that the drone maker’s user authentication systems allowed potential attackers to pose as a user and look at and steal users’ personal information, photos and video taken by their drones and information such as flight paths and GPS data.

According to the analysts, potential intruders would have been able to gain the tokens that allow users to access different applications on one platform — a software feature that has proven a security risk with other companies too.

“We are seeing over the past two years that malicious actors are exploiting tokens, for example in a Facebook incident last month involving the theft of tokens,” said Oded Vanunu, head of products vulnerability research at Check Point. 

Mr Vanunu said the analysts had undertaken their investigation on their own initiative following last year’s statement from the US Army citing vulnerabilities in DJI systems. 

Late last year, DJI initiated a bug bounty programme, an incentive some technology companies use to encourage benevolent hackers to help them find security loopholes.

Check Point said it had informed DJI of the problem in late March, but not taken any reward or signed any non-disclosure agreement with the Chinese company. 

According to the two companies, DJI had fixed the bug by late September, six months after being notified — a period Mr Vanunu said was double the time companies needed on average to patch such problems.

In February, Denver-based security firm Kivu Consulting, hired by the Chinese drone maker, gave DJI a clean bill of health with regard to the question whether its systems might extract user data and transfer them elsewhere without authorisation.

But Kivu also mentioned at the time that it had identified certain vulnerabilities in one DJI application and on one of its outsourced servers, and notified the company.

In a joint statement with Check Point, DJI applauded the cyber security firm for demonstrating the weakness. “All technology companies understand that bolstering cyber security is a continual process that never ends. Protecting the integrity of our users’ information is a top priority for DJI,” it quoted Mario Rebello, vice-president and country manager, North America, at DJI, as saying. 

DJI did not respond to a request for additional comment.