Governor Olli Rehn: Dialling back monetary restraint
Deutsche Bank markets prime finance monthly hedge fund trends August2013
1. EquityL/S
EventDriven
MarketNeutral
Multi-Strategy
CB&VolArb
Distressed
AllFunds
EmergingMarketsEquity
FixedIncome
Credit
Macro
CTA/ManagedFutures
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
75th Median Average 25th MSCI World
For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com
August 2013
Executive summary*
Deutsche Bank Research Highlights: “Global Economic
Perspectives: US labor market prospects mean tension
for Fed thresholds”, “Markets Research: Understanding
German Federal Elections” and “Markets Research:
Focus Europe – Who needs credit?”
The Global Markets Research team presents their projections for the
unemployment rate in the US over the next few years. They believe
that labor market prospects will feature prominently in monetary policy
decisions over the next several years. These projections have important
implications for the pace of rate hikes and highlight a natural tension
in the Fed’s desire to delay the first rate increase while committing to
a more gradual pace of hikes.
In our European research pieces, the Markets Research team discusses
the mechanics of the German federal election process and the recent
PMI trend which they believe implies the euro area is on track to post
a GDP recovery in H2 2013. The team debates the theory of the ‘credit
impulse’ across the big 4 euro economies.
Investor Sentiment
In July, the Hedge Fund Capital Group hosted a Japan Managers
Forum in New York, providing investors with an opportunity to meet a
variety of Japan-focused funds as well as learn about the macro and
investment environment in Japan. During the month, the team also met
with a variety of investors in Boston, who also showed an interest in
Asia-focused strategies broadly. Finally, the team also discusses their
recent “Hedge Fund Asset Raising Survey” which found that the US
continues to be the largest source of new assets for global clients.
Performance
Recovering from the previous month’s loss, the median fund gained
0.93% in July bringing the global cumulative median fund performance
to 4.85%. Regionally, equity l/s strategies continue to outperform other
strategies with European l/s up 8.17% YTD, US l/s up 9.21% YTD and
Japan l/s up 17.21% YTD.
Global dispersion of returns across strategies remains high with equity
l/s funds in the 75th percentile posting returns of 4.35% for July while
CTA/Managed futures and Macro funds in the 25th percentile returned
-5.19%.
Leverage
The MSCI World 30 day volatility decreased 3.15% in July ending the
month at 14.18. Gross fundamental equity exposure increased 4.78%
ending the month at 2.63, while net leverage decreased by 1.03%
to 0.63.
Securities Lending
The securities lending team discusses the mergers & acquisition
environment, which posted its strongest July since 2008. In Asia,
convertible bond activity plays a key theme along with earnings reports
which are driving short interest in the tech sector. Finally, the team
takes a look at the performance of mortgage REITs given the possibility
of Fed tapering.
Regulatory
As AIFMD came into effect on 22 July, the Regulatory team discusses
late implementation of AIFMD in certain EU member states, cooperation
agreements with global regulators, and technical standards of AIFMs.
Additionally, the team discusses developments with cross border
derivatives regulation and European Market Infrastructure Regulation.
July 2013 Cumulative Median Performance by Strategy
Global performance
July 2013 Performance Dispersion
-1.39%
1.51%
2.02%
2.90%
4.48%
4.55%
4.85%
4.94%
5.37%
7.36%
8.30%
8.78%
12.66%
0.00%-4.00% -2.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%
Market Neutral
Macro
Emerging
Markets Equity
Multi-Strategy
CB & Vol Arb
Equity L/S
Fixed Income
Distressed
Credit
CTA / Managed
Futures
Event Driven
MSCI World
All Funds
Source: Hedge Fund Intelligence (HFI), August 2013
Source: Hedge Fund Intelligence (HFI), August 2013
5 Time Voted No. 1 Prime Broker
Global Custodian Prime Brokerage Survey
2012, 2011, 2010, 2009, 2008
Marketing material - For institutional investors only
Markets Prime Finance
Monthly Hedge Fund Trends
Deutsche Bank
Median
Equity L/S 2.41% All Funds 0.93%
Event Driven 1.91% Emerging Markets Equity 0.85%
Market Neutral 1.47% Fixed Income 0.74%
Multi-Strategy 1.39% Credit 0.27%
CB & Vol Arb 1.06% Macro -0.67%
Distressed 0.94% CTA / Managed Futures -1.25%
* This document contains extracts and opinions from
various departments and business areas within
Deutsche Bank, including extracts from Research
Reports, as well as from external reports specifically
referenced herein. It is not, however, a research
piece and has been produced by a front office
function. Also, please refer to the body of the
document for a more detailed description of and
proper references to the topics covered in the
Executive Summary section.
2. 2
For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com
Monthly Hedge Fund Trends - Deutsche Bank Research Highlights
Marketing material - For institutional investors only
Global Economic Perspectives: US labor
market prospects mean tension for Fed
thresholds 1
Labor market prospects will feature prominently in monetary policy
decisions over the next several years: QE is conditioned on a “substantial
improvement” in the labor market outlook; 7% unemployment offers a
guidepost for the end of asset purchases; the unemployment threshold of
6.5% continues to (flexibly) guide the start of the policy rate hike cycle;
and 5.6% unemployment (NAIRU) will influence the pace of rate hikes.
Given its prominence in the Fed’s guidance, this week’s GEP focuses on
prospects for the unemployment rate. Our analysis suggests that the
unemployment rate is most likely to fall to 7% in Q1 2014, 6.5% in Q4
2014, and 5.6% in Q1 2016. However, the balance of risks suggests that
the unemployment rate may fall more gradually than this baseline
scenario.
These projections have important implications for the pace of rate hikes
and highlight a natural tension in the Fed’s desire to delay the first rate
increase while committing to a more gradual pace of hikes. With
unemployment expected to reach NAIRU and inflation at the Fed’s 2%
target in H1 2016, monetary policy rules suggest that the fed funds rate
should be back to its neutral level (4% in the FOMC’s view) by that time.
Thus, if the Fed begins raising rates in H1 2015, as we anticipate, the
pace of rate hikes will have to be much faster than the market expects
and the Fed’s forward guidance has implied.
To be sure, the pace of rate hikes will be data driven, and if inflation
pressures do not materialize, the Fed may very well have cover to hike at
the gradual pace they envision. But monetary policy operates with a lag,
and if inflation appears less benign, or if financial stability concerns
related to low interest rates rise, it seems unlikely that the Fed could both
wait until after the unemployment rate hits 6.5% for the first rate hike and
increase rates gradually. We continue to believe that the Fed will wait to
raise rates until H1 2015 and anticipate that the pace of increases will be
faster than the market currently anticipates.
Markets Research: Understanding German
Federal Elections 2
Markets Research: Understanding German Federal Elections
The next federal election will be held on 22 September. Two months
before this election, we provide a guide to the mechanics of this process
German federal election law has been changed numerous times, most
recently in May 2013. The current mechanism is a mix of direct (first past
the post) and proportional representation.
The size of the German parliament (the Bundestag)
is not fixed
Although the Bundestag has a target number of 598 seats, the election
mechanism virtually guarantees that the actual number of deputies can
be substantially higher, particularly under the new election law.
The complexity of the process arises from the combination of
party and federalm elements
Election law in Germany attempts to reconcile a number of potentially
contradictory elements: direct representation of local candidates, a
strong role of political parties including proportional representation, and
the federal structure of the republic. Variability of the number of seats in
the Bundestag is used to reconcile these elements.
The new law removes some distortions that currently favour
CDU and CSU
A particular feature of the German election system is the so-called
overhang mandates. These arise when a party wins more direct
mandates in a given Land than its share of proportional representation
seats. Currently, all overhang mandates are held by CDU and CSU. The
German constitutional court has criticised the distortions caused by these
mandates and the new law largely eliminates their impact on the overall
seat distribution. This will also affect election strategies.
Markets Research: Focus Europe
– Who needs credit? 3
The recent PMI trend, including the stronger-than-expected July flash
outturn, implies the euro area is on track to post a GDP recovery in
H2 2013 (we thinkQ2 will be positive too). In fact, even if the pace of
improvement in PMIs were to halve, the implied GDP path would be in
line with our H2 projections. The weaker credit flow numbers challenge
the conclusions from the more positive Bank Lending Survey, but with
the PMIs pointing to economic recovery the ECB can sit on its hands in
August while maintaining the forward easing bias. We are tempted to
put the clash between the actual credit flow data and the Bank Lending
Survey down to the usual noisiness of the ‘credit impulse’. Nevertheless,
to answer the question, are ‘credit-less recoveries’ possible, we look at
the behavior of the corporate sector in the big 4 euro economies since
the ‘Great Recession’ of 2008-2009.
The ‘credit impulse’ story holds in general: in periods of corporate
contraction, the credit impulse is negative and vice versa. However, the
credit impulse often under- or overshoots the pace of economic activity.
This occurs because in some cases – and particularly so in Italy and Spain
– corporations draw on their existing financial assets to repay their debt,
rather than ‘simply’ direct their flows of savings to deleveraging.
Across the big 4 euro economies, we see scope for business spending
to improve in Germany in the remainder of 2013 without a significant
uptick in the credit impulse. In Spain, we expect a demand-driven
improvement in the credit impulse. We are more circumspect about
the outlook in France and Italy. UK Q2 GDP growth of 0.6% qoq was
encouraging and could give way to an even stronger print in Q3 if the
PMIs hold current levels and confidence is supported by recent ‘good
news’ stories. However, UK output remains about the same level below
its pre-recession peak as US output is above its previous highs, and the
recovery may yet be tested. As a result, the BoE remains likely to decide
on some type of policy guidance at its next policy meeting on August 1,
to be announced alongside its Inflation Report on August 7.
Divergence between improving BLS and weak euro
credit impluse...
... but consistent with our projected gradual recovery
1
http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/2082-2577/29176419/DB_GEP_2013-08-
01_0900b8c08716fc1f.pdf, August 2013
2
http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/2764-E90F/8770262/DB_SpecialReport_2013-07-
24_0900b8c0870f4a8d.pdf, July 2013
3
http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3626-0071/15329534/DB_FocusEurope_2013-07-
26_0900b8c0871407f5.pdf, July 2013
45
55
65
35
25
15
5
-5
-15
-25
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Credit Impulse, lhs EA BLS - CS (mort & ent average) EA
-10
-8
-6
-4
-2
0
2
4
6
-8
-6
-4
-2
0
2
4
6
-10
-8
-6
-4
-2
0
2
4
6
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Credit impulse, lhs
Private domestic demand, rhs
% yoypp of GDP
Source: Deutsche Bank, HAver, ECB, Eurostat
3. 3
For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com
Monthly Hedge Fund Trends - Investor Sentiment 4
Marketing material - For institutional investors only
Deutsche Bank Hedge Fund Capital Group hosts the Japan
Managers Forum in New York
The Deutsche Bank Hedge Fund Capital Group hosted the Japan
Managers Forum in New York on July 17th. The event featured 14 of
our Japan focused hedge fund clients who presented to 108 investors
through one-on-one and small group meetings. The investors included
pension funds, insurance companies, endowments, foundations, family
offices, private banks and fund of funds. The attendee managers manage
mainly equity oriented strategies, including fundamental, systematic
l/s, directional, and market neutral .The level of investment experience
in Japan of attending investors varied greatly. We saw a number of
investors who are relatively new to the Japan space including some
investors with exposure to Asia ex Japan or Pan Asia, as well as others
who do not travel to Asia to see managers. Based on investor meeting
requests, we saw that the activists and managers who focus on small /
mid cap equity received the most attention from investors at the event.
For the luncheon presentation, Yoji Otani from our Global Markets
Research team in Tokyo asserted his view that the first two parts
(monetary easing and fiscal stimulus) of the Abe administration’s
three-pronged strategy are important, but that the third part, which
includes policies such as deregulation, is not critical to determine if the
reform is going to be successful. He also talked about the consumption
tax increase planned for April 2014 as the largest risk to the economy
in Japan. Overall, we found that while investors gained a better
understanding of the concept of Abenomics and its potential impacts
and risks, they need to understand individual stocks, especially small
and middle cap, in order to feel comfortable with an investment in Japan
focused hedge funds.
Boston investors show interest in Asia-focused managers
Our team visited Boston during the month to meet with a variety
of investors, including consultant, endowment and fund of funds.
Consistent with the solid attendance we witnessed at our Japan manager
event in New York, there is substantial interest among Boston investors
in Asia-focused managers broadly. Particularly, and also unsurprisingly,
longer-biased Asian equity managers that are locally-based in the region
remain the most favored as investors continue to exhibit the willingness
to tolerate higher volatility for greater potential returns. In addition, we
also observed interest among some of those investors in quantitatively-
driven Asian equity strategies, managed in either market neutral or
directional fashion.
US team explores institutional and fund of funds
communities in addition to traditional family office
community in Texas
At the end of July, our team visited with investors in Dallas and Fort
Worth, Texas. Large family offices and multi-family offices make up the
majority of the investor landscape in these two cities, but it is important
to note that there is a small community of pensions, endowments,
foundations, and fund of funds in this area. The family offices the
team met with were interested in a variety of managers – from more
established, larger managers for client wealth preservation to smaller
earlier stage managers for future generations’ wealth growth. It was a
case-by-case situation per office. They did however all collectively show
interest in fundamental, longer biased equity long/short managers,
except for one office that has recently exited their equity exposures in
anticipation of market volatility from the expected U.S. tapering in
the fall.
In addition, the team met with one public pension which prefers to meet
with larger managers with a long track record. They commented that
their annual volatility is in the low end of their target range and they
are looking to invest in higher volatility managers that focus on hedged
exposures and alpha generation. They further noted that fees are a
focus area for them and that they turnover one to two managers in their
portfolio annually.
The team rounded out the trip with a fund of funds visit. This fund of
funds has been raising assets which primarily come from local and
state pension funds. This fund of funds is interested in all strategies and
prefers to meet with managers early on.
The US continues to be the largest source of new assets
for global clients
The Hedge Fund Capital Group recently conducted a “Hedge Fund Asset
Raising Survey”, interviewing over 40 global hedge fund managers,
representing over $423bn in AUM. Results indicated that US institutional
investors remain the dominant source of capital for hedge funds globally,
representing 60% of assets raised. From our sample, macro and equity
hedge received more than half of H1 gross inflows. It was clear that
institutional investors continue to back the large, well-established firms,
with this group representing 57% of flows to $5bn+ firms. When asked
how their investor base has changed over the last couple of years, one
third of participating managers cited a decrease in the amount of fund
of funds clients. Concurrently, 24% of managers reported growth in their
institutional client base, and 21% specifically cited an increase in their
pension fund clientele.
4
From Deutsche Bank’s Hedge Fund Capital Group
4. 4
For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com
Monthly Hedge Fund Trends - Regulatory Special Feature – Hedge Fund Marketing 5
Marketing material - For institutional investors only
AIFMD (Alternative Investment Fund Manager Directive)
changes European marketing rules
AIFMD became effective on 22nd July 2013. From this date, all new
alternative investment fund managers (“AIFMs”) established within the
EU need to be authorized. Managers established in the EU prior to 22
July 2013 are able to make use of local transitional arrangements and
have up to a year to gain their new AIFMD registration.
The rules and regulations associated with AIFMD have a direct impact
on the how managers can market to European investors. Whilst most of
the provisions of AIFMD have been introduced in a harmonised fashion
across the EU member states, this is not generally the case with the rules
related to marketing under AIFMD.
AIFMD sets out two mechanisms by which AIFMs can market in the EU.
The first is a new route via the passport, and the second is via private
placement exemptions (“PPEs”) that may exist in each member state
and is the regime under which hedge funds have marketed to European
investors in the past. The passport, which is the most flexible route
and allows immediate access to all member states, will be available to
EU AIFMs (managers) once they are authorised. It is possible that this
passport will be extended to non-European AIFM’s in 2015. However
given the passport is a new concept, most managers who wish to market
to EU investors will continue to take the second route (via PPE), subject
to local laws in each member state. Whilst AIFMD introduces baseline
requirements across all member states with respect to marketing without
a passport, including certain reporting and transparency obligations, it
also allows member states to impose stricter rules should they wish. The
result is a somewhat disjointed approach to marketing across the EU
via PPE, albeit the predominant hedge fund markets remain open and in
some cases the transitional period allows some immediate relief from the
new rules.
Managers continue to be permitted to accept investment from EU
investors if initiated by the investor (a so called “reverse enquiry/
solicitation”). The principal benefit here is that any direct approach
initiated by the investor is not deemed to be “marketing” and thus
does require the manager to comply with the requirements of AIFMD.
Managers need to be very careful to consider the local laws in each
jurisdiction however, as again each member state may have differing
interpretations of what activities may constitute a “reverse enquiry” and/
or “marketing”.
A number of AIFMD requirements have yet to be finalised, most notably
remuneration and depositary liability rules. As such, most clients have yet
to make any decisions around AIFMD authorisation, adopting instead a
wait and see approach until further information is published.
5
From Deutsche Bank’s Hedge Fund Capital Group. This summary is for informational puposes only.
Please refer to the disclaimer section of this document for further information.
5. 5
For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com
Monthly Hedge Fund Trends - Performance
Marketing material - For institutional investors only
Americas
2013 Year to date median performance
Europe
2013 Year to date median performance
Asia
2013 Year to date median performance
Americas
July 2013 Performance dispersion of returns
Europe
July 2013 Performance dispersion of returns
Asia
July 2013 Performance dispersion of returns
GlobalL/S
USL/S
EventDriven
Multi-Strategy
AllFunds
Distressed
FixedIncome
Macro
Credit
CTA/ManagedFutures
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
75th Median Average 25th S&P 500
Source: Hedge Fund Intelligence (HFI), August 2013
EventDriven
EmergingMarketsEquity
EuropeanL/S
MarketNeutral
GlobalL/S
Multi-Strategy
FixedIncome
AllFunds
Credit
CTA/ManagedFutures
Macro
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
75th Median Average 25th Stoxx 600
Source: Hedge Fund Intelligence (HFI), August 2013
Multi-Strategy
ChinaL/S
AllFunds
JapanL/S
Asiaex-JapanL/S
Macro
Pan-AsiaL/S
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
75th Median Average 25th MSCI AsiaPac incl Japan
Source: Hedge Fund Intelligence (HFI), August 2013
9.21%
18.20%
8.32%
7.66%
5.14%
5.65%
4.95%
2.90%
1.74%
-1.62%
8.00% 12.00% 16.00% 20.00%4.00%-4.00% 0.00%
Distressed
8.35%
Credit
Fixed Income
CTA / Managed
Futures
Global L/S
All Funds
Multi-Strategy
Event Driven
S&P 500
US L/S
Macro
Source: Hedge Fund Intelligence (HFI), August 2013
-0.49%
-0.19%
2.55%
2.69%
3.75%
3.84%
4.07%
4.83%
6.03%
7.24%
8.17%
8.44%
0.00% 1.00%-1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%
CTA / Managed
Futures
Market Neutral
Emerging
Markets Equity
All Funds
Fixed Income
Event Driven
Stoxx 600
Multi-Strategy
Macro
Credit
Global L/S
European L/S
Source: Hedge Fund Intelligence (HFI), August 2013
2.23%
3.94%
3.97%
4.40%
5.69%
6.51%
7.28%
17.21%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00%
China L/S
MSCI AsiaPac
incl Japan
Pan-Asia L/S
Multi-Strategy
Macro
Japan L/S
All Funds
Asia ex-Japan L/S
Source: Hedge Fund Intelligence (HFI), August 2013
6. 6
For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com
Monthly Hedge Fund Trends - Leverage 6
Marketing material - For institutional investors only
Global
—— The MSCI World 30 day volatility decreased 3.15% in July ending the month at 14.18. Gross fundamental equity exposure increased 4.78%
ending the month at 2.63, while net leverage decreased by 1.03% to 0.63.
—— The percentage of funds in the mid-range (0 – 0.75) net equity leverage bands have increased since May. However, the percentage of funds in
higher (0.75 – 2) net equity leverage bands has decreased.
Global net gross equity leverage vs. volatility
Global – July 2013 Quarterly change in net equity leverage distribution across funds
2.4
2.5
2.6
2.7
2.3
2.2
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.3
0.4
40
30
35
25
20
10
15
5
27 Aug 12
24 Sep 12
22 Oct 12
19 Nov 12
17 Dec 12
14 Jan13
11 Feb 13
11 Mar 13
8 Apr 13
6 May 13
3 Jun 13
1 Jul 13
29 Jul 13
30 Jul 12
MSCI World 30d Vol
MCSIWorld30dayHistoricalVol
Leverage
Gross Leverage Net Leverage
Source: Deutsche Bank Global Prime Finance Risk, August 2013
16%
8%
0%
12%
4%
14%
6%
18%
10%
2%
-1 - -0.75
-0.75 - -0.5
-0.5 - -0.25
-0.25 - 0
0 - 0.25
0.25 - 0.5
0.5 - 0.75
0.75 - 1
1 - 1.25
1.25 - 1.5
1.5 - 1.75
1.75 - 2
01 Aug 13
%offunds(DeutscheBank)
01 May 13
Source: Deutsche Bank Global Prime Finance Risk, August 2013
6
Deutsche Bank Global Prime Finance Risk, August 2013
7. 7
For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com
Monthly Hedge Fund Trends - Securities Lending
Marketing material - For institutional investors only
Global 7
US % short interest sector change - July 2013
Mergers acquisitions post strongest July showing
since 2008
According to Thomson Reuters, mergers acquisitions posted its
strongest July showing since before Lehman Brothers collapsed in
September 2008. Global MA deals last month totaled $237.3 billion,
compared to $352.7 billion recorded in July 2008.8
Throughout the first
half of 2013 deal activity was lower than expected due to concerns over
the euro zone crisis, the impact of potential spending cuts on the US
economy, and a lack of clarity over whether central bank money-printing
programs would be extended. It’s also worth noting many of the largest
deals announced this month are either international or cross border
mergers. Those deals making headlines include Canadian food/drug store
retailer Loblaw Company’s cash or stock bid for Shoppers Drug Mart,
Publicis/Omnicom in the advertising space, Community Health Systems/
Health Management Associates in the healthcare sector, Canadian
retailer Hudson’s Bay cash bid for Saks Inc., and finally Perrigo’s cash
and stock bid for Irish pharmaceutical company Elan Corp.
As is the case with many merger arbitrage names, heavy inquiry
following the announcement of the deals puts upward pressure on
lending rebates in the overnight market. Lenders initially try to push stock
at more expensive levels to maximize their profit, however rates will
eventually ease if there is subdued demand. This was the case for Loblaw
when rates post announcement jumped to 6% but settled inside of 3%
by the end of July.
Convertible bond deals a key theme in Asia
Kingsoft issued five year convertible bonds worth about $160 million.9
While the deal did launch with packaged borrow, the desk was active
with secondary flow with borrow trading at 5-5.5%.
Kuroda Electric, which has several convertible bond issues that could
be driving demand to borrow, saw a 61% jump in demand to 11.6% of
shares outstanding. Japanese media firm, Kadokawa, was one of the
most shorted Japanese names ahead of earnings and has seen shares
out on loan increase by nearly 25%. This increase appears to be driven
by convertible bond arbitrage as the firm has two, large convertible
issuances outstanding.
Poor earnings reports drive short interest in mobile phones
Falling short of earnings expectations for an eighth consecutive quarter,
HTC now trades at its lowest levels since October 2005.10
Onshore recalls
for dividends led to $20-30 million of borrow returns over the past month.
MediaTek experienced directional demand ahead of third quarter
numbers with market speculation that July shipments and sales from cell
phone chip makers could miss expectations due to supply chain firms’
high inventory levels. With further turbulence in the MStar spread, which
contracted to 20% at month end, the passing of the onshore dividend
recall borrow fees eased as availability improved.
7
This material has been produced by the Deutsche Bank Securities Lending Group and must not be
regarded as research or investment advice.
8
http://www.thetimes.co.uk/tto/business/industries/banking/article3834122.ece
9
http://ir.kingsoft.com/phoenix.zhtml?c=189890p=irol-Announcementsnyo=0
10
http://www.reuters.com/article/2013/07/30/htc-guidance-idUST8N0EU02220130730
11
http://www.bloomberg.com/news/2013-06-12/ana-scraps-787-dreamliner-flight-after-engine-fails-to-
start-1-.html
12
http://www.markit.com/en/about/news/commentary/commentary-article.page?dcr=/en/securities-
finance/2013/26-07
13
http://www.reuters.com/finance/stocks/SPRM.SI/key-developments/article/2790585
Europe % short interest sector change – July 2013
Boeing’s woes cause jump in borrow demand for ANA
Following a recent spate of issues with its new 787 planes, the airline
ANA has seen demand to borrow jump by 12% in the last month to
7.1%.11
The company is the largest operator of Boeing’s troubled airplane
and will no doubt continue to attract interest from short sellers should the
plane run into further difficulty.
47% year to date price appreciation garners attention
for sharp
Tech firms Sony and Sharp are also seeing an increase in demand to
borrow. Sharp has seen the largest rise with a 32% increase in the
loan balance to 6.1% of the total shares. The upcoming quarter will no
doubt shed some light as to whether Sharp’s 47% year to date price
appreciation is justified given that the company is not expected to post
a profit until the second half of the year.12
Mortgage REITs slump with possibility of Fed tapering
Real Estate Investment Trusts (REITs) slumped during the first week of
trading last month after a better-than-forecasted employment report
suggested the Federal Reserve will begin to reduce the size of its asset
purchases. Annaly Capital Mgmt and American Capital Agency, two of
the larger REITs, led the downward trend. Despite an improving housing
market, US Mortgage REITs have fallen by 20% in the last two months.
The increased volatility has seen equity prices fall across the sector
following a strong showing through the first four months of the year.
Short sellers have acted on the back of this recent weakness according
to Markit Data. The average percentage of shares out on loan across
mortgage REITs now stands at 3.5%, which is up two-thirds from the
start of the year. Those companies leading in terms of short demand are
Redwood Trust Inc, Western Asset Mortgage Capital, Istar Financial Inc,
Javelin Mortgage Investment Corp, and New York Mortgage Trust Inc.
In Asia, Singapore Press filed their REIT prospectus with the expected
IPO launch on the horizon.13
At $700 million we continue to see the
short base as the largest in Singapore with borrow fees over 7%.
-10.0% -5.0% 0.0% 5.0% 10.0%
Healthcare
Cons Disc.
Materials
Info Tech
Energy
Financials
Cons Staples
Industrials
Telecom
Utilities
-10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%
Info Tech
Industrials
Utilities
Telecom
Cons Disc.
Energy
Cons Staples
Materials
Healthcare
Financials
Source: Data Explorers Deutsche Bank, August 2013 Source: Data Explorers Deutsche Bank, August 2013
8. 8
For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com
Monthly Hedge Fund Trends - Regulatory 14
Marketing material - For institutional investors only
The European Securities and Markets Authority (ESMA)
publishes arrangements for the late implementation of
AIFMD in certain EU member states
Although the main fund domiciles in the EU have implemented the
AIFMD legislation, according to Ernst and Young fifteen jurisdictions to
date are still to implement the rules, including Spain, Portugal, Slovenia,
Hungary, Finland and Belgium.15
This creates some legal uncertainty
as to whether a manager authorised in one country would be able to
manage a fund or market a fund cross border in another country that
has not implemented the rules. The ESMA opinion clarifies that those
Member States that have not yet implemented AIFMD cannot restrict
the marketing or management of funds in their country if the manager
has a valid authorisation from a Member State that has implemented
AIFMD. Member States that have not yet implemented AIFMD
would need to disapply any local restrictions preventing marketing or
management of funds in their jurisdiction.
ESMA signs seven additional cooperation arrangements between
EU and global securities regulators in relation to AIFMD
The arrangements will permit managers from third countries access
to EU markets. Under the AIFMD, ESMA is empowered to facilitate
the negotiation and conclusion of cooperation arrangements between
the competent authorities of EU Member States and the supervisory
authorities of third countries. National regulators are now in the process
of signing Memorandums of Understanding with those jurisdictions
relevant to their market.
In total, ESMA has now negotiated 38 agreements on behalf of the
31 EU/EEA national competent authorities for securities markets
supervision, including Cayman Islands, the United States, including,
but not limited to, the Commodity Futures Trading Commission (CFTC),
the Bahamas, and Japan. The cooperation agreements allow for
the exchange of information, cross-border on-site visits and mutual
assistance in the enforcement of respective supervisory laws.
Technical standards on types of AIFMs rejected
ESMA also published a letter it had received from the European
Commission rejecting the regulatory technical standards (RTS) on types
of AIFMs that it had submitted in April 2013. The Commission states
that while it agrees with the overall approach suggested by the draft
RTS it does not believe that basing the distinction between open and
closed-end AIFs on the frequency at which redemptions can be made
is compatible with the level 1 requirements of AIFMD. The Commission
invites ESMA to re-submit draft regulatory technical standards. The
rejection will cause uncertainty for national competent authorities that
are currently in the process of implementing the legislation.
European Commission and the Commodity Futures Trading
Commission (CFTC) affirm joint approach to cross border
derivatives regulation
The European Commission and the Commodity Futures Trading
Commission (CFTC) made an announcement regarding their joint
understanding of a package of measures for how to approach
crossborder derivatives regulation, affirming they share the view that
jurisdictions and regulators should be able to defer to each other when
it is justified by the quality of their respective derivatives regulation and
enforcement regimes.
On uncleared swaps, the regulators will continue to work together on
similar approaches to straight-through-processing and harmonized
international rules on margin for uncleared swaps. The EU and US
have a broadly similar approach in terms of which market participants
are covered by clearing requirements, but have agreed to a ‘stricter-
ruleapplies’ approach to cross-border transactions where necessary. For
the US trading requirement, the CFTC has clarified that where a swap is
executed on an anonymous and cleared basis on a registered designated
contract market (DCM), swap execution facility (SEF), or foreign board
of trade (FBOT) the counterparties will be deemed to have met their
transaction-level requirements, including the CFTC’s trade-execution
requirement.
On trade reporting, the regulators will seek to resolve any material
issues that may arise in line with the conclusions that may be drawn
from international discussions on the topic. Lastly, with respect to
central counterparties (CCPs), CCP initial margin coverage is the only
key material difference and the regulators will work together to reduce
any regulatory arbitrage opportunities and will endeavour to ensure that
CCPs that have not yet been recognised or registered in the US or the
EU will be permitted to continue their business operations.
Following the agreement with the EU, the CFTC on 12 July approved
final guidance on the cross-border application of Dodd-Frank’s swap
regulatory requirements and an exemptive order phasing-in compliance.
The exemptive order expires on 21 December 2013 or such earlier date
specified in the order. The guidance includes the final definition of a
US person, which is largely territorial-based and captures collective
investment vehicles, including hedge funds, that are directly or indirectly
majority-owned by US persons, or that have their principal place of
business in the US. The guidance also clarifies which swaps should
be included by non-US swap dealers and major swap participants in
their threshold calculations for registration with the CFTC and outlines
how various entity level and transaction level requirements will apply
to cross-border transactions and sets out a substituted compliance
framework.
Discussion paper published on implementation of
clearing obligation for derivatives under European Market
Infrastructure Regulation (EMIR)
In the discussion paper, ESMA sets out the timescales for setting
clearing obligations and the methodology for determining which
contracts within a particular asset class should be captured by a clearing
obligation. ESMA are proposing to take a criteria-based approach to
determining which contracts should be subject to clearing obligations,
based on the economic features of the product.
Following CCP authorisations under EMIR, ESMA will then separately
consult on draft technical standards for specific clearing obligations.
Mandatory clearing is expected to take effect from as early as mid 2014.
US Fed unanimously approves Final Regulatory Capital Rule
to implement Basel III
The rule will apply from January 2014 for the largest US banks (more
than $500 million in assets).The final rule mandates minimum capital
ratios in line with the Basel III agreement (4.5% Common Equity
Tier 1 (CET1); 6% Tier 1 and total capital of 8%) including a capital
conservation buffer of 2.5% CET1 for all banks and a countercyclical
capital buffer which can be varied up to 2.5% for banks using advanced
approaches. From 1 January 2015, all banks will calculate their risk-
weighted assets (RWAs) using both the standardised model and
advanced approaches, and apply the most conservative of the two. This
will limit variation between banks’ valuations and serve as a floor, as
required by terms of Dodd-Frank.
The rule also mandates that all banks are subject to a leverage ratio
of 4% under US GAAP, and that banks using advanced approaches
are subject to an additional minimum supplementary leverage ratio of
3%, based on a wider range of exposures defined under Basel III. Fed
Governor Tarullo also announced that the Fed will shortly propose a rule
for a minimum leverage ratio above the Basel III 3% minimum.
Consultation published on draft Regulatory Technical
Standards (RTS) for EU remuneration requirements
On 29 July, the European Banking Authority (EBA) published a
consultation on draft Regulatory Technical Standards (RTS) for classes
of instruments other than equity which can be used in variable
remuneration.
The draft RTS published by the EBA sets out the classes of instruments
which can be used for variable remuneration: Additional Tier 1 (AT1),
Tier 2; other debt instruments; and synthetic instruments. They also
prescribe a write-down and conversion mechanism for Tier 2 and other
instruments if they are paid towards variable remuneration, since this
process is already defined in CRD IV for AT1. The EBA is aiming to
finalise the RTS at the beginning of 2014. Comments on the consultation
can be made until 29 October 2013.
15
http://www.ey.com/Publication/vwLUAssets/EY_AIFMD_readiness_report_identifies_mixed_
progress/$FILE/EY-AIFMD-The-road-to-implementation-July-2013.pdf
14
Deutsche Bank Government Regulatory Affairs Group
This is a summary of some of the themes underlying recent regulatory developments affecting hedge
funds and their managers. It does not purport to be legal or regulatory advice and must not be relied
on for that purpose. Deutsche Bank is not acting and does not purport to act in any way as your advisor.
We therefore strongly suggest that you seek your own independent advice in relation to any legal, tax,
accounting and regulatory issues relating to the merits or otherwise of the products and services discussed.
10. 10
For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com
Monthly Hedge Fund Trends
Marketing material - For institutional investors only
Disclaimer
This document is intended for discussion purposes only and does not create any legally binding obligations on
the part of Deutsche Bank AG and/or its affiliates (“DB”). Without limitation, this document does not constitute
an offer, an invitation to offer or a recommendation to enter into any transaction. When making an investment
decision, you should rely solely on any specific final documentation relating to a transaction and not the summary
contained herein. DB is not acting as your legal, financial, tax or accounting adviser or in any other fiduciary
capacity with respect to any proposed transaction mentioned herein. This document does not constitute the
provision of investment advice and is not intended to do so, but is intended to be general information. Any
product(s) or proposed transaction(s) mentioned herein may not be appropriate for all investors and before
entering into any transaction you should take steps to ensure that you fully understand the transaction and have
made an independent assessment of the appropriateness of the transaction in the light of your own objectives,
needs and circumstances, including the possible risks and benefits of entering into such transaction. For general
information regarding the nature and risks of the proposed transaction and types of financial instruments
please go to www.globalmarkets.db.com/riskdisclosures. You should also consider seeking advice from your
own advisers in making any assessment on the basis of this document. If you decide to enter into a transaction
with DB, you do so in reliance on your own judgment. The information contained in this document is based on
material we believe to be reliable; however, we do not represent that it is accurate, current, complete, or error free.
Assumptions, estimates and opinions contained in this document constitute our judgment as of the date of the
document and are subject to change without notice. Any projections are based on a number of assumptions as
to market conditions and there can be no guarantee that any projected results will be achieved. Past performance
does not guarantee or predict future results. This material was prepared by a Sales or Trading function within DB,
and was not produced, reviewed or edited by the Research Department. Any opinions expressed herein may differ
from the opinions expressed by other DB departments including the Research Department. Sales and Trading
functions are subject to additional potential conflicts of interest which the Research Department does not face.
DB may engage in transactions in a manner inconsistent with the views discussed herein. DB trades or may trade
as principal in the instruments (or related derivatives), and may have proprietary positions in the instruments
(or related derivatives) discussed herein. DB may make a market in the instruments (or related derivatives)
discussed herein. Sales and Trading personnel are compensated in part based on the volume of transactions
effected by them. DB seeks to transact business on an arm’s length basis with sophisticated investors capable of
independently evaluating the merits and risks of each transaction, with investors who make their own decision
regarding those transactions.
The distribution of this document and availability of these products and services in certain jurisdictions may
be restricted by law. You may not distribute this document, in whole or in part, without our express written
permission. DB SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR
OTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY
THAT MAY ARISE FROM ANY RELIANCE ON THIS DOCUMENT OR FOR THE RELIABILITY, ACCURACY,
COMPLETENESS OR TIMELINESS THEREOF. DB is authorised under German Banking Law (competent authority:
BaFin - Federal Financial Supervising Authority) and regulated by the Financial Services Authority for the conduct
of UK business. In the US this document is approved and or distributed by Deutsche Bank Securities Inc.,
a member of the NYSE, FINRA, NFA and SIPC.
IN AUSTRALIA: Deutsche Bank holds an Australian financial services licence (AFSL 238153).
In SAUDI ARABIA: Deutsche Securities Saudi Arabia (“DSSA”) is regulated by CMA under authorisation no.
07073-37. DSSA is located on the 17th floor, Al-Faisalia Tower, Riyadh. Tel. +966-1-273-9700 / Fax +966-1-273-9777”.
IN DUBAI: This information has been provided to you by Deutsche Bank AG Dubai (DIFC) branch, an Authorised
Firm regulated by the Dubai Financial Services Authority. It is solely directed at Market Counterparties or
Professional Clients which meets the regulatory criteria as established by the Dubai Financial Services Authority
and may not be delivered to or acted upon by any other person.
IN MALAYSIA: This document is distributed in Malaysia by Deutsche Bank (Malaysia) Berhad.
IN JAPAN: This document is prepared by Deutsche Bank AG London Branch and is distributed in Japan by
Deutsche Securities Inc. (“DSI”). Please contact the responsible employee of DSI in case you have any question
on this document. DSI serves as contact for the product or service described in this document.
IN QATAR: Marketing in Qatar by DB non QFC registered entity is permitted with restrictions.
IN HONG KONG: This document is intended for “Professional Investors” within the meaning of the Securities
and Futures Ordinance (Cap. 571) and any rules made thereunder. In Hong Kong this document is distributed by
Deutsche Securities Asia Limited (“DSAL”) and Deutsche Bank AG (“DBAG”). DSAL is an exchange participant
of The Stock Exchange of Hong Kong Limited and a licensed corporation with the Securities and Futures
Commission. Deutsche Bank AG is regulated by the Hong Kong Monetary Authority as a licensed bank.
This document contains information regarding recent regulatory developments. Any regulatory information
contained in this document is for information purposes only and does not puport to be legal or regulatory advice
and must not be relied on for that purpose. DB is not acting and does not purport to act in anyway as your advisor
in relation to regulatory matters. You should consider seeking your own independent advice in relation to any
regulatory matters dicussed herein.