What Is The “Market”?
Blaine Rollins | Dec 21, 2014 01:18AM ET
Commentators are constantly bombarding the public with news regarding the “market”. It seems that every “market” move can be explained by the action of our President, OPEC, Draghi, Yellen, or a Goldman Sach’s analyst. As we all consume the commentary, we tend to ignore a glaring question, what is the “market”? To many it’s the Dow Jones Industrial Average, as this seems the most frequently quoted in the media. To others, it’s the S&P 500 Index, as it includes the vast majority of well-known U.S. companies. To some, it’s what their neighbor says they have made this year at the neighborhood holiday party.
Some may wonder why this even matters and what it has to do with alternative investments. The answer is that when trying to analyze how a portfolio or money manager has performed, it is important to understand what “market” is the appropriate comparison and what the drivers of performance have been. This is especially true when looking at months such as October and November when spreads between different markets were large (oil was down more than 14% while the Nasdaq 100 was up 4.6%) or when portfolio changes made mid-month drastically change performance outcomes (the S&P 500 was down 5.5% MTD through October 15th then reversed direction, gaining 8.4% in the second half of the month). When markets exhibit volatility, and dispersion between markets is high, investors need to ignore the commentators (and their neighbors) and instead endeavor to understand what is driving returns. Only then can useful conclusions be had.
Liquid Alts Corner
Long/Short Equity once again experienced the largest outflows among alternative funds, with nearly $900 million in net redemptions during November. However, this was due almost entirely to the MainStay Marketfield Fund, which shed another $1.6 billion during the month, and has now seen more than $5 billion exit during the year. The largest inflow was for the V2 Hedged Equity Fund, which launched during the month with $243 million. Market Neutral funds also saw outflows, which totaled about $140 million. The Arbitrage Fund was the largest contributor, with roughly $100 million coming out of the fund during the month. Offsetting some of the outflows was the PIMCO Fundamental Advantage Absolute Return Strategy, which gained $274 million, bringing its year to date growth to $825 million. Finally, the Multi-alternative universe was once again the largest asset gathering category, with $790 million in positive flows. Funds within the category saw widespread inflows, with the GMO Special Opportunities Fund garnering the most assets, as investors added $150 million into the fund during the month.
Get The News You Want
NYLIM Entering ETF Market with IndexIQ Acquisition
New York Life Insurance Co is jumping into the nearly $2 trillion U.S. exchange-traded funds market with its plan to acquire ETF provider IndexIQ. The mutual life insurance company said Thursday, its asset management business, New York Life Investment Management, was set to acquire Rye Brook, New York-based IndexIQ, well known for its alternative investment strategies. IndexIQ will become a part of New York Life’s MainStay Investments platform, adding $1.5 billion to MainStay’s $101 billion in assets under management. “We have been very interested observers of the ETF space for quite some time,” said Drew Lawton, chief executive officer of New York Life Investment Management, in an interview. The deal underscores the growing weight and popularity of the rapidly expanding ETF market.
Columbia Joins Blackstone in Retail Hedge Fund Initiative
Blackstone Alternative Asset Management agreed to research and develop an investment offering, according to a statement today from the Columbia business at Ameriprise Financial Inc. Class A shares of the mutual fund will be available to the general public with a minimum initial investment of $2,000 for most buyers, and the maximum sales charge is listed as 5.75 percent, according to a prospectus. Blackstone funds will be included as part of Columbia’s offerings.
Asset managers have been adding alternative mutual funds to win clients and generate fee revenue. The offerings use approaches traditionally employed by hedge funds, such as betting against stocks through short sales or investing in non-traditional assets, including leveraged loans and commodities. Boston-based Columbia in June hired William Landes from Gottex Fund Management Holdings Ltd. to expand specialized strategies.
“The objective is modest volatility, downside-risk protection and diversification against the other assets in the portfolio,” Landes said in an interview today. “I would argue if a category like alternatives is able to deliver that, it is applicable to anyone’s portfolio.” Alternative mutual funds had about $158 billion at the end of October, compared with $111 billion 18 months earlier, according to Chicago-based researcher Morningstar Inc.
Hedge Funds In The News
Not Everyone is Jumping on the Liquidity Bandwagon as Lockups Return
Hedge-fund managers want their lockups back—and they are willing to negotiate. For years, liquidity has been the byword among investors, driving hedge funds to reduce or even abandon lock-up periods, during which clients are restricted from redeeming. But as the industry’s performance has waned, some firms are looking to hold on to money for longer, enabling them to invest in more illiquid—and potentially profitable—opportunities.
Two-thirds of new hedge funds insisted on lock-ups of a year or more, according to eVestment, with the average fund imposing a 377-day wait before allowing withdrawals without penalty. But to win over skeptical clients, many are offering fee reductions in exchange for the reduced liquidity, The Wall Street Journal reports, with the size of the reduction tied to the length of the lockup.
AlphaMetrix Settles with Feds
The Commodity Futures Trading Commission has reached a settlement with former futures fund manager AlphaMetrix that requires the defunct company to pay $5.6 million, though it’s unlikely that payment will ever be made in full.
The agreement was filed yesterday in the U.S. District Court for the Northern District of Illinois in Chicago and a hearing on it is scheduled for Dec. 16. It calls for AlphaMetrix to pay restitution of $2.8 million, plus interest, and a civil monetary penalty of $2.8 million. While there would be a priority on paying the $2.8 million to investors still owed money, the penalty isn’t likely to be collected.
The agency sued AlphaMetrix in November 2013 after it became apparent that the Chicago-based firm’s top executives were using money they owed fund managers and investors to prop up the failing firm’s finances.
At the time, the National Futures Association shut the firm down and the CFTC received court authority to freeze AlphaMetrix’s assets and appoint a federal receiver, who over the past year has been liquidating the assets to repay fund managers, investors and other creditors. The investors are owed about $3.5 million in rebates and the managers are owed about $7.2 million in rebates, according to the receiver’s filings in court.
In The Classroom
Among the truly alternative mutual fund categories tracked by Morningstar, Long/Short Equity is by far the largest, with approximately $56 billion in assets under management as of November 30. As we stated in last month’s Alternatives Briefing, the popularity of the category is understandable, as the investment argument is intuitive and compelling, liquidity is a lower order concern than for many alternative strategies, and investors need not radically shift their thinking around asset allocation and portfolio construction in order to take advantage of these strategies. But there is one complicating factor, and that is identifying skilled managers in the space, which is no small task. So how should investors evaluate long/short equity managers?
If you’d like our thoughts on the subject, please click here .
And Lastly…
Wishing you Peace, Happiness, and Prosperity during the Holiday Season and throughout the New Year.
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