• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
JPM Prime Brokerage Global Hedge Fund Trends November 2013
 

JPM Prime Brokerage Global Hedge Fund Trends November 2013

on

  • 438 views

 

Statistics

Views

Total Views
438
Views on SlideShare
438
Embed Views
0

Actions

Likes
0
Downloads
14
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

CC Attribution-NonCommercial LicenseCC Attribution-NonCommercial License

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    JPM Prime Brokerage Global Hedge Fund Trends November 2013 JPM Prime Brokerage Global Hedge Fund Trends November 2013 Document Transcript

    • J.P. Morgan Prime Brokerage Global Hedge Fund Trends November 13, 2013 Executive Summary Along with most other risk assets, hedge funds posted broadbased gains in October, rising +1.48% in the aggregate and +7.19% year-to-date, the best such performance since 2009. All of the major hedge fund strategies delivered positive returns in October, with equity long short (+1.80%) and event driven (+1.50%) strategies leading. Figure 1: October 2013 performance HFRI and Market Indices. Monthly Returns 5.0% 4.0% 3.0% 2.0% Leverage For all accounts in the Prime Brokerage portfolio, gross leverage 1 declined from 1.83 to 1.82 (-0.37%) in October. Net exposure 2 for equity-biased strategies decreased from 0.78 to 0.74 (-4.78%). Net leverage declined from 0.66 to 0.65 (2.12%). Securities Lending The U.S Prime Brokerage portfolio experienced the largest shorting in single names in October of any single month in 2013. The fixed income book was net shorted for a second consecutive month. In Europe, long/short hedge funds expressed a net long bias in Financial and Consumer, Noncyclical names while Industrials were net shorted. In Asia, earnings season resulted in heighted volumes, though activity trailed off towards month-end as clients closed positions to avoid liquidity traps. Short balances ended October up +2%. Institutional Investor Sentiment The Capital Introduction Group (CIG) traveled to Boston where consultants, endowments and funds of hedge funds (FoFs) dominate the hedge fund investor community. Several consultants have started to consider managers further down the AUM spectrum. Among European investors, CIG is observing increased interest in alternative UCITS. CIG has also observed an uptick in investor interest in Asia Pacific strategies. 1.0% 0.0% -1.0% HF Index Equity Hedge Event Driven Macro Rel Value S&P 500 Fixed CMDTY Income USD Credit -2.0% Source: Bloomberg, Hedge Fund Research Table 1: Performance of hedge fund strategies and asset classes HFRI and Market Indices 3 Year-to-Date 7.19% 11.27% 10.03% -0.90% 5.93% 25.30% -2.41% -3.72% 0.53% -0.49% Oct-13 1.48% 1.80% 1.50% 1.09% 1.19% 4.60% 0.90% -1.56% -0.03% 1.58% HF Index Equity Hedge Event Driven Macro Relative Value S&P 500 Fixed Income CMDTY USD Credit Source: Bloomberg, Hedge Fund Research Figure 2: Hedge fund beta to equities Rolling 21-day beta of HFRX equal-weighted index returns to the S&P 500 Total Return Index 0.19 0.17 3,100 0.15 3,000 0.13 2,900 0.11 2,800 0.09 2,700 0.07 2,600 0.05 2,500 0.03 Market Perspectives There was a considerable degree of uncertainty leading up to the October FOMC meeting. Coming out of the meeting, the Federal Reserve opted not to change the pace of its bond buying program or its interest rate forward guidance. In its post-meeting statement, the Federal Reserve indicated that the FOMC remains biased towards reigning in the pace of the program at coming meetings. Notably, the statement belied little concern about the recent softening in growth indicators. 3,200 2,400 0.01 Oct-12 Dec-12 Feb-13 Apr-13 Equity Beta (LHS) Jun-13 Aug-13 Oct-13 2,300 S&P 500 Total Return Index (RHS) Source: Bloomberg, Hedge Fund Research 1 Gross leverage is the total market value of long and short positions divided by clients' equity in J.P. Morgan’s Prime Brokerage portfolio. 2 Calculated for Equity Long Short and Market Neutral funds on J.P. Morgan’s Prime Brokerage platform only. Net leverage is defined as the market value of long positions (LMV) minus the market value of short positions (SMV), divided by clients’ equity (Eq). Net exposure is defined as the ratio of LMV and SMV, minus one. 3 Market indices from Bloomberg are as follows: S&P 500 (SPTR Index), Fixed Income (JPMGGLBL Index), CMDTY (SPGSCI Index), USD (DXY Index), and Credit (JULIR Index). 1 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures This section presents a summary of the changes that we have observed in leverage and sector exposures across the range of hedge funds that we work with. The confidentiality of our clients’ positions is important to us and as such this information has been aggregated and displayed in an anonymous manner in an effort to mitigate the risk of revealing or alluding to any one fund’s exposures. Information may be excluded due to the perceived risk of revealing sensitive information. The information discussed is specific to activities on J.P. Morgan’s books, and may not represent total client activity. These numbers should only be viewed as representative observations. Market Overview 4 Although the U.S. federal government shutdown and debt ceiling debate commandeered headlines in October, risk assets rallied broadly on the month, suggesting that markets have to some extent grown numb to the gyrations of politics and policy, which seem to have become the rule rather than the exception. Fundamentally driven investors benefitted from declining cross-asset correlation and volatility. From October 7 through month-end, the Chicago Board Options Exchange S&P 500 Implied Correlation Index fell -28.21% to 41.55 and reached 36.07 on October 18, the lowest level since February 2007. Similarly, the VIX decreased -17.17% on the month (See Figure 3). Figure 3: CBOE S&P 500 Implied Correlation and VIX indices, October 2013 60 30 28 55 26 24 50 22 45 20 18 40 16 September, as investors are once again seeking yield from defensive, dividend-paying stocks. October also ushered in the start of the third quarter earnings season. As of November 6, 2013, approximately 71% of the companies that had reported earnings exceeded estimates, the highest percentage since the first quarter of 2012. 6 Among such companies, earnings exceeded analysts’ expectations by an average of +4.88%. Third quarter EPS is tracking J.P. Morgan’s forecast of $28, with companies in the Materials sector exceeding analysts’ expectations by the largest margin. Approximately 76% of companies in the S&P 500 Materials sector have exceeded third quarter EPS forecasts. Whether such results are sustainable going forward is an open question, though. One reason for concern is muted top line growth. Revenue per share disappointed in both the U.S., where it was flat, and in Europe (-1%). 7 Additionally, growth expectations remain stationary and, although global manufacturing PMI rose from 51.8 in September to 52.1 in October, the Markit U.S. PMI fell to a one-year low. Furthermore, U.S. factory orders declined -0.1% for August. Estimates had posited growth of +0.3%. Accordingly, global earnings expectations are continuing to decline (See Figure 4). 14 35 12 30 10 Figure 4: 2013 and 2014 global equity earnings forecasts 32 31 CBOE Implied Correlation Index (LHS) VIX (RHS) Source: Bloomberg 30 29 October was an auspicious month for equities, which reached new highs yet again. Except for Japan, where the Nikkei Index declined -0.88%, equity markets in major regions increased between +3% and +5% month-over-month. European equities again outperformed; the Euro Stoxx 50 Index rallied +6.04% on the month as compared with +4.46% for the S&P 500 Index. 5 Defensive sectors slightly outperformed cyclicals. That pattern is to some degree symptomatic of the Federal Reserve’s no-taper decision in 4 Hedge fund strategy returns are based on data supplied by Hedge Fund Research. 5 Reference is to the SPX Index, not the SPTR Index, as in Table 1. 28 27 26 25 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 2013 MSCI AC World EPS Jul-13 Aug-13 Sep-13 Oct-13 2014 MSCI AC World EPS Source: Datastream, J.P. Morgan 6 J.P. Morgan Global Asset Allocation, Global Markets Outlook and Strategy, November 6, 2013, https://jpmm.com/research/content/GPS-1252799-0. 7 Same as Footnote 6. 2 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures October was also marked by ongoing, across-the-board tightening of credit spreads. Investment grade bonds returned +1.6% month-over-month while high-yield bonds (+2.6%) and loans (+0.8%) also rallied. Leveraged loan spreads fell 0.27% in October and thus are 111 basis points tighter yearto-date. 8 Composite Hedge Fund Performance Along with most other risk assets, hedge funds posted broadbased gains in October, rising +1.48% in the aggregate and +7.19% year-to-date, the best such performance since 2009. All of the major hedge fund strategies delivered positive returns in October, with equity long short (+1.80%) and event driven (+1.50%) strategies leading. Global macro gained +1.09% in the aggregate, the first positive monthly performance for the strategy since April. Equity Hedge October’s gains among equity long short managers were driven to a strong degree by quantitative directional funds, which returned +2.70% in the aggregate. Managers benefitted from exposure to U.S. small cap stocks, large cap U.S. Consumer Staples names and large cap names in the U.S. Materials sector. Market neutral funds also delivered positive returns (+2.08%). managers benefitted from positioning in NYSE/IntercontinentalExchange, Provident/Sterling Bancorp, Akorn/Hi-Tech Phamacal, Koch/Molex and Thermo Fisher/Life Technologies. Relative Value Fixed income relative value managers gained +1.19% on the month, aided yet again by tightening credit spreads and the continued decline in yields. Year-to-date aggregate returns now stand at +5.93%. Convertible arbitrage managers were up, positing aggregate gains of +0.33% on the month. Global Macro Global macro strategies were up +1.09% in the aggregate month-over-month. Managers with emerging markets exposure (+2.05%), particularly with respect to EM Asia and Brazil, helped fuel October’s gains. Systematic strategies and CTAs also contributed to October’s returns, rising +1.41% month-over-month. Figure 5: Sector performance (S&P 500 Index), October 2013 8.0% 7.0% 6.0% 5.0% 7.35% 6.13% 5.05% 4.60% 4.0% 4.50% 4.20% 4.11% 4.07% 3.66% 3.15% 3.0% 2.0% 1.0% 0.0% -1.0% Source: Bloomberg, Standard & Poor’s Event Driven October’s gains by event driven managers mark the fifteenth consecutive month of positive aggregate gains for the strategy. Positive performance was fueled largely by activist and special situations funds, which returned +3.50% and +1.90%, respectively, month-over-month. Merger arbitrage 8 J.P. Morgan High Yield and Levered Loan Research, Leveraged Loan Market Monitor, November 1, 2013, https://jpmm.com/research/content/GPS-1248497-0. 3 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures Figure 8: Z-score of gross leverage and the S&P 500 Index Leverage and Risk Exposures Gross Leverage Gross leverage for all accounts in the Prime Brokerage portfolio declined slightly from 1.83 to 1.82 (-0.37%) in October (See Figure 6). Gross leverage of levered accounts in the Prime Brokerage portfolio fell from 2.53 to 2.48 (-1.97%) (See Figure 7). The decrease in leverage levels amidst the continued market rally in October suggests that clients are hesitant to add risk into the rally at current market levels. To that point, it should be observed that hedge fund beta to equities decreased noticeably in October (See Figure 2). The decline is also attributable partly to an increase in client equity resulting from mark-to-market activity. Figure 6: Daily gross leverage and the S&P 500 Index 1,800 1.90 1,600 1.85 1,500 1.80 1,400 1.75 Jan-13 Mar-13 May-13 S&P 500 Index (LHS) Jul-13 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Difference between gross leverage and S&P 500 Index Z-scores Source: Bloomberg, J.P. Morgan Prime Brokerage 1.95 1,700 1,300 Nov-12 The Z-score measures how many standard deviations an observation is above or below the mean Gross Leverage by Strategy High Grade Fixed Income, Equity Long Short and Convertible Arbitrage experienced increases in gross leverage month-over-month, rising +24.2%, +3.6% and +3.3%, respectively. At 2.52, High Grade Fixed Income ended October at a year-to-date high. The remaining strategies experienced a decrease in gross leverage in October. Equity Long Short, Convertible Arbitrage, High Grade Fixed Income and High Yield Fixed Income are running gross leverage above their two-year average levels. Sep-13 Figure 9: Gross leverage by strategy Gross Leverage (RHS) 4 Source: Bloomberg, J.P. Morgan Prime Brokerage Figure 7: Gross leverage (levered accounts) 5-day moving average and the S&P 500 Index 1,800 3 2.7 2 1,700 2.6 1 1,600 0 1,500 2.5 Market Neutral Equity Long Multi-Strategy Convertible Short Arbitrage Aug-13 1,400 Sep-13 High Grade High Yield Fixed Income Fixed Income Oct-13 Source: J.P. Morgan Prime Brokerage 1,300 Nov-12 2.4 Jan-13 Mar-13 S&P 500 Index (LHS) May-13 Jul-13 Sep-13 Gross Leverage (Levered Accounts - RHS) Source: Bloomberg, J.P. Morgan Prime Brokerage 4 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures Table 2: Gross leverage by strategy Table 3: Long and short exposures by sector Average and first quartile calculated for the period of October 2011 to October 2013 Long (Short) exposure by sector as a percentage of total client long (short) exposure in Prime Brokerage portfolio First % Change Q uartile 3.62 -2.5% Aug-13 Se p-13 O ct-13 Ave rage Market Neutral 3.89 3.87 3.78 3.85 Equity Long Short 1.96 2.01 2.09 1.84 1.72 3.6% Multi-Strategy 1.77 1.76 1.74 1.77 1.74 -0.7% Convertible Arbitrage 3.72 3.77 3.90 3.75 3.62 3.3% High Grade Fixed Income 2.22 2.03 2.52 2.46 2.22 24.2% High Yield Fixed Income 1.42 1.45 1.44 1.26 1.16 -0.9% PB Portfolio (Levered Accounts) 2.47 2.53 2.48 2.51 2.47 -2.0% Long exposure Oct-12 Sep-13 Short exposure Oct-13 Oct-12 Sep-13 Oct-13 Equity Long Short and Market Neutral funds on the Prime Brokerage platform only. LMV: Market value of long positions. SMV: Market value of short positions. Eq: Equity in the clients’ accounts 0.9 0.8 4.6% 5.1% 5.0% 4.6% 15.0% 15.2% 7.2% 6.3% 6.2% Consumer, Cyclical 10.5% 11.6% 11.8% 9.0% 8.2% 7.7% 15.2% 16.5% 15.3% 11.9% 10.6% 10.2% Diversified 0.3% 0.3% 0.3% 0.1% 0.0% 0.0% Energy 8.0% 9.0% 9.3% 5.8% 6.5% 7.0% Non sector-specific ETF 3.4% 1.7% 2.1% 16.2% 17.6% 16.9% Financial 20.0% 16.7% 16.8% 11.2% 8.6% 8.2% 5.9% 6.6% 6.4% 5.9% 7.4% 7.3% Technology 4.7% 5.0% 4.8% 6.6% 7.2% 6.6% Utilities 1.5% 1.3% 1.4% 1.6% 1.5% 1.6% Government 6.5% 7.1% 7.2% 8.9% 8.5% 9.6% Other Figure 10: Net exposure and net leverage 4.6% 12.7% Industrial Net Exposure and Net Leverage Net exposure for equity-biased funds fell in October, decreasing from 0.78 to 0.74 (-4.78%). Net leverage also declined, falling from 0.66 to 0.65 (-2.12%). 5.0% Communications Consumer, Noncyclical Source: J.P. Morgan Prime Brokerage Basic Materials 6.3% 4.6% 4.6% 10.6% 12.5% 14.0% Source: J.P. Morgan Prime Brokerage 0.7 0.6 0.5 0.4 Oct-11 Jan-12 Apr-12 Jul-12 Net Exposure (LMV/SMV)-1 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Net Leverage (LMV-SMV)/Eq Source: J.P. Morgan Prime Brokerage Sector Exposures The largest month-over-month increases in the long Prime Brokerage portfolio were in Non sector-specific ETFs (+0.4%) and in the Energy sector (+0.3%). The largest decline was in the Consumer, Non-cyclical sector (-1.2%). The largest increase in the Prime Brokerage short portfolio was in the Energy sector (+0.5%). The most substantial decreases in short exposure occurred in Non sector-specific ETFs (-0.7%), Technology (-0.6%) and in the Consumer, Cyclical sector (-0.5%). The Prime Brokerage portfolio may have become more bullish on the Communications, Consumer, Cyclical and Financial sectors, as well as Non sector-specific ETFs, which experienced month-over-month increases in long exposure and decreases in short exposure. 5 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Securities Lending North America Securities Lending Equities During October, the U.S Prime Brokerage portfolio experienced the largest shorting in single names of any single month in 2013. While the move was significant, it nonetheless failed to offset September’s covering activity. October’s increase in short exposure was driven by singlenames, with heightened flows driven by the third quarter earnings season. Correspondingly, there was a 30% increase in gross trading volume in the Prime Brokerage Portfolio month-over-month. With the exception of Basic Materials, all sectors were net shorted with Energy and Consumer, Cyclical as the primary drivers. ETFs The U.S. Prime Brokerage ETF book was net covered in October. IWM (iShares Russell 2000 Index), MDY (SPDR S&P MidCap 400 ETF) and SPY (SPDR S&P 500 ETF Trust) experienced significant covering as the market continued its rally. Equal-weighted S&P Retail XRT (SPDR S&P Retail ETF) and XOP (SPDR S&P Oil & Gas Exploration & Production ETF) saw notable covering as well. IYR (iShares Dow Jones US Real Estate ETF) and XLE (Energy Select Sector SPDR ETF) experienced some shorting on the month in contrast to the overall trend. Large increases in shares outstanding, stemming from a rise in creations, improved overnight loan liquidity in SPY, MDY and MSCI EFA (iShares MSCI EAFE Index Fund). Fixed Income The U.S. Prime Brokerage fixed income book was net shorted for a second consecutive month. Shorting was significant across all fixed income products, including U.S. Treasuries in the two and five year parts of the curve. The largest increases on our corporate book were in the Consumer, Cyclical, Communications and Industrial sectors. The following cap structures experienced marked activity on the month: Wind Acquisition Holding (Windim), NII Capital (NIHD), Cliff Natural Resources (CLF), BonTon Dept Stores (BONT), Energy Future (TXU) and Essar Steel Algoma (ALGCN). In the convertible bond space, our book saw considerable short increases with Intl Game Technology (IGT 3 ¼ 5/1/14), Lam Research Corp. (LRCX 1.25% 05/15/18), Priceline (PCLN .35 6/15/20) and Prologis LP (PLD 3 ¼ 3/15/15) being names of interest. Event Driven • Applied Materials, Inc. (AMAT) and Tokyo Electron Limited (8035 JP) announced an agreement to merge in an all stock deal. The merger was approved by the boards of both companies and is expected to close in mid to late 2014. Holders of Tokyo Electron will receive 3.25 shares of the new company for each Tokyo Electron share. Applied Materials shareholders will receive only 1 share. Borrow in Applied Materials has been active but remains GC with considerable supply available. • American Realty Capital Properties (ARCP) announced a merger with Cole Real Estate Investments (COLE) near the end of October. Cole shareholders will have the option to receive either 1.0929 shares of American Realty or $13.82 in cash, subject to a 20% proration. The merger is expected to close in the first half of 2014. While much of the supply on American Realty was taken down on the day the merger was announced, rates have since stabilized. 6 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Securities Lending Figure 11: Cumulative net activity Table 5: U.S. securities lending trends by ETFs Market value change of activity across equities, ETFs, and fixed income For the month of October 2013 $6.0 5 Day $4.0 30 Day Price Change Position Change (shares) SPDR S&P 500 ETF TRUST 0.4% ISHARES RUSSELL 2000 (1.6%) $2.0 $0.0 -$2.0 ISHARES US REAL ESTATE ETF ENERGY SELECT SECTOR SPDR SPDR S&P OIL & GAS EXP & PRODUCTION -$4.0 -$6.0 -$8.0 Equity 2-Jan 1-Feb 3-Mar 2-Apr ETF 2-May Fixed Income 1-Jun Net Activity 1-Jul 31-Jul Price Change Price Change Position Change (shares) 1.7% 3.8% (3.3%) 4.4% 12.2% (2.6%) 1.2% (17.3%) 5.5% (18.7%) (2.0%) 1.9% 2.2% 12.2% (1.9%) 66.1% 0.4% (7.3%) 3.7% 4.3% 5.4% 0.5% 30-Aug 29-Sep 29-Oct Source: J.P. Morgan Securities Lending (2.7%) (4.3%) 3.6% (29.2%) 12.9% (21.6%) POWERSHARES QQQ TRUST, SERIES 1 (ETF) -$10.0 -$12.0 90 Day Position Change (shares) 0.6% 16.6% 3.7% 0.1% 9.4% (6.5%) INDUSTRIAL SELECT SECTOR SPDR 0.3% 19.4% 4.2% 29.6% 8.1% 24.2% (0.2%) (15.4%) 2.3% (5.0%) 1.2% 18.3% (1.0%) 4.2% 2.6% 12.2% 0.1% (25.0%) (0.0%) 39.4% 1.4% 70.3% 8.0% (64.6%) ISHARES IBOXX HIGH YIELD CREDIT ETF FINANCIAL SELECT SECTOR SPDR ISHARES MSCI EMERGING MARK Figure 12: Rolling 1-month daily short flow Daily Activity Relative to 30-Day Average (LHS) and S&P 500 Index (RHS) 250% 1,775 200% 1,750 150% Source: J.P. Morgan Securities Lending 1,725 100% 1,700 50% 1,675 0% 1,650 -50% 1,625 -100% 1,600 -150% 1,575 -200% -250% 02-Oct 1,550 09-Oct 16-Oct Net Cover Activity (LHS) 23-Oct Net Short Activity (LHS) 30-Oct S&P 500 Index (RHS) Source: Bloomberg, J.P. Morgan Securities Lending Table 4: U.S. securities lending trends by sector For the month of October 2013 5 Day 30 Day Consumer, Non-cyclical Price Change (0.9%) Position Change (shares) 1.1% Financial (1.0%) Technology 90 Day Price Change (0.0%) Position Change (shares) 2.9% Price Change Position Change (shares) 4.2% (2.0%) 2.0% 2.9% (0.2%) 2.0% (6.9%) 0.1% 3.5% 0.6% 2.4% 6.0% 3.0% Energy (0.6%) 5.5% 3.3% 9.6% 8.0% 11.0% Communications (0.3%) 0.8% 1.5% 0.6% 9.0% 3.7% Industrial (1.3%) 1.8% 1.5% 2.5% 6.0% 1.8% Consumer, Cyclical (0.4%) 1.3% 0.0% 4.9% 5.0% (1.3%) Basic Materials (0.4%) 1.1% 5.4% (0.4%) 9.8% (10.8%) Utilities (0.1%) 2.7% 3.2% 0.1% (1.9%) (3.4%) Source: J.P. Morgan Securities Lending 7 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Securities Lending International Securities Lending EMEA Fundamental and quantitative directional long/short hedge funds expressed a net long bias in Financial and Consumer, Non-cyclical names while Industrials were net shorted. Clients remained bearish on Outotec OYJ (OTE1V FH), ThromboGenics NV (THR BB) and Royal Imtech NV (IM NA). K+S AG-REG (SDF GR) experienced short covering during most of October. Banca Monte dei Paschi (BMPS IM) remained a tight borrow with the lending pool nearly 100% utilized. Among the top 20 names in Europe, Peugeot (UG FP), Telecom Italia (TIT IM), Koninklijke Vopak NV (VPK NA) and Kone OYJ-B (KNEBV FH) saw the largest percentage increases in shorting month-over-month. Several of the most crowded shorts in Europe reported third quarter earnings that caused volatile price reactions. October also saw the much anticipated IPO of Royal Mail (RMG LN). Merger and event arbitrage funds were highly active in October. Several funds initiated long positions in Celesio (CLS1 GR) after McKesson offered EU23 per share to acquire the company. Rights issues traded in Schmolz+Bickenbach (STLN SW) and Nexans (NEX FP) and borrow was tight for both names. October also saw share offerings in Portugal Telecom (PTC LS), Indra Sistemas (IDR SM) and Abengoa B (ABG/P MC). Deutsche Wohnen (DWNI GR) (exchange offer) saw limited interest from our client base. Convertible bond issuance slowed in October, although there were issues from NH Hoteles (NHH SM) and from ACS, which issued bonds convertible into Iberdrola (IBE SM) ordinaries. There was also continued interest in Nyrstar (NYR BEN), Alcatel (ALU), Peugeot (UG FP) and Melia Hotels (MEL SM). Asia Pacific Ex-Japan Earnings season resulted in heightened volumes in October, though activity trailed off towards month-end as clients closed positions to avoid liquidity traps. Short balances ended October +2%. Taiwan Taiwan saw significant two-way flow in major tech names due primarily to new Apple product launches. Activity was especially pronounced for Mediatek Inc. (2454 TT) as directional funds took profits on longstanding shorts. HTC Corp. (2498 TT) also experienced heavy activity. Hong Kong The coal sector experienced the largest increase in short interest after several earnings reports came in below expectations. Yanzhou Coal Mining Co Ltd. (1171 HK) was down -4.25% from its three-month high and China Coal (1898 HK) was down -9.2% from its September highs. The iShares China A50 tracker (2823 HK), a popular hedge to A share exposure, saw increased demand and became easier to borrow as supply also increased throughout the month. Chinese banks saw short covering as did Chinese automakers after better than expected earnings from Geely Automobile Holdings Ltd. (175 HK) and Guangzhou Automobile Group Co. Ltd. (2238 HK). Korea Borrow in Celltrion Inc. (068270 KS) remained tight and rates spiked on new demand. There was also fresh demand for certain electronics names including Samsung Electronics Co. Ltd. (005930 KS) and SK Hynix Inc. (000660 KS) due to the sudden increase in DRAM prices. Japan Deregulation of price-setting rules and large-lot margin trading took effect in October. The main change was removal of the uptick rule, subject to certain exceptions. As a result, it is possible that short volumes may spike in November. Earnings season dominated Japan in October, with results that were generally weaker than expected. Interest was acute in construction, airline, online gaming and China names such as: Kumagai Gumi Co. Ltd. (1861 JP), IHI Corp. (7013 JP), Ana Holdings Inc. (9202 JP), GungHo Online Entertainment Inc. (3765 JP), Dena Co. Ltd. (2432 JP), Gree Inc. (3632 JP), Komatsu Ltd. (6301 JP), and Hitachi Construction Machinery Co. Ltd. (6305 JP). Australia As the market rallied in October, the Materials sector experienced the heaviest short covering followed by the Energy and Consumer Discretionary sectors. Consumer Staples were the most shorted. There was heavy interest in Leighton Holdings Limited (LEI AU) and in ResMed Inc. (RMD AU). Shorts in ear plant manufacture Cochlear Ltd. (COH AU) reached year-to-date highs after several brokers downgraded the name. There was new activity in the REIT space after Dexus Property Group (DXS AU) offered to acquire Commonwealth Property Office Fund (CPA AU). There was continued short interest in Monadelphous Group Ltd. (MND AU) as a result of lower capex within the mining services sector. 8 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Institutional Investor Sentiment Institutional Investor Sentiment North America In October, the Capital Introduction Group (CIG) traveled to Boston where consultants, endowments and funds of hedge funds (FoFs) dominate the hedge fund investor community. Although the consultants are still allocating to the larger hedge fund managers, they have begun to look at managers further down the AUM spectrum. As with institutional investors in other regions, Boston-based allocators are interested in learning about new launches and emerging managers albeit primarily for informational purposes. Most investors in the region require at least a one year track record before committing capital. Investors generally remain interested in equity long short (with some sector interest in healthcare and technology) and event driven strategies, including activism. Some investors in North America have recently inquired about strategies that can serve as a hedge in a rising rate environment. CIG has also seen searches for niche credit strategies such as direct lending and aircraft leasing. Several groups also have inquired about co-investment opportunities. Table 6: Investor strategies of interest by region 9 North America Direction of Interest Level of Interest EMEA Direction of Interest Asia Pacific Level of Interest Direction of Interest Convertible Arbitrage Neutral Neutral Neutral Corporate Credit Neutral Neutral Neutral Equity Long Short Neutral Neutral Increasing Event Driven Neutral Increasing Increasing Macro Neutral Neutral Neutral Decreasing Neutral Neutral Neutral Neutral Increasing Decreasing Neutral Level of Interest Decreasing CTA Market Neutral Structured Credit Legend Low Interest Medium Interest High Interest Source: J.P. Morgan Capital Introduction Group EMEA CIG is observing increased interest in alternative UCITS from European investors. The investors have different motivations for the searches, including improved portfolio liquidity and underlying demand for regulated structures. The allocators showing interest include asset managers, private banks and FoFs. Interest is also coming from traditional longonly investors seeking absolute return. While equity strategies have traditionally formed the bulk of the UCITS universe, investors are now seeking UCITS funds that concentrate on other strategies to diversify their portfolios. Asia Pacific There has been a marked uptick in overseas investor interest in Asia Pacific strategies based on research and due diligence trips to the region. Inquiries have come from a wide array of allocators, ranging from smaller FoFs and family offices to multi-billion dollar institutions. Interest also has been geographically broad, coming from across the U.S. and Europe. It should be noted, though, that many of the abovementioned investor trips appear to be more fact-finding in nature. Commensurate allocation flows have yet to occur. 9 This information comes from CIG conference calls and meetings with global hedge fund managers and institutional investors. This table represents views of the CIG team and may not be completely exhaustive. 9 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Market Perspectives October Commentary There was a considerable degree of uncertainty leading up to the October FOMC meeting. The federal government shutdown created something of a wildcard since the outcome of the October meeting was necessarily contingent on a resolution of the budget imbroglio. However, the meeting itself was largely uneventful. Coming out of the meeting, the Federal Reserve opted not to change the pace of its bond buying program or its interest rate forward guidance. In its post-meeting statement, the Federal Reserve indicated that the FOMC remains biased towards reigning in the pace of the program at coming meetings. Notably, the statement belied little concern about the recent softening in growth indicators. In fact, in contrast to prior releases, the statement made no mention about rising mortgage rates or the “tightening of financial conditions” as being impediments to economic growth. Perhaps the most noteworthy aspect of the FOMC statement was its mention of “available data,” which underscores that it was working with limited information as a result of the backlog of economic data releases because of the shutdown (which it is believed may lead to distortions in reports on the economy over the next few months). We were therefore left with a placeholder report, which was not surprising in light of the September meeting surprise. Many analysts now expect Fed tapering to begin in March 2014. That timeline could become complicated, though, since the March FOMC meeting coincides with the next “drop dead” date for the debt ceiling. The Fed taper guessing game will therefore continue for the time being. The following sections are excerpts from J.P. Morgan Research publications. The full publications can be accessed via the sources provided in the footnotes below. Japan: can Abenomics achieve fiscal targets? 10 Prime Minister Abe claims that Abenomics has been working effectively to boost growth and public confidence, but he seems rather reluctant to focus on fiscal consolidation beyond his decision to raise the consumption tax (VAT) rate from the current 5% to 8% in April next year. It appears that boosting nominal growth is his priority, and that he believes fiscal concerns can be largely overcome by high growth. Indeed, 10 J.P. Morgan Economic and Policy Research, Japan: can Abenomics achieve fiscal targets? October 25, 2013 https://jpmm.com/research/content/GPS-1241116-0. the decision to raise the VAT next year accompanied a promise of a large, ¥5 trillion (1% of GDP) fiscal stimulus to ease the drag. Also, although the next tax hike in October 2015 from 8% to 10% is already legislated, Abe mentioned that the government will reassess Japan’s economic situation before the final decision, as it did this summer. However, the government has internationally committed to fiscal targets that halve deficits in the primary balance (PB) of central and local government by FY2015 (3.3% of GDP) from FY2010 (6.6%) and aims to achieve a surplus in FY2020. There is no doubt that this is a major challenge. We think there is little danger that the prospect of missing the targets triggers a collapse in JGB market, because the ongoing, aggressive purchases by the BoJ—which seem unlikely to end anytime soon—are a powerful policy tool to lower JGB yields. Still, it is reasonable to expect that missing the targets would damage confidence in Japanese fiscal health, which raises the risk of future turbulence in the government bond market. Without meaningful reforms in social security and the tax system, in addition to reforms to the economic structure that is the current focus of the third arrow of Abenomics, we believe fiscal concerns will not fade. EM have driven recent pop in global IP growth 11 Global manufacturing has strengthened materially in recent months, with output gains of more than 4% annualized in the three months through August. This is the fastest pace in about two and a half years, with the exception of the brief pops that followed the Tohoku disaster and the Thai flooding. The recent pace is consistent with global GDP growth that is a bit above trend, so it poses some upside risk to our forecast, though the gap is certainly well within the margin of error. Likewise, the 4% pace of IP growth is aligned with the latest readings for the global output PMI and the PMI orders/inventory ratio, which track current and future growth in manufacturing. Although IP growth has picked up in most countries, the lift is concentrated in the emerging market economies, whereas the improvement in the developed world has been more modest. This is somewhat surprising since most of the improvement in GDP growth up until now has occurred in the DM (notably Western Europe and Japan), whereas the EM have been hobbled by various domestic factors. 11 J.P. Morgan Economic and Policy Research, EM have driven recent pop in global IP growth, October 18, 2013, https://jpmm.com/research/content/GPS-1234199-0. 10 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Prime Brokerage Global Hedge Fund Trends – Market Perspectives Our global forecast does incorporate some lift in EM GDP growth (especially excluding China). However, we expect less than the normal unit beta response to the acceleration in DM growth. This expected underperformance owes to domestic drags including the squeeze on corporate profit margins and hiring, tighter EM bank credit standards, and a further deterioration in EM financial conditions as the Fed moves toward tapering. The unexpected strength of EM IP growth raises several questions. The first is whether we are underestimating 3Q GDP outcomes in the EM. This week, we got an upside surprise in Chinese GDP growth for 3Q even though the forecast already had been raised in advance of the report. It also is worth noting that the growth of EM IP was unusually weak relative to EM GDP in 2Q, so the recent pickup in IP growth could merely be reversing this gap. The second question to consider is what is driving the EM IP lift, and in particular, whether the impulse has been from final demand or inventory growth (indeed, we are grappling with this same question at the global level). A sustained upside surprise in final demand growth would open the door to faster EM GDP growth in 4Q and beyond. 11 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.
    • Important Information and Disclaimers Contact Us: Alessandra Tocco Alessandra.Tocco@jpmorgan.com 212-272-9132 Kenny King, CFA Kenny.King@jpmorgan.com 212-622-5043 Christopher M. Evans c.m.evans@jpmorgan.com 212-622-5693 Stacy Bartolomeo Stacy.Bartolomeo@jpmorgan.com 212-272-3471 This material (“Material”) is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. This Material includes data and viewpoints from various departments and businesses within JPMorgan Chase & Co., as well as from third parties unaffiliated with JPMorgan Chase & Co. and its subsidiaries. The generalized hedge fund and institutional investor information presented in this Material, including trends referred to herein, are not intended to be representative of the hedge fund and institutional investor communities at large. This Material is provided directly to professional and institutional investors and is not intended for nor may it be provided to retail clients. This Material has not been verified for accuracy or completeness by JPMorgan Chase & Co. or by any of its subsidiaries, affiliates, successors, assigns, agents, or by any of their respective officers, directors, employees, agents or advisers (collectively, “JPMorgan”), and JPMorgan does not guarantee this Material in any respect, including but not limited to, its accuracy, completeness or timeliness. Information for this Material was collected and compiled during the stated timeframe, if applicable. Past performance is not a guarantee of future results. JPMorgan has no obligation to update any portion of this Material. This Material may not be relied upon as definitive, and shall not form the basis of any decisions. It is the user’s responsibility to independently confirm the information presented in this Material, and to obtain any other information deemed relevant to any decision made in connection with the subject matter contained in this Material. Users of this Material are encouraged to seek their own professional experts as they deem appropriate including, but not limited to, tax, financial, legal, investment or equivalent advisers, in relation to the subject matter covered by this Material. JPMorgan makes no representations (and to the extent permitted by law, all implied warranties and representations are hereby excluded), and JPMorgan takes no responsibility for the information presented in this Material. This Material is provided for informational purposes only and for the intended users’ use only, and no portion of this Material may be reproduced or distributed for any purpose without the express written permission of JPMorgan. The provision of this Material does not constitute, and shall not be construed as constituting or be deemed to constitute, a solicitation of, or offer or inducement to provide or carry on, any type of investment service or activity by JPMorgan. Under all applicable laws, including, but not limited to, the US Employee Retirement Income Security Act of 1974, as amended, or the US Internal Revenue Code of 1986 or the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, as amended, no portion of this Material shall constitute, or be construed as constituting or be deemed to constitute “investment advice” for any purpose, and JPMorgan shall not be considered as a fiduciary of any person or institution for any purpose in relation to Material. This Material shall not be construed as constituting or be deemed to constitute an invitation to treat in respect of, an offer or a solicitation of an offer to buy or sell any securities or constitute advice to buy or sell any security. This Material is not intended as tax, legal, financial or equivalent advice and should not be regarded or used as such. The Material should not be relied upon for compliance. An investment in a hedge fund is speculative and involves a high degree of risk, which each investor must carefully consider. Returns generated from an investment in a hedge fund may not adequately compensate investors for the business and financial risks assumed. An investor in hedge funds could lose all or a substantial amount of its investment. While hedge funds are subject to market risks common to other types of investments, including market volatility, hedge funds employ certain trading techniques, such as the use of leveraging and other speculative investment practices that may increase the risk of investment loss. Other risks associated with hedge fund investments include, but are not limited to, the fact that hedge funds: can be highly illiquid; are not required to provide periodic pricing or valuation information to investors; may involve complex tax structures and delays in distributing important tax information; are not subject to the same regulatory requirements as mutual funds; often charge higher fees and the high fees may offset the fund’s trading profits; may have a limited operating history; can have performance that is volatile; may have a fund manager who has total trading authority over the fund and the use of a single adviser applying generally similar trading programs could mean a lack of diversification, and consequentially, higher risk; may not have a secondary market for an investor’s interest in the fund and none may be expected to develop; may have restrictions on transferring interests in the fund; and may affect a substantial portion of its trades on foreign exchanges. JPMorgan may (as agent or principal) have positions (long or short), effect transactions or make markets in securities or financial instruments mentioned herein (or derivatives with respect thereto), or provide advice or loans to, or participate in the underwriting or restructuring of the obligations of, issuers mentioned herein. JPMorgan may engage in transactions in a manner inconsistent with the views discussed herein. © 2013 JPMorgan Chase & Co. All rights reserved. All product names, company names and logos mentioned herein are trademarks or registered trademarks of their respective owners. Access to financial products and execution services is offered through J.P. Morgan Securities LLC (“JPMS”) and J.P. Morgan Securities plc (“JPMS plc”). Clearing, prime brokerage and custody services are provided by J.P. Morgan Clearing Corp. (“JPMCC”) in the US and JPMS plc in the UK. JPMS and JPMCC are separately registered US broker dealer affiliates of JPMorgan Chase & Co., and are each members of FINRA, NYSE and SIPC. JPMS plc is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the UK. J.P. Morgan Securities (Asia Pacific) Limited is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. 12 This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments. For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.