Deutsche Bank markets primefinance monthly hedge fund trends - february 2013


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Deutsche Bank Markets PrimeFinance_Monthly Hedge Fund Trends - February 2013

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Deutsche Bank markets primefinance monthly hedge fund trends - february 2013

  1. 1. Deutsche Bank Marketing material - For institutional investors onlyMarkets Prime Finance 5 Time Voted No. 1 Prime BrokerMonthly Hedge Fund Trends Global Custodian Prime Brokerage Survey 2012, 2011, 2010, 2009, 2008February 2013Executive summary* Global performanceDeutsche Bank Research Highlights: “US housing recovery: January 2013 Performance DispersionEngine of growth in 2013” and “Investor Positioning and 7.00% Emerging Markets EquityFlows: Underweights and Inflows Supporting Equities” CTA / Managed FuturesOur Global Markets Research team believes that 2012 marked a turning Event Driven Equity L/S 6.00%point in the US housing market recovery and expect housing to be an All Fundsimportant engine of growth in 2013. They project that house prices willrise 3.9% y/y, and the resulting wealth effect will add about $85 billion 5.00% Multi-Strategy Distressedto real personal consumption expenditures. Macro CB & Vol Arb 4.00% Market NeutralIn the second piece, our team notes that despite $100 billion inequity flows over the last 10 weeks, funds still remain underweight. 3.00% Fixed IncomeThey believe that continued reallocation out of cash could help sustain Creditthe torrid pace of equity inflows. 2.00%Investor Sentiment 1.00%In early 2013 investors are showing a renewed interest in fundamentalequity l/s and event-driven equity strategies. They believe hedged equity 0.00%strategies will benefit from an environment in which macro eventsand government intervention take a backseat. European investors are -1.00%inquiring about equity l/s, commodities and macro managers, with a 75th Median Average 25th MSCI Worldkeen interest in emerging markets macro. MedianPerformance Emerging Markets Equity 3.80% Multi-Strategy 1.95%A strong start to 2013 with the global median up 2.23% and all Equity L/S 3.24% CB & Vol Arb 1.75%strategies performing positively. Equity strategies performed the best Distressed 2.83% Credit 1.56%this month, with emerging markets heading the pack (up 3.80%); All Funds 2.23% Macro 1.00%China l/s and US l/s strategies were particularly impressive, posting CTA / Managed Futures 2.18% Market Neutral 0.91%gains of 6.28% and 3.81% respectively. January also witnessed an Event Driven 2.10% Fixed Income 0.65%unusually high dispersion of returns with Emerging markets equitybetween 1.66%-5.73%, event driven between 0.71%-4.82%,and macro between -0.20%-3.44%. Source: Hedge Fund Intelligence (HFI), February 2013LeverageMSCI World 30-day volatility increased 20% in January, ending the January 2013 Cumulative Median Performance by Strategymonth at 8.88. Gross fundamental equity exposure and net fundamentalequity exposure both increased in January, ending the month at 2.41 5.00% MSCI World(up 1.43%) and 0.61 (up 7.96%) respectively. Emerging 3.80% Markets EquitySecurities Lending 3.24% Equity L/SThe start of the year has seen shorts increase in financials and consumer 2.83% Distresseddiscretionary stocks in Japan, Chinese autos, and Taiwanese firms thatform part of Apple’s supply chain. Our stock loan team also witnessed 2.23% All Fundsstrong demand for Japanese firms Fanuc and Advantest on the back of CTA / Managed 2.18%downward earnings forecast revisions, steady demand in Asian solar Futuresnames and short covering in US shipping. 2.10% Event Driven 1.95% Multi-StrategyRegulatoryIn January it was confirmed that 11 EU Member States will move 1.75% CB & Vol Arbforward with an FTT under the enhanced cooperation procedure that 1.56% Creditis likely to come into effect on 1st January 2014. ESMA announced a 1.00% Macrocooperation agreement with Brazil under AIFMD, MEPs discussed thepotential phasing out of performance fees under the UCITS regime 0.91% Market Neutraland the European Parliament debated whether alternative investment 0.65% Fixed Incomemanagers marketing to retail investors should be required to produce aPackaged Retail Investment Products (PRIPs) key information documents 0.00% 1.00% 2.00% 3.00% 4.00% 5.00%(KID) going forward. Source: Hedge Fund Intelligence (HFI), February 2013In the US, certain derivatives reporting requirements under Dodd-Frankcame into effect at the start of the year, while the CFTC extended thecomment period on several aspects of derivatives-related regulation.The Office of the Comptroller of the Currency (OCC) announced a two * This document contains extracts and opinions fromyear transition period to comply with the swaps push-out rule that will various departments and business areas withinbegin on July 16th 2013. 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.For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email:
  2. 2. Monthly Hedge Fund Trends - Deutsche Bank Research Highlights 2Marketing material - For institutional investors onlyGlobal Economic Perspectives – US housing Asset Allocation – Investor Positioningrecovery: Engine of growth in 2013 1 and Flows: Underweights and InflowsThe continuing housing recovery is critical for US economic growth in Supporting Equities 22013. Indeed, in addition to the direct implications for residential The combination of fund managers covering fiscal cliff underweightsinvestment for GDP, house prices are crucial for household and banking and $63b in equity flows helped fuel the 5% equity rally in January.sector balance sheets and, therefore, for consumer spending and credit With our composite equity beta up notably but still near 3y lows, fundsconditions in the year ahead. We believe that 2012 marked a turning point remain underweight despite trailing to start 2013. Long-short equityin the housing market recovery and expect housing to be an important funds, macro funds and hybrids are closer to neutral, but mutual fundsengine of growth in 2013. We project that house prices will rise 3.9% y/y, are very underweight. Only 25% of our equity mutual fund sampleand the resulting wealth effect will add about $85bn to real personal underperformed in the two-day dip to end January, implying exposureconsumption expenditures. is low. Sector positioning has also neared extremes in Tech and Energy underweights; Healthcare, Discretionary and Staples overweights.This constructive view of the housing market is driven by both demandand supply fundamentals. On the demand side, our model projects that The current pace of $100b in equity inflows the last 10 weeks hashousehold formations will continue to rise to their longer-term average as surpassed those prior periods when flows returned to equities. Bondthe labor market steadily improves. There remain significant upside risks funds are also getting moderate inflows as a normal allocation of savings,to this view, as the average number of adults per household has mainly going to EM and HY. Money market funds are still sitting oncontinued to climb. In addition, housing affordability remains at record $90b of cumulative inflows since October, after cash holdings stayedhigh levels, but continuing tightness in lending conditions has meant that flat through most of 2012. Some portion of the $31b in money markethigh affordability has translated into a lower than anticipated increase in outflows likely found their way to equities and bonds the last three weeks.housing demand. Continued reallocation out of cash could help sustain the torrid pace of equity (and bond) inflows, like it did in early 2012.On the supply side, several years of severely depressed homebuildingactivity and improving housing demand has resulted in low levels of newhomes for sale, and the stock of vacant homes has returned back to trend Funds remain underweight across risk assetsafter increasing substantially during the housing crash. Moreover, theaverage months of supply has returned to pre-housing crisis levels. This Equity exposure up modestly but remains very underweighttight housing market portends well for further price increases in 2013. −− Mutual fund equity exposure is still 7pp underweight; −− Hybrid funds increased exposure notably but remain 4pp underweight;To be sure, there remain risks in the housing market. Althoughforeclosures and delinquencies have declined significantly from their −− Long-short equity fund beta has been modestly below the historical2008 levels, they remain well above normal values. And even with the average;recent increase in home prices, nearly 30% of homes with a mortgage −− Macro hedge funds have moved to a 4pp overweight position;have negative home equity. However, the fundamentals alreadymentioned and our forecast models suggest that, despite these risks, −− MFs and HFs significantly overweight Consumer sectors and Healthhousing will contribute significantly to economic growth in 2013. Care; MF positioning in Energy and Tech near historical lows; −− Across regions, all funds except Asia are underweight; US funds most U/W.House prices are projected to rise about 4% in 2013 Futures and option positioning for rates, FX and commoditiesyoy% SA Corelogic house prices yoy% SA −− Rates positioning has remained close to neutral; −− Yen falls even as shorts trimmed; EUR net longs increase; GBP longs 25 Actual Model forecast 25 pared; Out of 20 sample 20 −− Oil long nears 3y highs; copper long pared; gold long cut; silver longs forecasts 15 15 added. 10 10 Big inflows to equities, moderate bond inflows, money 5 5 markets outflows 0 0 Moderate bond inflows last two weeks; big outflows from money markets -5 -5 −− Money market outflows of $31b the last three weeks;-10 -10 −− Government bonds saw 9th straight week of outflows, totaling -$5.1b;-15 -15 −− Outflows from IG corporates last 2 weeks; inflows to EM and HY continue;-20 -20 1984 1989 1994 1999 2004 2009 2014 −− Big inflows to floating rate funds; big outflows from longer maturity bonds.Source: FRB, Census, BEA, Treasury, CoreLogic, BLS, Haver Analytics, DB Global Markets Research Equity inflow of $19b last week; 10 straight weeks of inflows totaling $100b −− Inflows aided by strong $11.3b flows to US; big inflows to US ETFs ($9.7bn) −− Mutual funds get 4th consecutive week of inflows, after 24w of outflows; −− EM equity inflows continue for 21st straight week ($60b cumulative); −− Modest inflows to Japan and Europe; −− Inflows to Cons Goods, Tech, Healthcare; Telecom outflows; −− Big inflows to large cap funds; inflows to small and mid caps as well.1 Deutsche Bank – Global Markets Research: “Global Economic Perspectives – US housing recovery: Engine of growth in 2013” 30th January 2013. 4D7B/9283984/DB_GEP_2013-01-31_0900b8c08652f8ba.pdf2 Deutsche Bank – Markets Research: “Asset Allocation – Investor Positioning and Flows: Underweights and Inflows Supporting Equities” 1st February 2013. DocPull/3449-3478/17814882/Investor_Positioning_and_Flows.pdfFor further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email:
  3. 3. Monthly Hedge Fund Trends - Investor Sentiment 3 3Marketing material - For institutional investors onlyInterest in fundamental l/s equity and event-drivenequity strategiesIn early 2013 we are hearing renewed interest in fundamental long/shortequity from all types of investors. The last couple years fundamentalvaluation has often taken a back seat to macro events and the risk-on/risk-off government manipulation that has made extracting alphaextremely difficult. With managers stating dispersion in equities iswidening, it is likely we will see gross exposures ramp up to takeadvantage of the reversal in correlations experienced over the last coupleyears. Many investors, while slow to shift assets early in the year, arepicking up on this opportunity; and combined with the low interest ratesand spread tightening in most credit opportunities, 2013 could see ashift towards hedged equity strategies. Even with renewed interest inthe strategy, the preference isn’t necessarily for high net managers,but rather there is increased attention being paid to managers who candemonstrate alpha in their short book. Capacity is also an issue, as thefocus towards uncorrelated strategies puts a premium on managerssmall enough to play in the small-mid cap space.Further there is renewed interest in less-liquid event-driven equitystrategies that are classified as catalyst or activist. Given theunderperforming fundamental l/s equity over the past couple years,patient investors with a tolerance of longer lock-ups are seekingmanagers that can un-lock alpha over longer periods. Clearly a reversalof sentiment post the 2008 liquidity crisis, however investors point toless levered companies with healthy cash reserves.Midwest bullish on equity strategiesThis month our Midwest team visited St. Louis and Chicago. While manyallocators expressed disappointment in how their hedge fund portfoliosperformed during 2012, most said they still had a high level of convictionin their current stable of managers and hedge funds as an asset class.Several investors commented that they were interested in sourcing newequity long/short managers because they were on the lower end of theirtypical range of allocation and believed that because the strategy hasbeen out of favor for several years it may be well positioned to reboundthis year.In Chicago, most fund-of-funds are developing a range of strategies toadapt to the challenges facing their industry. An increasingly importantarea they are focusing on is developing ’40 Act products to tap intothe retail space and the increasingly important Defined Contributionmarket. They view retail money as very “sticky” and potentially veryprofitable despite the low margins because of the size of the market andthe scalability of the products. Several funds also mentioned they arelaunching vehicles with a more focused-mandate such as start-ups orcommodity focused, and continue to push for lower fees to help add-value to their client base. They also continue to develop more customizedsolutions on both a discretionary and non-discretionary basis to helpdiversify their business models.Broad strategy interest in EuropeMeetings with European investors in January have been encouraging,as investors feel that hedge funds have played their desired role in 2012.As such, they continue to see value in a hedge fund allocation within theoverall portfolio and are currently discussing where to allocate this year.Much like the global equity markets year-to-date, investors have entered2013 ready for another solid year of performance. The large range ofstrategy searches that we have received indicates that investors feel that2013 should be a healthy environment for alpha generation from a rangeof hedge fund managers.We have seen several investors actively looking at fundamental equitylong/short, commodities and macro managers, with a noteworthynumber having a focus on emerging markets macro. A few havementioned trimming of credit positions after strong performancein 2012. Some European investors have mentioned a preference forniche strategies with less crowded trades and ideas, whilst others haveindicated that they are keeping their eyes open for early stage investingopportunities. The European wealth managers continue seek UCITSstrategies, as they prioritize onshore regulated vehicles. Their clientsalso tend to have a preference for more liquid investment terms. From Deutsche Bank’s Hedge Fund Capital Group3For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email:
  4. 4. Monthly Hedge Fund Trends - Performance 4Marketing material - For institutional investors onlyAmericas Americas2013 Year to date median performance January 2013 Performance dispersion of returns CTA / Managed Futures Event Driven 5.04% SP 500 6.00% US L/S 3.81% US L/S Global L/S All Funds 5.00% Multi-Strategy 2.59% Global L/S Distressed 2.57% Distressed 4.00% 2.16% All Funds Fixed Income 3.00% Credit 2.03% Event Driven Macro 1.92% Multi-Strategy 2.00% 1.75% Credit 1.00% CTA / Managed 1.72% Futures 0.91% Fixed Income 0.00% 0.69% Macro -1.00% 75th Median Average 25th SP 5000.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%Source: Hedge Fund Intelligence (HFI), February 2013 Source: Hedge Fund Intelligence (HFI), February 2013Europe Europe2013 Year to date median performance January 2013 performance dispersion of returns Emerging CTA / Managed Futures Emerging Markets Equity 3.84% 7.00% Markets Equity Global L/S CTA / Managed 2.71% Futures 6.00% Macro Stoxx 600 European L/S 2.70% 5.00% All Funds Event Driven 2.62% European L/S 2.17% Global L/S 4.00% Market Neutral Multi-Strategy 2.07% All Funds 3.00% Credit 2.05% Event Driven Fixed Income 1.49% Credit 2.00% 1.23% Macro 1.00% 1.02% Market Neutral 0.00% 0.45% Multi-Strategy 0.38% Fixed Income -1.00%0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 75th Median Average 25th Stoxx 600 -2.00%Source: Hedge Fund Intelligence (HFI), February 2013 Source: Hedge Fund Intelligence (HFI), February 2013Asia Asia2013 Year to date median performance January 2013 performance dispersion of returns 8.00% China L/S 6.28% China L/S Japan L/S 7.00% Pan-Asia L/S All Funds 3.75% All Funds Asia ex-Japan L/S 6.00% Multi-Strategy 3.68% Pan-Asia L/S Macro 5.00% 3.56% Japan L/S 4.00% MSCI AsiaPac 2.98% incl Japan 3.00% 2.71% Asia ex-Japan L/S 2.00% 2.55% Multi-Strategy 1.00% 2.12% Macro 0.00% 75th Median Average 25th MSCI AsiaPac incl Japan0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%Source: Hedge Fund Intelligence (HFI), February 2013 Source: Hedge Fund Intelligence (HFI), February 2013For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email:
  5. 5. Monthly Hedge Fund Trends - Leverage 4 5 Marketing material - For institutional investors only Global −− MSCI World 30 day volatility increased 20% in January, ending the month at 8.88. Gross fundamental equity exposure and net fundamental equity exposure both increased in January, ending the month at 2.41 (up 1.43%) and 0.61 (up 7.96%) respectively. −− he percentage of funds in most net equity leverage bands (-1 – 1.25) have decreased since the beginning of November. However, the percentage T of funds in the higher net equity leverage bands (1.25 – 2) has increased. Global net gross equity leverage vs. volatility 40 2.5 2.4 2.3 35 2.2 2.1 2.0MCSI World 30 day Historical Vol 30 1.9 1.8 1.7 1.6 25 Leverage 1.5 1.4 1.3 20 1.2 1.1 1.0 15 0.9 0.8 0.7 10 0.6 0.5 0.4 5 0.3 12 12 2 2 2 12 2 12 t 12 2 2 13 r1 r1 y1 12 Jul g1 Sep v1 c1 Jan Jan Feb Ma Ap Ma Jun Au 28 Oc No De 28 28 28 28 28 28 28 28 28 28 28 28 MSCI World 30d Vol Gross Leverage Net Leverage Source: Deutsche Bank Global Prime Finance Risk, February 2013 Global – January 2013 Quarterly change in net equity leverage distribution across funds 18% 16% 14% 12%% of funds (Deutsche Bank) 10% 8% 6% 4% 2% 0% -2% 5 5 0 5 0.5 5 1 5 1.5 5 2 -0.7 -0.5 -0.2 5- 0.2 5- 0.7 5- 1.2 5- 1.7 5- -1 - 5- - -0.2 0- 0.2 0.5 - 0.7 1- 1.2 1.5 - 1.7 -0.7 -0.5 01 Feb 13 01 Nov12 Source: Deutsche Bank Global Prime Finance Risk, February 2013 4 Deutsche Bank Global Prime Finance Risk, February 2013 For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email:
  6. 6. Monthly Hedge Fund Trends - Securities Lending 6Marketing material - For institutional investors onlyGlobal 5US % short interest sector change - January 2013 European % short interest sector change - January 2013Financials Energy Info Tech TelecomCons. Stap FinancialsHealthcare Cons. StapCons Disc. UtilitiesIndustrials Industrials Telecom Info Tech Utilities Materials Energy Cons Disc. Materials Healthcare -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%Source: Data Explorers Deutsche Bank, February 2013 Source: Data Explorers Deutsche Bank, February 2013Shorts unwind positions in US shipping names as prices Financials and consumer discretionary sectors in Japan faceapproach 52 week lows heightened short interestDespite the positive start to stocks in 2013, structural inefficiencies The average percentage of shares out on loan across the 225 Nikkeiafflicting shipping companies have resulted in increased short interest constituents has increased 6% year to date to 726 million shares out onin many of these names. The outlook for the shipping sector is less loan. Financials (+27%) and consumer discretionary (+2%) are amongstoptimistic as companies struggle to secure traditional sources of lending. the sectors seeing the most significant increase in shorts in January.The sector has been under pressure for failing to adapt fast enough Energy (-33%), healthcare (-14%) and utilities (-9%) have seen theto changing market conditions and continues to suffer from excess sharpest decrease in shorts this, which has ultimately put downward pressure on rates. While theindustry anticipates an increase in global trade, costs are also expected Sharp Corp, Gree Inc, Panasonic Corp and Ricoh remain amongst the topto rise due to an increase in its overall fuel requirement. The names crowded names in Japan for the month of January.most targeted by shorts in this space include Genco Shipping, OverseasShipholding Group, Nordic American, Frontline Ltd, and Kirby Corp. Japanese firms revise earnings forecasts downwardsDespite the unfavourable outlook, we have seen most shorts unwinding Japanese firms have been revising down earnings forecasts for Marchtheir positions throughout the month as all of these stocks are currently in an environment plagued by slowing demand in China (exacerbated bytrading at or near their 52 week lows. That being said, liquidity is a diplomatic spat that chilled interest in Japanese products) as well asavailable for those funds looking to press on further weakness. an ongoing EU debt crisis that has severely crimped consumption in the region. Fanuc fell 17% this month, citing both of the above reasons whenMerger arbitrage funds struggle to profit from the Kinder it cut its operating profit by 13% to JPY 178 billion ($2 billion).8 AdvantestMorgan / Copano Energy deal due to a lack of borrow Corp shed 10% year to date, after the chipmaker’s operating profit foravailability in Kinder Morgan the year ending March was expected to miss expectations due to fewerIn US mergers acquisitions, Kinder Morgan Energy Partners orders from Apple and weaker PC demand.9announced it will buy natural gas line operator Copano Energy.The deal is the latest in a trend of multi-billion-dollar acquisitions in US regulators’ probe into batteries manufactured by GSthe US pipeline industry over the past two years as companies look to Yuasa drives short interest in its stocktake advantage of a shortage of pipelines to move gas and gas liquids. GS Yuasa stock is down 27% year to date after US regulators orderedThe terms of the deal include a stock payout in shares of Kinder Morgan airlines to prove the company’s lithium-ion batteries deployed inEnergy Parnters to long holders of Copano Energy.6 Merger arbitrage Boeing 787 planes are safe, following the emergency landing of Boeingfunds will struggle to profit from the deal as there is a shortage of Kinder Dreamliner fleets by both All Nippon Air and Japan Airlines earlier thisMorgan Energy Partners supply in lending programs to hedge this deal. month on reports of problem with the battery.10 The percentage of GSDue to Kinder Morgan’s classification as a limited partnership (LP), Yuasa out on loan increased 12% year to date, with current levels atmost custodians will not lend due to potential tax implications to the 8.3 million shares as reported by Bloomberg.long holder. The lack of borrow supply in Kinder Morgan has preventedthe spread from trading tighter from its closing level on the day the deal Chinese autos on the rise on bullish sales forecastswas announced. Bullish forecasts on Chinese auto sales for 2013 contributed to the rally in Chinese auto stocks in early January. There were spikes in shortingRally in solars activity into the strength with Guanzhou Automobile Group a constantThe early half of January saw a rally in regional solar stocks with positive feature on the daily top shorted stocks list as as a percentage of volume.sentiment driven by news of Warren Buffet’s $2.5 billion investment New borrow demand for Dongfeng Group, Great Wall Motor Co andin solar projects, coupled with Chinese plans to add 49 gigawatts of BYD Co Ltd has emerged.renewable energy capacity in 2013. While the desk saw long term shortscovering into the squeeze, short interest remained steady given new Disappointing profit and sales growth in Apple drives shortclient flow shorting into the strength. Two-way action continued throughthe month for crowded names such as GCL Poly Energy Holdigs and interest in its supply chainOCI Co Ltd. There were also onshore recalls for Taiwanese solar plays News that Apple had its slowest profit growth since 2003 and weakestNeo Solar Power Corp and Gintech Energy Corp due to profit taking. sales increase in 14 quarters amid rising costs and accelerating competition from Samsung Electronics sparked renewed interest in the Apple supply chain names, Hon Hai Precision Industry Co Ltd,China Metal Recycling suspends trading in response to TPK Holding Co and Quanta Computer Inc were stand outs.11“strong sell” ratingChina Metal Recycling came into to focus this month when the companysuspended trading in response to Glaucus Research rating the company 5 This material has been produced by the Deutsche Bank Securities Lending Group and must not bea “strong sell”.7 China Metal Recycling has been a mainstay on our regarded as research or investment ten crowded shorts list with 23 days volume short. A new wave of 6 7 demand resulted from the suspension with borrow fees rising suspended-for-second-day/above 20%. A high 68% utilization rate of the borrow pool leaves China 8 weakens.htmlMetal Recycling as one of our top squeeze candidates. 9 weakens.html 10 weakens.html 11 further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email:
  7. 7. Monthly Hedge Fund Trends - Regulatory 12 7Marketing material - For institutional investors onlyAIFMD – ESMA announces cooperation arrangement Alternative Investment Managers marketing or selling towith Brazil retail investors might be required to produce a PRIPS KIDIn January, the European Securities and Markets Authority (ESMA) going forwardannounced a cooperation arrangement with Brazil under the Alternative The European Parliament are currently debating the EuropeanInvestment Fund Managers Directive (AIFMD). The AIFMD enters into Commission’s proposal to update the PRIPS regulation which sets theforce on 22 July 2013, with a one year transition period, in advance of regulatory framework for key information documents (KID) for a varietywhich ESMA must negotiate cooperation agreements on cross-border of investment products. MEPs held a debate in January to discusssupervision with relevant non-EU authorities. Under AIFMD, alternative potential amendments to the legislation. Whilst the Commission’sinvestment funds from third countries will only be allowed access to the proposal was limited to “packaged” retail investment products only,EU market if their home country regulators have cooperation agreements MEPs from all the political groups were in favour of extending the scopewith their EU counterparts. The announced agreement, with the Brazilian of the regulation – but with disagreement on how far. Pervenche BerèsComissão de Valores Mobiliários (CVM) covers Brazilian investment MEP, the rapporteur for the legislation, has expressed a desire for thefunds that manage or market alternative investment funds (AIFs) in the KID to apply to all savings or investment products, including shares, lifeEU and EU alternative investment fund managers (AIFMs) that manage insurance and bonds, but as in the European Commission (EC) proposal,or market AIFs in Brazil. certain insurance and pension products are excluded. Alternative Investment Managers marketing or selling to retail investors would alsoUK Treasury publishes a consultation paper on the potentially be required to produce a PRIPS KID under the Commission’stransposition of AIFMD proposal.Individual Member States must also transpose the AIFMD in nationallaw by the July deadline. In January, the UK Treasury published a MEPs will submit their amendments in early February and then theconsultation paper on the transposition of the AIFMD in the UK, ECON Committee will vote on the Parliament’s final position at the endindicating that it will take a “copy-out” approach wherever possible of March. The final PRIPS text will then have to be agreed in negotiationin order to minimise the regulatory burden. The UK Treasury with the EU Council and EC later in the year.consultation paper is open for comment until 27th February 2013. Capital Requirements Directive (CRD IV) still in the finalESMA clarifies certain aspects of the Regulation on Short stages of trilogue discussionSelling and Certain Aspects of CDS (SSR) The implementation of the Basel III standards in Europe (CRD IV), whichOn 30th January, the European Securities and Markets Authority cover among other things increased quality and quantity of capital,(ESMA) published a revised Questions Answers (QA) document short- and long-term liquidity ratios and the possibility of an introductionclarifying a number of aspects of the Short Selling Regulation. The QA of a 3% leverage ratio, is still in the final stages of trilogue discussioncomplements the sections relating to the scope of the SSR, such as the between the European Commission, Parliament and Council. Agreementtreatment of ETFs and ADRs/GDRs, the calculation of net short positions, is expected to be reached in March, with implementation expected tothe treatment of derivatives on sovereign debt with respect to duration take place from 1 January 2014.adjustment and a new section dedicated to the application of therestriction on uncovered CDS positions. ESMA Guidelines on the market European Council votes in favour of the EU FTT undermaking exemption were published on 1st February and are expected to Enhanced Cooperation Procedure, while Italy and Portugalapply in Q2 2013. plan to unilaterally introduce a FTT The European Council voted in favour of an Enhanced CooperationThe technical standards relating to the European Market Procedure (ECP) for the EU FTT on 22nd January. This opens the wayInfrastructure Regulation (EMIR) are expected to enter into for the eleven participating Member States (France, Germany, Austria,force in March Belgium, Spain, Portugal, Italy, Slovakia, Slovenia, Greece and Estonia) toThe regulatory and implementing technical standards were adopted commence discussions, but first the EU Commission must formally bringby the European Commission on 19th December and passed to the forward a proposal. This is not expected before mid-February. It is likelyEuropean Parliament (EP) and Council for approval. The EP considered to apply the FTT to a wide range of cash and derivative transactions,rejecting two of the standards, but the motion did not get sufficient where a counterparty is “resident” in a participating Member As a compromise, the European Commission have committedto issuing a set of “FAQs” to clarify the issues in relation to timely Separately, a number of Member States including Italy and Portugalconfirmations and setting the clearing thresholds for non financial have announced plans to unilaterally introduce FTTs as part of their 2013counterparties. The Commission will also issue a Memorandum of budgets. The Italian FTT will apply from 1st March 2013 to purchasesUnderstanding to improve its interaction with the Parliament on the of shares and similar securities, including ADRs and conversionsrulemaking process going forward. The technical standards related to to existing shares, from Italian issuers. This will be set at 0.1% forclearing, reporting and CCPs are likely to come into force in March 2013. transactions on regulated markets or multi-lateral facilities and at 0.2% for OTC transactions. There are exemptions for share issuance, securitiesThe margin requirements for non centrally cleared derivatives were due lending and repos, market-making, supporting underwriting, intra-to be finalised by the end of 2012 are now expected to be subject to group transactions, listed firms under a EUR 500 million market cap andfurther consultation. BCBS- IOSCO, who initially issued proposals last “subjects merely interposed in the execution of a transaction.”July for universal two way exchange of initial and variation margin byall financial firms and systemically important non financial entities are The law also includes a tax on derivatives related to the securitiesnow expected to consult again on a revised set of proposals within the covered by the FTT, to apply from 1st July 2013. The rate at which theycoming weeks. would be taxed is to be determined but will be a fixed amount which varies by the nature and notional value of the contract. The law also includes a 0.2% duty on significant modification and cancellation ofMEPs discuss the phasing out of performance fees under electronic orders in a short time frame for instruments covered by thethe Undertakings for Collective Investment in Transferable FTT.Securities (UCITS) regimeNegotiations are continuing in the European Parliament around the The Portuguese tax will apply to the purchase and sale of financialreview of the UCITS directive which introduces new policies and instruments, such as equity shares, bonds, money market instruments,practices for remuneration, a sanctions regime and increased depository units in investment funds, structured products and derivatives, andliability. A debate was held on 22nd January in which MEPs discussed conclusion or modification of derivatives. It also makes provision for aperformance fees and depository liability. Some MEPs expressed a special regime to target high frequency trading. The maximum tax ratedesire to see performance fees phased out, whilst others are in favour is 0.3% for most cash and derivative products, but 0.1% for HFT. Theof retaining them. Some MEPs also want stricter liability for UCITS tax will become effective during 2013, although the exact date is notdepositories when compared to the AIFMD. A compromise will now be currently known.prepared and the relevant committee is due to vote to adopt a positionon 25th February. A final text will have to be negotiated with theEuropean Council, who do not currently have any meetings planned. Deutsche Bank Government Regulatory Affairs Group 12It is uncertain when a final agreement will be reached. 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.For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email:
  8. 8. Monthly Hedge Fund Trends - Regulatory 8Marketing material - For institutional investors onlyCFTC extends comment period on several aspects ofderivatives-related regulationThe US Commodity Futures Trading Commission (CFTC) extendedthe comment period for their proposed rule on enhancing protectionsfor customers and customer funds held by futures commissionmerchants(FCMs) and derivatives clearing organizations (DCOs)from January 14th to February 15th. Market participants continue toawait further developments with respect to requirements for swapexecution facilities and block trades, as well as margin requirementsfor uncleared swaps. Developments on the latter are likely to beinfluenced by international developments, with BCBS-IOSCO expectedto issue another set of proposals for public comment in the comingweeks. The US Securities and Exchange Commission (SEC) extendedthe comment period for their proposed rule on capital, margin andsegregation requirements from January 22nd to February 22nd.Swaps push-out provision transition period to begin onJuly 16th, 2013In early January, the Office of the Comptroller of the Currency (OCC)published guidance on the transition period for the swaps push-out provision of the Dodd-Frank Act, which prohibits banks that aredesignated as swap entities from using the federal assistance theyreceive -- such as federal deposit insurance or access to the discountwindow -- to support certain swaps activities. The OCC’s guidancestates that insured Federal depository institutions can request up toa two-year transition period, which would begin on July 16th 2013,to comply with the swaps push-out rule.Derivatives reporting obligations under Dodd-Franktake effectThe Dodd-Frank derivatives reporting requirements for interest rate andcredit asset classes took effect at the beginning of the year and reportingwill begin for equity, foreign exchange and other commodities swapson February 28th, 2013 for swap dealers and major swap participants.Central clearing requirements will be phased-in beginning March 11thfor swaps between swap dealers and major swap participants in assetclasses deemed subject to the central clearing requirement by the CFTC.SEC intends to publish money market funds reforms bythe end of MarchOutside of derivatives, the US Financial Stability Oversight Council(FSOC) on January 15th extended the comment deadline from January18th until February 15th for their proposed rules on money market fund(MMF) reform. The FSOC proposed in November three recommendationsfor structural reform of MMFs, including a floating net asset value (NAV),a stable NAV combined with a NAV buffer and “minimum balance atrisk,” and a stable NAV combined with a NAV buffer and other measures.The FSOC released these recommendations after disagreement withinthe SEC prevented the SEC from advancing proposed rules. On January16th, SEC Commissioner Daniel Gallagher suggested a consensus isforming within the SEC and indicated his intention to publish rules onMMFs by the end of March.For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: