JPM Prime Brokerage Global Hedge Fund Trends March 2013

J.P. Morgan Prime Brokerage Global Hedge Fund Trends
March 12, 2013 Figure 1: February 2013 performance
HFRI and Market Indices. Monthly Returns
Executive Summary 3.5%
There was a slight pullback in risk assets1 during February. All
2.5%
of the major hedge fund strategies posted gains except for
Global Macro, which fell -0.67%. The HFRI Global Hedge 1.5%
Fund Index inched up +0.14%, with Relative Value (+0.66%)
being the top performer among the key hedge fund strategies 0.5%

for February. The HFRI Equity Hedge Index increased -0.5% HF Index Equity LS Event Macro Rel Value S&P 500 Fixed CMDTY USD Credit
Driven Income
+0.50% and Event Driven rose +0.06%.
-1.5%
Leverage
-2.5%
For all accounts in the Prime Brokerage portfolio, gross
leverage2 fell from 1.91 to 1.88 (-1.5%) in February as market -3.5%
participants slightly reduced exposure and leverage in light of
-4.5%
increased market volatility. Net exposure3 for equity-focused
Source: Bloomberg, Hedge Fund Research
strategies fell from 0.78 to 0.70 (-9.6%). Net leverage for
equity-biased strategies declined from 0.69 to 0.64 (-7.2%) Table 1: Performance of hedge fund strategies and asset classes
due largely to a decrease in long exposure. HFRI and Market Indices4

Feb-13 Year-to-Date
Securities Lending
HF Index 0.14% 2.67%
As the Dow Jones Industrials and S&P 500 indices Equity LS 0.50% 3.84%
approached all-times highs in February, clients were reluctant Event Driven 0.06% 2.38%
to add short exposure. The U.S. Prime Brokerage short book Macro -0.67% 0.98%
Relative Value 0.66% 2.40%
was therefore net covered in February, offsetting January’s
S&P 500 1.36% 6.61%
increase in short activity. In Europe, new deal activity was Fixed Income -1.08% -2.56%
light, with new trading flows stemming primarily from capital CMDTY -4.02% 0.25%
raising events. Flows were also light across Asia. USD 3.46% 2.73%
Credit 0.76% 0.04%
Institutional Investor Sentiment Source: Bloomberg, Hedge Fund Research
Fewer new allocations are going to structured credit from U.S.
investors. At the same time, U.S. allocators are showing Figure 2: Hedge fund beta to equities
Rolling 21-day beta of HFRX equal-weighted index returns to the S&P 500 Total Return
heightened appetite for directional strategies. European Index
allocators continue to upgrade portfolios while Asian investors 0.16 2,800

are pulling back from longer-biased credit exposure. 0.14 2,700

0.12 2,600
Market Perspectives
Tightening measures in China, disappointing data from 0.10 2,500

Europe and the perpetual impasse in Washington were 0.08 2,400
sufficient to cause only a pause in the 2013 rally. The U.S.
0.06 2,300
continues to lead the global recovery. However, it may be
0.04 2,200
infeasible for the U.S. economy – and in turn the global
recovery – to attain “escape velocity” absent longer-term 0.02 2,100
Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13
clarity with respect to fiscal policy in Washington, including Equity Beta (LHS) S&P 500 Total Return Index (RHS)
the pace with which, and the extent to which, federal spending Source: Bloomberg, Hedge Fund Research
will be pared back.

1
Assets other than cash and government fixed income securities.
2
Gross leverage is the total market value of long and short positions divided by clients'
equity in J.P. Morgan’s Prime Brokerage portfolio.
3
Calculated for Equity Long Short and Market Neutral funds on J.P. Morgan’s Prime
4
Brokerage platform only. Net leverage is defined as the market value of long positions Market indices from Bloomberg are as follows: S&P 500 (SPTR Index), Fixed Income
(LMV) minus the market value of short positions (SMV), divided by clients’ equity (Eq). (JPMGGLBL Index), CMDTY (SPGSCI Index), USD (DXY Index), and Credit (JULIR
Net exposure is defined as the ratio of LMV and SMV, minus one. 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 February 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
Equity Hedge
There was a slight pullback in risk assets during February. Equity Hedge strategies returned +0.50% in February
Although the S&P 500 Index increased +1.1%,5 the MSCI according to the HFRI Equity Hedge Index. Overall,
AC World Index declined -0.2%. European markets exerted a defensives led other sectors. The MSCI World Consumer
drag, with the Euro Stoxx Index down -6.2%. Emerging Staples Index was up +2.4% in February compared to +0.5%
markets equities also underperformed, with the MSCI EM for the MSCI World Consumer Discretionary Index and a
Index falling -1.3% through month-end. Year to date, decline of -2.9% for the MSCI Market Materials Index.
however, equities continue to rally. The S&P 500 is up Market neutral managers benefitted from small cap and pair
+6.46% and the Russell 2000 has risen +7.70%. Additionally, trading strategies while fundamental growth strategies
the S&P 500 / 10-Year Treasury return differential stands at capitalized on gains in the U.S. Small Cap, Cyclical and
+6.54%. Alongside February’s slight pullback in risk assets, Financial sectors.
the HFRI Global Hedge Fund Index inched up +0.14%. All
of the major hedge fund strategies posted gains except for Event Driven
Macro, which reversed two consecutive months of positive The HFRI Event Driven Index was largely flat in February,
performance. inching up +0.06% month-over-month amidst robust
strategic, financial and distressed M&A activity. LBO
On the macro economic front, inconclusive election results in
activity was particularly strong in February, accounting for
Italy captured news headlines but the impact was primarily
$51 billion out of $200 billion in total M&A globally
localized, as demonstrated by declining yields on Spanish
according to J.P. Morgan Global Asset Allocation. February
and Portugese debt (though Italian yields rose). The Yen
thus marked the strongest month for LBO activity since July
continued to weaken in February pursuant to “Abenomics,”
2007, when volumes reached $55 billion (See Figure 3).
further bolstering Japanese equities. Year to date, the Nikkei
February’s heightened LBO activity was spurred by low
remains one of the world’s strongest markets, having surged
yields, record levels of cash on corporate balance sheets and
+11.65%. High expectations surrounding new leadership for
robust demand for high yield loans, as evidenced, for
the Bank of Japan have helped drive yields on 10-year JGBs
example, by record new issuance of loans and high yield
to a decade-long nadir.
bonds in February (See Figure 4).
Relative Value
Figure 3: LBO transactions as a percentage of total M&A
Relative Value was the best performer among the major
40%
hedge fund strategies in February, with the HFRI Relative
Value Index increasing +0.66%. Multi-strategy relative value 35%
managers profited from active commodity spread trading. 30%
Gains among multi-strategy fixed income arbitrage and
25%
convertible arbitrage strategies also contributed to February’s
positive returns. Multi-strategy fixed income arbitrage 20%
managers benefitted from global credit exposures as the 15%
HFRI Relative Value Multi-Strategy Index rose +1.49%.
10%
Convertible arbitrage funds with directional exposures to
Asia Pacific convertible securities performed well, with the 5%
HFRI Fixed Income-Convertible Arbitrage Index up +0.45% 0%
month-over-month. Jan-00 Apr-02 Jul-04 Oct-06 Jan-09 Apr-11
Source: J.P. Morgan Global Asset Allocation

5
References are to SPX Index vs. SPTR Index as in Table 1.

2


Figure 4: Loan and HY bond new issuance ($ billions) USD. Several factors underpinned this trend, including a
140 Institutional loans further decline in the Yen (-0.9%) due to anticipated easing
High‐yield bonds measures by the Bank of Japan, Moody’s UK downgrade,
120
and renewed pressure on the Euro (-3.8%) as a result of
100
113
disappointing fourth quarter GDP.
80

60 38 34 52 32
44 27
50 19
24 30 33
40 7 14 22 26 14
18 16 10 6
20 46 40 42 13 47 43 48
33 34 27 8 24 32 31 31 30
22 20 17
8 6 10 26 22 19 13 23
0 1 7 10 4
May‐…

May‐…
Mar‐…

Mar‐…
Nov‐…

Nov‐…
Jul‐11

Oct‐11

Jul‐12

Oct‐12
Jan‐11

Dec‐11
Jan‐12

Dec‐12
Jan‐13
Apr‐11

Apr‐12
Feb‐11

Aug‐11

Feb‐12

Aug‐12

Feb‐13
Jun‐11

Sep‐11

Jun‐12

Sep‐12
Source: J.P. Morgan High Yield and Leveraged Loan Research

While the HFRI Event Driven Index was more or less flat in
February, managers with exposures to active target
companies in pending mergers have benefitted from robust
year to date corporate activity (See Figure 5). If conditions
such as low interest rates and high levels of cash on corporate
balance sheets persist, the auspicious M&A climate is likely
to continue, especially as companies seek to grow through
acquisition rather than organically. Merger arbitrage
managers should in turn benefit, assuming that completion
rates follow the same trajectory.

Figure 5: S&P Long-Only Merger Arbitrage Index year to date
performance
1910

1900

1890

1880

1870

1860

1850

1840
2-Jan 9-Jan 16-Jan 23-Jan 30-Jan 6-Feb 13-Feb 20-Feb 27-Feb

S&P Long-Only Merger Arbitrage Index

Source: Bloomberg

Global Macro
Global Macro strategies declined in February, blunting the
gains of the prior two months. The HFRI Macro Index fell –
0.67% as negative performance among systematic CTAs
(-1.11%)6 partially offset gains among currency and fixed
income discretionary managers.

Discretionary managers with long USD and short JPY
exposures posted gains as most currencies sold off against the

6
HFRI Macro: Systematic Diversified Index, February 2013.

3


Leverage and Risk Exposures Figure 8: Z-score of gross leverage and the S&P 500 Index
The Z-score measures how many standard deviations an observation is above or below
the mean
Gross Leverage
Gross leverage and net exposure for clients in the Prime 1.3

Brokerage Portfolio were stable in the first half of February
but trailed off towards month-end as market participants
reduced exposure and leverage slightly because of increased
market volatility. For all accounts in the Prime Brokerage 0.0
portfolio, gross leverage fell from 1.91 to 1.88 (-1.5%) (See
Figure 6). By contrast, gross leverage of levered accounts in
the Prime Brokerage portfolio increased from 2.50 to 2.59
(+3.8%) (See Figure 7). This dichotomy was a reversal from
-1.3
the pattern in January. As fewer clients deployed leverage in Feb-11 Aug-11 Feb-12 Aug-12 Feb-13
February, gross leverage among levered accounts was
Difference between gross leverage and S&P 500 Index Z-scores
skewed higher since clients that retained debits did so at
higher levels. Month-over-month, leverage in the Prime Source: Bloomberg, J.P. Morgan Prime Brokerage

Brokerage portfolio was subdued relative to the gain in the Gross Leverage by Strategy
S&P 500 (See Figure 8). Gross leverage rose for High Yield Fixed Income from 1.26
Figure 6: Daily gross leverage and the S&P 500 Index to 1.42 (+12.4%). Gross leverage for Market Neutral also
increased in February from 4.26 to 4.47 (+4.9%). By
1,550 1.95
contrast, gross leverage fell for High Grade Fixed Income,
1,500 which declined from 2.41 to 2.06 (-14.3%). All strategies are
1.90
running leverage above their average 2-year levels except for
1,450
High Grade Fixed Income.
1,400 1.85
Figure 9: Gross leverage by strategy
1,350
1.80
5
1,300

4
1,250 1.75

S&P 500 Index (LHS) Gross Leverage (RHS) 3

Source: Bloomberg, J.P. Morgan Prime Brokerage
2
Figure 7: Gross leverage (levered accounts) 5-day moving
average and the S&P 500 Index
1
1,550 2.7

1,500 0
Market Neutral Equity Long Multi-Strategy Convertible High Grade High Yield
Short Arbitrage Fixed Income Fixed Income
1,450 2.6

Dec-12 Jan-13 Feb-13
1,400
Source: J.P. Morgan Prime Brokerage
1,350 2.5

1,300

1,250 2.4

S&P 500 Index (LHS) Gross Leverage (Levered Accounts - RHS)

Source: Bloomberg, J.P. Morgan Prime Brokerage

4


Table 2: Gross leverage by strategy Table 3: Long and short exposures by sector
Average and first quartile calculated for the period of February 2011 to February 2013 Long (Short) exposure by sector as a percentage of total client long (short) exposure in
Prime Brokerage portfolio
First
Dec-12 Jan-13 Feb-13 Average % Change
Quartile Long exposure Short exposure
M arket Neutral 4.36 4.26 4.47 3.84 3.54 4.9%
Feb-12 Jan-13 Feb-13 Feb-12 Jan-13 Feb-13
Equity Long Short 1.86 1.97 1.94 1.83 1.72 -1.0%
M ulti-Strategy 1.76 1.77 1.79 1.77 1.74 1.2% Basic Materials 6.2% 5.6% 5.4% 4.2% 5.2% 4.8%
Convertible Arbitrage 3.65 4.17 4.29 3.61 3.44 2.7% Communications 11.6% 13.5% 14.4% 6.5% 6.6% 7.2%
High Grade Fixed Income 2.39 2.41 2.06 2.61 2.38 -14.3% Consumer, Cyclical 11.3% 11.0% 11.0% 8.5% 8.6% 7.9%
High Yield Fixed Income 1.17 1.26 1.42 1.21 1.16 12.4% Consumer, Non-
14.2% 15.1% 14.9% 10.2% 11.8% 10.8%
PB Portfolio (Levered Accounts) 2.54 2.50 2.59 2.53 2.48 3.8% cyclical
Diversified 0.3% 0.3% 0.3% 0.0% 0.0% 0.0%
Energy 8.7% 8.6% 8.7% 7.5% 5.9% 6.2%
Non sector-specific
3.3% 4.1% 4.2% 14.9% 16.0% 18.4%
Net Exposure and Net Leverage ETF
Net exposure for equity-biased funds fell from 0.78 to 0.70 (- Financial 20.4% 18.1% 17.9% 11.6% 11.8% 10.8%

9.6%) in February and net leverage declined from 0.69 to Industrial 6.3% 5.9% 5.8% 6.2% 6.7% 6.7%

0.64 (-7.2%). These decreases reflected the overall pullback Technology 5.2% 4.0% 4.1% 5.4% 7.1% 6.6%

in February as managers reduced their net long exposure. Utilities 1.9% 1.3% 1.1% 1.9% 1.9% 1.9%
Other 5.5% 6.3% 6.1% 9.2% 10.1% 11.8%
Figure 10: Net exposure and net leverage
Equity Long Short and Market Neutral funds on the Prime Brokerage platform only. Source: J.P. Morgan Prime Brokerage
LMV: Market value of long positions. SMV: Market value of short positions.
Eq: Equity in the clients’ accounts
1.3

1.0

0.7

0.4
Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13

Net Exposure (LMV/SMV)-1 Net Leverage (LMV-SMV)/Eq


Sector Exposures
The most sizeable increase in the long Prime Brokerage
portfolio month-over-month once again was in the
Communications sector (+0.9%). The largest declines
occurred in the Basic Materials, Consumer, Non-cyclical,
Financial and Utilities sectors, each of which fell -0.2%.

The largest increases in the Prime Brokerage short portfolio
were in the Non sector-specific ETF (+2.4%) and
Communications (+0.6%) sectors. (The increase in long and
short exposure for the Communications sector was
attributable largely to heightened M&A activity.) The most
substantial decreases in short exposure occurred with respect
to the Financial (-1.0%) and Consumer, Non-cyclical (-1.0%)
sectors.

5


Prime Brokerage Global Hedge Fund Trends – Securities Lending
U.S. Securities Lending  Liberty Global agreed to acquire Virgin Media (VMED)
in a stock and cash deal valued at over $23 billion.
Equities
Shareholders of VMED will receive a combination of
As the equities market approached all-time highs in February,
cash and shares of Liberty series A & C shares. Liberty
clients were reluctant to add short exposure, with the U.S.
expects to realize synergies from the scale of the
short book net covered for the month. As of month-end, the
combined business once the acquisition is completed by
short sale/buy to cover ratio by market value for 2013 was
mid-year. LBTYA and LBTYK borrows remain liquid
flat, with shorting in ETFs offset by single name covering.
despite increased demand.
Most sectors were net covered in February led by Consumer,
Non-cyclical, Consumer, Cyclical and Technology. The lone  LinnCo. LLC (LNCO) announced its acquisition of all of
outlier was the Communications sector, which was net the Berry Petroleum (BRY) shares in an all-stock
shorted. That anomaly resulted from heightened demand for transaction. The transaction represents the first
Liberty Global shares (LBTYA and LBTYK), which spiked acquisition of a publicly held company by an upstream
after the planned acquisition of Virgin Media (VMED) was LLC/MLP. The transaction has already been approved
announced. by the boards of directors of each of Linn Energy
ETFs (LinnCo.’s parent), LinnCo, and Berry, and is expected
February was the second consecutive month during which to close in the second quarter. Arbitrage funds have not
ETFs were net shorted. SPY (SPDR S&P 500 ETF Trust), been very active with this transaction due to scarce
IYR (iShares Dow Jones US Real Estate) and HYG (iShares borrow in LNCO.
iBoxx High Yield Corp Bond) were the key drivers. Clients
 OfficeMax (OMX) and Office Depot (ODP) announced
increased short exposure in other broad based ETFs such as
an all-stock merger, which has already been approved by
QQQ (PowerShares QQQ Trust) and MDY (SPDR S&P
the board of both companies. OMX stockholders will
Midcap 400 ETF). There was reduced exposure to small-cap
receive 2.69 shares of ODP for every share held, and the
ETFs led by IWM (iShares Russell 2000).
transaction is expected to close by year-end. Borrow for
HYG was the most active ETF in February from a stock loan ODP remains liquid despite increased demand.
standpoint. Creating to lend HYG is unattractive and
 PPG Industries (PPG) completed the spinoff of its
expensive due to the difference between the creation basket
chemicals and commodities business to Axiall Corp
and the high-yield index that it tracks. When demand
(AXLL – formerly Georgia Gulf (GGC)). Overall, just
increases, as it did in February, borrow cost spikes and the
under 15% of PPG shareholders elected to take part in
ETF trades like a hard-to-borrow security. FXI (iShares
the voluntary exchange offer.
FTSE XinhuaChina 25 Index) also was active in February,
skewed towards buys-to-cover. The fund saw large outflows Fixed Income
as demand decreased, in turn causing the cost to borrow to There was a marked decrease in fixed income shorting for
ease. both investment grade and high yield corporate debt in
February. Financials and technology were the only sectors
Event Driven
for which there were net increases in shorts. Basic Materials,
M&A activity was again robust in February, continuing the
trend that commenced in January: Communications, Consumer, Non-cyclical and Utilities were
the leading sectors for short covering. February witnessed
 Kinder Morgan Energy Partners (KMP) agreed to strong flows in the following names, partly in response to
acquire Copano Energy (CPNO) in a transaction valued potential LBO activity: Dell, Inc., (DELL), HJ Heinz Co.
at approximately $5 billion. Owners of CPNO will (HNZ) and JC Penny (JCP).
receive 0.4563 shares of KMP for each Copano share
they own. The transaction is expected to close in the In contrast to February’s corporate debt activity, there was a
third quarter of this year subject to regulatory and net increase in short balances with respect to convertible
shareholder approvals. We are approving limited bonds. Several issues experienced a sudden tightening of
quantities of KMP. However, supply across the street liquidity along with headline-driven rate volatility. The U.S.
remains constrained. Prime Brokerage book continues to see heavy flows around

6


Lam Research (LAM), Newmont Mining (NEM), Peabody Table 4: U.S. securities lending trends by sector
For the month of February 2013
(BTU), Priceline (PCLN) and RadioShack (RSH).
5 Day 30 Day 90 Day

Figure 11: Cumulative net activity Position Position Position
Market value change of activity across equities, ETFs, and fixed income Price Change Price Change Price Change
$4.0 Change (shares) Change (shares) Change (shares)
Consumer, Non-cyclical 1.2% -2.4% 1.6% -4.9% 9.0% 1.0%
$2.0 Financial 0.8% -1.8% 1.2% -3.5% 12.1% -3.8%
Technology 0.9% 0.0% -2.0% -3.2% 14.0% -11.5%
$0.0
Energy 0.5% -3.4% 1.6% 2.8% 10.4% -4.0%
Communications 1.5% -0.3% -0.1% 7.0% 14.1% 3.4%
‐$2.0
Industrial 1.3% 0.3% 0.9% -1.3% 14.7% -6.2%

‐$4.0
Consumer, Cyclical 0.7% -0.5% -0.4% -1.6% 9.8% -7.2%
Basic Materials 0.7% 2.6% -6.0% 0.7% 1.8% 24.4%
‐$6.0 Utilities 1.2% -0.1% 2.0% -0.8% 9.8% 11.3%

‐$8.0 Source: J.P. Morgan Securities Lending
Equity ETF Fixed Income Net Activity

‐$10.0
3-Jan 17-Feb 2-Apr 17-May 1-Jul 15-Aug 29-Sep 13-Nov 28-Dec 11-Feb

Table 5: U.S. securities lending trends by ETFs
Source: J.P. Morgan Securities Lending For the month of February 2013

5 Day 30 Day 90 Day
Figure 12: Rolling 1-month daily short flow Position Position Position
Daily Activity Relative to 30-Day Average (LHS) and S&P 500 Index (RHS) Price Change Price Change Price Change
Change (shares) Change (shares) Change (shares)
350% 1,550 SPDR S&P 500 ETF TRUST 0.9% 32.6% 1.1% 34.7% 8.9% 27.1%

ISHARES RUSSELL 2000 0.6% -1.8% 0.5% -4.4% 13.5% 3.7%
250%
SPDR S&P MIDCAP 400 ETF 0.7% 0.0% 0.6% 17.0% 12.0% -11.2%
150% ENERGY SELECT SECTOR
1,500 0.8% 12.0% 1.3% -8.0% 10.0% -25.9%
SPDR
ISHARES IBOXX H/Y CORP
50% 0.7% 14.4% -0.8% 41.3% 2.2% 81.9%
BOND
POWERSHARES QQQ
0.9% 9.3% 0.0% 37.4% 5.0% -15.0%
-50% NASDAQ 100
INDUSTRIAL SELECT
1.2% -2.9% 1.5% 47.0% 12.3% 23.2%
1,450 SECTOR SPDR
-150% MATERIALS SELECT
1.9% 25.9% -2.4% 57.4% 7.2% 89.7%
SECTOR SPDR
SPDR BARCLAYS HIGH
-250% 0.3% -15.3% -1.6% 87.4% 1.6% 46.8%
YIELD BOND ETF
CONSUMER STAPLES
0.1% -21.4% 3.5% -15.7% 8.3% -8.4%
-350% 1,400 SPDR

01-Feb 08-Feb 15-Feb 22-Feb
Source: J.P. Morgan Securities Lending
Net Cover Activity (LHS) Net Short Activity (LHS) S&P 500 Index (RHS)

Source: Bloomberg, J.P. Morgan Securities Lending

7


International Securities Lending general meetings in March. There was heavy activity around
MediaTek Inc. (2454 TW) as market participants trimmed
Europe
New deal activity was light in February with most of the long positions and put on new shorts in anticipation of
trading flows stemming from capital raising events. antitrust approval for the company’s merger with MStar
Koninklijke KPN N.V., Citycon OYJ and Royal Imtech N.V. Semiconductor, Inc. (3697 YW).
each announced rights issues. Borrow demand was most
substantial for Koninklijke KPN as funds sought shares prior Hong Kong
to the general shareholders meeting in March. Borrow for As in January, fees on Evergrande (3333 HK) and Zoomlion
Citycon was limited, with aggressive bidding by arbitrage (1157 HK) declined during February as liquidity for those
funds. Utilization of Royal Imtech borrow was high in names increased. Demand was heavy for company names
advance of its rights issue announcement. The only other that are under review as a result of the MSCI’s rebalancing.
trade of note was Exor S.p.A., which is planning a mandatory
Japan
conversion of preferred shares.
Although the Nikkei was up +3.8% in February, activity was
generally light as was the case in the rest of the region.
Directional trades remained a primary focus for many hedge
Hedge funds sought locates in names such as Gree Inc. (3632
funds in February. Nokia, which has been heavily shorted
JP), Dena Co. Ltd. (2432 JP) and Start Today Co Ltd (3092
over the last 12 months, experienced heightened demand in
JP). The Prime Brokerage book experienced recalls for Bic
advance of its deletion from the Euro Stoxx 50. Index tracker
Camera, Inc. (3048 JP) in anticipation of the company’s
funds re-balanced, which in turn catalyzed recalls. Demand is
record date.
still robust for Banca Monte dei Paschi, with many funds
increasing short positions. The borrow level for Alcatel-
Australia
Lucent continued to ease as a number of funds covered short February was earnings season in Australia. There was strong
positions. February saw heightened recalls on PagesJaunes demand for borrow in Monadelphous Group Limited (MND
Groupe, for which utilization is still heavy. AU), as investors remain bearish on the mining services
sector. Borrow for Tatts Group Ltd. (TTS AU) also was in
In Spain, the Prime Brokerage book continued to see strong demand ahead of the company’s earnings statement. Tatts
demand from directionally-oriented hedge funds for Bankia, Group continues to trade at expensive multiples relative to its
Caixabank, Banco Popular and Fomento de Construc Y peers, a fact that also helped spur demand. Additionally, there
Contra, with recall pressure in Bankia pushing borrow rates was increased short interest in Ansell Ltd. (ANN AU) on the
to 70%. heels of disappointing net profits.

With respect to the Glencore/Xstrata merger, the completion
date moved to mid-April. Risk arbitrage funds therefore
added to their positions, which created upward pressure on
borrow costs.

Asia ex-Japan

Korea
Overall, flows were light in February. Brokers used the
opportunity to refinance existing shorts. Activity declined for
OCI Co. Ltd. (010060 KS), which has been a popular name
among short sellers. Demand remains strong for LG
Electronics (056670 KS).

Taiwan
Flows were generally muted in February, with activity driven
largely by investors exercising calls in anticipation of annual

8


Prime Brokerage Global Hedge Fund Trends – Institutional Investor Sentiment
Institutional Investor Sentiment Asia
Asian investors are pulling back from long-biased credit
Americas
exposure and instead are showing renewed interest in low
We are approaching an inflection point in the market for
directional, relative value and long short credit. Among
institutional investor capital, as flows into structured credit
investors who do not already have exposure to structured
are slowing while allocators are showing heightened appetite
credit, there is strong interest in the strategy. As ever, “good”
for directional strategies with higher betas. Given the strong
discretionary macro managers are in demand but Asian
returns and corresponding inflows that structured credit
investors are generally disillusioned with underperformance
generated from 2009 through 2012 – a period during which
among macro funds. However, there has been a slight uptick
the HFRX Fixed Income-Asset Backed Index averaged
in interest in emerging markets macro.
+19.63% annually – fewer investors are making new
allocations since (1) the strategy now comprises part of many Equity long short remains a “bread and butter” strategy
U.S. investors’ portfolios and (2) some investors who have among Asian investors and there is renewed interest in the
not yet made allocations are concerned about the current region in capturing risk-on equity upside. However, only
opportunity set. There has been a palpable uptick in interest investors who are currently underweight equities are making
in equity long short and event driven managers. Interest in such allocations. Asian investors are generally saturated with
systematic strategies and CTAs remains muted. New respect to multi-strategy funds, as most of the major multi-
launches continue to garner interest. strategy managers already account for core allocations in
The Capital Introduction Group (CIG) spent time with investors’ portfolios. Finally, interest in CTAs has waned.
institutional investors in and around Boston in February. Only groups that view CTAs as a tail to their portfolios
Fund of hedge funds (FoFs) continue to grow their advisory remain committed to the strategy.
and customized businesses while their comingled vehicles Table 6: Investor strategies of interest by region7
contract. Notably, Boston-area consultants were interested in
learning about new launches, which have not been a Americas Europe Asia
Direction of Level of Direction of Level of Direction of Level of
traditional focus for them. Interest Interest Interest Interest Interest Interest
Convertible
CIG also hosted a heavily attended event on convertible Neutral Neutral Neutral
Arbitrage
arbitrage managers in February. While it is too early to say
Distressed Neutral Neutral Neutral
that a trend is underway, we have seen an uptick in interest in
convertible arbitrage, especially given heavy 2013 issuance. Equity Long
Increasing Increasing Neutral
Short

Europe Event
Increasing Neutral Neutral
Driven
To the extent that any clear themes have emerged among
European allocators, it is the continual upgrading of Macro Neutral Neutral Decreasing

portfolios as investors rotate away from managers who have
CTA Neutral Neutral Decreasing
underperformed. As in the U.S., there is interest among
European investors in new managers across the strategy Market
Neutral Neutral Increasing
Neutral
spectrum.
Structured
Neutral Neutral Increasing
Credit
CIG met with an array of investors in Switzerland. Zurich-
based family offices continue to reduce their hedge fund Legend
Low Interest
holdings, with private equity and direct market investments
Medium Interest
benefitting from this reallocation. Swiss corporate pensions
continue to disintermediate FoFs in lieu of direct High Interest

investments, albeit not without the services of consultants. Source: J.P. Morgan Capital Introduction Group
Overall, there is rising interest in directional equity long short
strategies and, in a few instances, long-only equity as
investors try to increase the volatility in their portfolios.
7
Institutional investors in Switzerland also expressed interest 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
in global macro and European structured credit. and may not be completely exhaustive.

9


Prime Brokerage Global Hedge Fund Trends – Market Perspectives
February Commentary The following sections are excerpts from J.P. Morgan
Research publications. The full publications can be
The rally that commenced with vigor in January took a pause
accessed via the sources provided in the footnotes below.
in February. Headwinds emerged as a result of tightening
measures in China, disappointing data from Europe and the Bernanke Stays the Course on Asset Purchases 8
perpetual impasse among Washington policymakers over the
federal budget. As expected, Fed Chair Bernanke's semiannual monetary
policy testimony sounded a little more dovish than the most
Those obstacles, however, were sufficient only to cause a recent FOMC minutes. In particular, while noting the costs to
pause in, rather than a reversal of, the global recovery, which balance sheet expansion, he concluded that these costs were
continued in February but at a lower pace. The J.P. Morgan either small or nonexistent, and more than easily offset by the
Global Manufacturing PMI was 50.8 in February, still in beneficial effects of asset purchases. These benefits were
expansion territory but down from 51.4 in January. characterized as "clear" whereas the "potential" costs were
Significantly, data from China also blunted momentum as the methodically discussed and minimized. We believe today's
country’s manufacturing PMI declined from 50.4 in January testimony supports the view that the Fed remains comfortable
to 50.1 last month. February was therefore the fifth continuing with its asset purchase program.
consecutive month during which China’s PMI signaled
The first cost that the Chairman dismissed was worries that
expansion. However, the month-over-month decline is
the eventual exit would un-anchor inflation expectations. To
indicative of a decrease in the rate of that expansion.
this he noted that measures of inflation expectations remain
low and that the Committee was "confident" in their exit
The U.S., by contrast, continues to be a key driver behind the
tools. The second cost was excessive risk-taking, in the form
global recovery. Even as across-the-board federal spending
of, for example, reach-for-yield behavior. Bernanke observed
cuts took hold, the U.S. PMI rose to 54.2 in February from
that some risk-taking, such as that by entrepreneurs, is part of
53.1 in January, the highest reading since June 2011.
a healthy recovery. He also echoed Governor Stein's point
Additionally, the U.S. economy added 236,000 jobs in
that low rates encourage longer-term funding, which should
February as unemployment fell to 7.7%, the lowest level
reduce systemic risk. He concluded that the Fed's regulatory
since December 2008. Furthermore, new factory orders – a
tools should help to head off brewing financial imbalances.
key leading indicator – climbed to 57.8 in February from
Finally, on the topic of potential losses on the Fed balance
January’s 53.3, the largest such increase since March 2010.
sheet, he made that the point that on a through-the-cycle
Accordingly, the U.S. expansion continues to gain steam in
basis, any future decline in remittances should be more than
spite of the ongoing paralysis in Washington.
offset by the outsized remittances that the Fed has paid to
Treasury over the past few years. In sum, Bernanke brushed
Expiration of the continuing resolution for the federal budget
off the costs and risks attending to asset purchase, while
and the debt ceiling loom next on the horizon. Yet markets
noting that the benefit has been an important support to the
now appear to view a refusal by Congress to renew its
recovery.
continuing resolution on March 27, or to lift the debt limit in
May, as low probability outcomes. Bernanke's remarks on the economy were quite limited and
focused on the labor market and the costs of high and
Such resilience notwithstanding, the pullback in federal extended unemployment. His testimony also commented on
spending, even if incremental, is likely to extract a toll. U.S. fiscal policy, repeating the usual advice to put in place long-
GDP slowed from 3.1% in the third quarter to 0.1% in the run reforms in lieu of short-run fiscal austerity. The Monetary
fourth quarter partly as a consequence of declining federal Policy Report did not add too much to the discussion, other
outlays, which fell at an annualized rate of 14.8% over that than to more thoroughly examine the benefits of asset
period. It may therefore be infeasible for the U.S. economy – purchases, to which "a balanced reading of the evidence
and in turn the global recovery – to attain “escape velocity” supports the conclusion that LSAPs have provided a
absent longer-term clarity with respect to fiscal policy,
including the pace at which, and the extent to which, U.S.
federal spending will be pared back. 8
J.P. Morgan Chase North America Economic Research, Bernanke Stays the Course on
Asset Purchases, February 26, 2013, J.P. Morgan Markets, https://na-
markets.jpmorgan.com/research/content/GPS-1062584-0.

10


Prime Brokerage Global Hedge Fund Trends – Market Perspectives
meaningful support to the economic recovery while across households, banks, and sovereigns. In the event, the
mitigating deflationary risks." rebound in spending on durables was modest overall and
focused on machinery, transport equipment, and autos. The
The Next Wiggle is a Weaker US Consumer9 recovery relied heavily on the ending of an inventory
adjustment and the recovery of global trade. The region
Global activity indicators lifted as we turned into the New
moved back into recession in late 2011, as these exceptional
Year with the latest three-month gains in global industrial
supports faded, financial stress increased, and the region
production and retail sales volumes each tracking close to a
turned to substantial fiscal consolidation.
4% pace of increase. We believe that this news points to a
broad positive turn in global growth, but we recognize that As we look to the coming few quarters, we expect the region
the underlying pace of global growth is not as rapid as the to exit recession and start growing again. The initial impulse
latest activity readings suggest. Drags that weighed heavily for growth is coming from a return of confidence in the
on global growth early last quarter—notably the Japan-China integrity of the Euro area, a fading of fiscal austerity, and an
dispute, Hurricane Sandy, and a temporary drop in global improvement in the global backdrop. But, for growth in the
auto production—have faded, boosting industrial activity region to be sustained, cyclical forces need to be at work. The
around year-end. Meanwhile, household spending was lifted scope for a cyclical recovery, as seen in 2009-10, is clearly
last quarter by falling inflation. In the coming months, this there: cash balances are high, levels of spending on durables
boost will be replaced by large headwinds concentrated in the are low, and monetary policy remains very easy. But, on the
US, resulting from rising energy prices and a tax hike. other hand, inventory positions are less lean than in 2009,
global trade will not be bouncing back from depressed levels,
We have sent a message that there is upside risk to our
and the same deleveraging headwinds remain in place. Thus,
current quarter 2.4% global GDP forecast because the lift in
the recovery over the coming 18 months is unlikely to be as
global activity into the New Year has proved stronger than
solid as during the period from the middle of 2009 to the
anticipated. However, the stage is now set for moderation in
middle of 2011.
the monthly data flow. Global retail sales volumes are
expected to flatten during February and March as US
spending contracts. Meanwhile, global production gains are
expected to slow to a roughly 2.5% annualized pace over the
next three months. If we are right, this softening will prove
temporary and a rebound into midyear will leave 2Q13 global
growth roughly in line with this quarter’s outcome.

Cyclical Lift in the Euro Area: Let’s Have Another Go10

In our view, the Euro area is moving toward exiting recession
and will start to grow again from the second quarter. The last
time the region made a transition from recession to expansion
was in the middle of 2009. After a 5.6% drop in the level of
GDP from early 2008 to the spring of 2009, the economy
began to expand again from the third quarter of 2009 and
enjoyed eight quarters of growth averaging 2% ar.

Despite very depressed levels of spending on durables, low
inventory positions, and very low interest rates, it was always
clear that the recovery from the 2008-09 recession was going
to be hard work. There was significant pressure to delever

9
J.P. Morgan Economic Research, Global Data Watch: The Next Wiggle is a Weaker
US Consumer, February 22, 2013, J.P. Morgan Markets, https://na-
10
J.P. Morgan Economic Research, Economic Research Note: Cyclical Lift in the Euro
Area: Let’s Have Another Go, February 22, 2013, J.P. Morgan Markets, https://na-

11


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Kenny King, CFA
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12


JPM Prime Brokerage Global Hedge Fund Trends March 2013

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