JPM Prime Brokerage Global Hedge Fund Trends May 2013.pdf
J.P. Morgan Prime Brokerage Global Hedge Fund Trends1 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 April 2013 unless otherwise stated.May 13, 2013Executive SummaryApril was characterized by continued increases in the equitymarkets along with a broad selloff in commodities. The HFRIGlobal Hedge Fund Index increased +0.69% month-over-month. In a notable trend reversal, global macro was amongthe strongest performers of the major hedge fund strategies,rising +1.00%. Relative value made a strong contribution,increasing +0.99%. The HFRI Event Driven Index rose+0.90% and the HFRI Equity Hedge Index was up +0.35%.LeverageFor all accounts in the Prime Brokerage portfolio, grossleverage1rose from 1.88 to 1.89 (+0.5%) in April as marketparticipants increased risk appetite incrementally. Netexposure2rose from 0.69 to 0.75 (+7.9%) month-over-monthand net leverage increased from 0.63 to 0.68 (+7.4%).Securities LendingThe U.S. Prime Brokerage portfolio was net covered for athird consecutive month. Equities drove activity as investorsfocused on first quarter earnings. Fixed income activity wasalso skewed towards covering, while ETFs were net shorted.In Europe, the Glencore/Xstrata merger was finalized,resulting in downward pressure on borrow rates.Institutional Investor SentimentIn North America, a number of consultants are beginning toconsider emerging managers in an effort to differentiatethemselves. In Europe, there is some interest in differentiatedequity strategies such as activist managers with concentratedportfolios.Market PerspectivesAlthough certain data points emerged in April that potentiallybode well for the U.S. economy, growth remains tepid. U.S.first quarter GDP was 2.5%, which exceeded the fourthquarter’s anemic pace of 0.4%, but was nevertheless belowexpectations. The government sector in the U.S. continues toexert a drag, as federal spending contracted -4.1% during thefirst quarter. It seems likely that the ongoing pullback infederal outlays will continue to serve as a weight on the heelsof a still-muted recovery.1Gross leverage is the total market value of long and short positions divided by clientsequity in J.P. Morgan’s Prime Brokerage portfolio.2Calculated for Equity Long Short and Market Neutral funds on J.P. Morgan’s PrimeBrokerage 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.Figure 1: April 2013 performanceHFRI and Market Indices. Monthly ReturnsSource: Bloomberg, Hedge Fund ResearchTable 1: Performance of hedge fund strategies and asset classesHFRI and Market Indices3Apr-13 Year-to-DateHF Index 0.69% 4.37%Equity LS 0.35% 5.39%Event Driven 0.90% 4.84%Macro 1.00% 2.29%Relative Value 0.99% 4.16%S&P 500 1.93% 12.74%Fixed Income 0.97% -1.86%CMDTY -4.67% -3.42%USD -1.48% 2.48%Credit 1.81% 1.89%Source: Bloomberg, Hedge Fund ResearchFigure 2: Hedge fund beta to equitiesRolling 21-day beta of HFRX equal-weighted index returns to the S&P 500 Total ReturnIndexSource: Bloomberg, Hedge Fund Research3Market indices from Bloomberg are as follows: S&P 500 (SPTR Index), Fixed Income(JPMGGLBL Index), CMDTY (SPGSCI Index), USD (DXY Index), and Credit (JULIRIndex).-2.0%-1.0%0.0%1.0%2.0%3.0%HF IndexEquity LS EventDrivenMacro Rel Value S&P 500 FixedIncomeCMDTY USD Credit2,1002,2002,3002,4002,5002,6002,7002,8002,9000.010.030.050.070.090.110.130.15Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13Equity Beta (LHS) S&P 500 Total Return Index (RHS)
Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures2 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 April 2013 unless otherwise stated.This section presents a summary of the changes that we have observed in leverage and sector exposures across the range of hedge funds that wework with. The confidentiality of our clients’ positions is important to us and as such this information has been aggregated and displayed in ananonymous manner in an effort to mitigate the risk of revealing or alluding to any one fund’s exposures. Information may be excluded due to theperceived risk of revealing sensitive information. The information discussed is specific to activities on J.P. Morgan’s books, and may not representtotal client activity. These numbers should only be viewed as representative observations.Market OverviewApril was characterized by continued gains in the equitymarkets, particularly in the U.S. and Japan, a broad selloff incommodities and mixed economic data. The S&P 500 TotalReturn Index increased +1.93% month-over-month and theNikkei rose +11.7%, posting its strongest April performancesince 1993 as the Bank of Japan (BoJ) proceeded with itsplans to reflate Japan’s economy. In terms of economic data,the U.S. jobs report for April exceeded expectations, withtotal nonfarm payrolls rising 165,000, causing theunemployment rate to fall to 7.5%. By contrast, though,manufacturing PMIs were down globally, March factoryorders slid -4.0%, and first quarter U.S. GDP was weakerthan expected at 2.5%. In part because of the mixed data, theFederal Reserve is unlikely to reign in its bond buyingprogram in the foreseeable future. Credit should thereforeremain plentiful, in turn prolonging investors’ hunt for yield.Hedge Fund CompositeThe HFRI Global Hedge Fund Index climbed +0.69% inApril. Global macro and relative value strategies fueled mostof those gains, but all of the major hedge fund categoriesreturned positive performance, as was the case in March.There was a noticeable increase in April in the beta of theHFRX equal-weighted index returns to the S&P 500 TotalReturn Index.Global MacroIn a noticeable reversal of a months’-long trend, global macrowas the best performing strategy in April among the corehedge fund categories. The HFRI Macro Index returned+1.00% month-over-month. Trend followers navigated themassive selloff in gold and other commodities. (Goldsuffered its largest two-day decline in April over the last 30years.) Accordingly, the HFRI Macro Systematic DiversifiedCTA Index rose +2.3%. Both systematic and discretionarymanagers with short Yen and long Japanese equitiesexposures also benefitted from the Bank of Japan’s onwardmarch with respect to monetary easing. Managers with longexposure to U.S. equities benefitted from continued gains inthe S&P 500.Figure 3: Gold spot daily performance year-to-dateSource: BloombergRelative ValueAs in prior months, relative value managers were among thebest performers within the main hedge fund strategies, withthe HFRI Relative Value Index rising +0.99% in April. As inMarch, gains among relative value strategies were fueledlargely by multi-strategy and convertible arbitrage managers,which posted increases of +1.5% and +1.1%, respectively.April marked the eleventh consecutive monthly gain for theHFRI Relative Value Index, which has delivered positiveperformance in 45 of the 52 months since December 2008.Event DrivenThe HFRI Event Driven Index rose +0.90% in April. Gainswere helped by ongoing deal activity. Distressed transactionsadded to the gains, with the HFRX Distressed RestructuringIndex up +0.85% month-over-month. Merger arbitragemanagers also contributed to April’s positive performance,with the HFRX Merger Arbitrage Index increasing +0.72%month-over-month.Equity HedgeThe HFRI Equity Hedge Index increased +0.35% in April asthe S&P 500 continued its year-to-date climb. Equity-biasedmanagers benefitted from exposures to U.S. and Japaneseequities, which continued their ascent. Equity-focused fundsalso benefitted from continued shareholder-friendly activity,including dividend payments and share buybacks.Throughout April, market participants were heavily focusedon corporate earnings. Of the companies that reported, 65%-11.0%-9.0%-7.0%-5.0%-3.0%-1.0%1.0%3.0%Jan-13 Feb-13 Mar-13 Apr-13GOLDLNPM Index
Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures3 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 April 2013 unless otherwise stated. exceeded earnings per share expectations, which is in linewith trend. Energy and industrials sectors, which declined -0.88% and -0.84%,4respectively, offset gains in othersectors, particularly telecommunications (+5.99%) andutilities (+5.89%), which outperformed. Weakness in theenergy and industrials sectors may reflect slowing growthrates, which were captured in the sagging manufacturingPMIs.Figure 4: Sector performance, April 2013Source: Standard & Poor’s, BloombergApril seemed to mark a growing divergence between equitymarkets on one hand, which continued their year-to-dategains, and underlying economic data on the other hand,which sent negative signals. In addition to declining outputPMIs in the U.S., the Euro zone and China, the globalmanufacturing PMI is now in negative territory – a bearishindicator for cyclical sectors. The continued rise in equitymarkets is therefore not a reaction to positive signs regardingeconomic growth. Instead, it appears that share buybackactivity is helping to support equity markets to a significantextent. As Figure 5 shows, share buyback activity year-to-date is comparable to the highs reached in the same periodsin 2007, 2007 and 2011.4Based on S&P 500 Energy Index and S&P 500 Industrials Index.Figure 5: Global share announced buybacks in first four monthsof the year ($billion)Source: ThomsonOne, J.P. Morgan Global Markets Outlook and Strategy5.99% 5.89%2.93% 2.90%2.79% 2.69%0.83%0.55%-0.84% -0.88%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%05010015020025030002 03 04 05 06 07 08 09 10 11 12 13
Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures4 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 April 2013 unless otherwise stated.Leverage and Risk ExposuresGross LeverageThere was a modest uptick in risk appetite towards month-end once volatility subsided after having notched up duringthe middle of April. For all accounts in the Prime Brokerageportfolio, gross leverage rose from 1.88 to 1.89 (+0.5%) (SeeFigure 6). Gross leverage of levered accounts in the PrimeBrokerage portfolio fell from 2.57 to 2.49 (-2.9%) (SeeFigure 7). The divergence in gross leverage between leveredaccounts and all accounts is typical during risk-onenvironments. During such periods, a greater number ofclients run leverage, including those that opportunistically doso at lower levels, which causes the average among leveredaccounts to be skewed lower.Figure 6: Daily gross leverage and the S&P 500 IndexSource: Bloomberg, J.P. Morgan Prime BrokerageFigure 7: Gross leverage (levered accounts) 5-day movingaverage and the S&P 500 IndexSource: Bloomberg, J.P. Morgan Prime BrokerageFigure 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 belowthe meanSource: Bloomberg, J.P. Morgan Prime BrokerageGross Leverage by StrategyGross leverage rose for Equity Long Short (+6.3%) in Aprilwhile Convertible Arbitrage and High Grade Fixed Incomefell -5.9% and -9.0%, respectively. An uptick in leverage forequity-biased strategies is in line with the historical trendalongside earnings season. As in March, all strategies arerunning leverage at or above their 2-year averages except forHigh Grade Fixed Income.Figure 9: Gross leverage by strategySource: J.P. Morgan Prime Brokerage1.751.801.851.901.951,2501,3001,3501,4001,4501,5001,5501,600May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13S&P 500 Index (LHS) Gross Leverage (RHS)188.8.131.52.71,2501,3001,3501,4001,4501,5001,5501,600May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13S&P 500 Index (LHS) Gross Leverage (Levered Accounts - RHS)-1.30.01.3May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13Difference between gross leverage and S&P 500 Index Z-scores012345Market Neutral Equity LongShortMulti-Strategy ConvertibleArbitrageHigh GradeFixed IncomeHigh YieldFixed IncomeFeb-13 Mar-13 Apr-13
Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures5 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 April 2013 unless otherwise stated. Table 2: Gross leverage by strategyAverage and first quartile calculated for the period of April 2011 to April 2013Source: J.P. Morgan Prime BrokerageNet Exposure and Net LeverageNet exposure for equity-biased funds rose from 0.69 to 0.75(+7.9%) in April and net leverage increased from 0.63 to 0.68(+7.4%). Higher exposures and net leverage are reflective ofan uptick in bullishness and risk appetite among equity-centric managers.Figure 10: Net exposure and net leverageEquity 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’ accountsSource: J.P. Morgan Prime BrokerageSector ExposuresThere was a general increase in long exposures during April,reflecting incremental bullishness. There were increases inthe long Prime Brokerage portfolio month-over-month in theFinancial (+0.6%), Consumer, Cyclical (+0.5%), andTechnology (+0.5%) sectors. The largest declines occurred inthe Non sector-specific ETF (-2.1%) and Basic Materials (-0.4%) sectors.The largest increases in the Prime Brokerage short portfoliowere in the Energy (+0.8%) and Technology (+0.6%) sectors.The most substantial decreases in short exposure occurredwith respect to the Non sector-specific ETF (-0.7%) andIndustrial (-0.6%) sectors.Month-over-month, changes in sector exposures may indicatethat the Prime Brokerage portfolio has become more bullishon the Consumer, Non-cyclical, Financial and Industrialsectors, for which there were noticeable increases in longexposure and declines in short exposure.Table 3: Long and short exposures by sectorLong (Short) exposure by sector as a percentage of total client long (short) exposure inPrime Brokerage portfolioLong exposure Short exposureApr-12 Mar-13 Apr-13 Apr-12 Mar-13 Apr-13Basic Materials 5.6% 5.0% 4.6% 4.5% 5.5% 5.4%Communications 11.9% 14.5% 14.4% 6.5% 7.0% 6.7%Consumer, Cyclical 11.4% 10.9% 11.4% 8.6% 8.0% 8.2%Consumer, Non-cyclical15.0% 15.2% 15.3% 10.0% 11.3% 11.1%Diversified 0.3% 0.3% 0.3% 0.1% 0.0% 0.0%Energy 9.3% 8.8% 9.1% 6.7% 6.3% 7.1%Non sector-specificETF3.1% 4.1% 2.0% 15.6% 16.1% 15.4%Financial 19.0% 17.5% 18.1% 11.8% 11.0% 10.9%Industrial 6.5% 6.1% 6.4% 5.8% 7.0% 6.4%Technology 5.3% 4.2% 4.7% 5.4% 7.1% 7.7%Utilities 1.6% 1.1% 1.2% 1.4% 1.9% 1.8%Government 5.4% 6.8% 7.2% 15.3% 7.3% 7.2%Other 5.6% 5.6% 5.4% 8.2% 11.5% 12.1%Source: J.P. Morgan Prime BrokerageFeb-13 Mar-13 Apr-13 AverageFirstQuartile% ChangeMarket Neutral 4.47 4.34 4.25 3.82 3.54 -2.1%Equity Long Short 1.94 1.94 2.06 1.82 1.72 6.3%Multi-Strategy 1.79 1.78 1.80 1.78 1.76 0.8%Convertible Arbitrage 4.29 4.52 4.25 3.67 3.47 -5.9%High Grade Fixed Income 2.06 2.24 2.04 2.59 2.38 -9.0%High Yield Fixed Income 1.42 1.42 1.44 1.22 1.16 1.4%PB Portfolio (Levered Accounts) 2.59 2.57 2.49 2.52 2.48 -2.9%0.40.71.01.3Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13Net Exposure (LMV/SMV)-1 Net Leverage (LMV-SMV)/Eq
Prime Brokerage Global Hedge Fund Trends – Securities Lending6 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 April 2013 unless otherwise stated. North America Securities LendingEquitiesMarket participants remained hesitant to add short exposuresin the face of the ongoing equities rally, which resulted in athird consecutive month of net covering across the U.S. shortbook. Equities drove activity in April as investors focused onfirst quarter earnings. Fixed income activity was also skewedtowards covering, while ETFs bucked the trend with a solidmonth of shorting. In a sign of higher overall engagement,gross volume was up by more than 20% month-over-month.From a sector perspective, the strongest covering occurred inthe Communications, Consumer Cyclical and Industrialsectors, while Technology and Energy led short activity.ETFsAs the lone asset class net shorted for the month, ETF shortactivity was heavily index-focused on IWM (iShares Russell2000 Index Fund) and MDY (SPDR S&P MidCap 400 ETF),with one notable sector play in XLE (Energy Select SectorSPDR). Covering in SPY (SPDR S&P 500) and QQQ(PowerShares QQQ Trust, Series 1) ran contrary to theoverall trend, with further sector ETF covering across retailand technology. Japanese and fixed income ETFs lead withrespect to creation inflows, while emerging markets ETFsexperienced the largest outflows.Event DrivenProvident New York Bancorp (PBNY) and Sterling Bancorp(STL) agreed to merge in a stock–for–stock transactionannounced in early April. Sterling shareholders will receive1.2625 shares of Provident and will ultimately ownapproximately 47% of the combined company. Providentshort interest is relatively unchanged since news of themerger broke, while borrow is available at close to GC rates.The transaction is expected to be completed by year-end.General Electric (GE) agreed to acquire Lufkin Industries(LUFK) in an all cash transaction totaling $3.3 billion.Lufkin shareholders will receive $88.50 per share and thetransaction is expected to close by the end of 2013. Interestin Lufkin borrow has been relatively light. Lufkin borrowremains plentiful at GC levels.Dish Network (DISH) announced an offer to acquire SprintNextel Corp (S) for $7.00 per share, $4.76 of which will becash; the remainder will be in stock. Dish is now competingwith Softbank Corp’s (9984 JP) offer from October 2012.Short interest in Sprint shares has been on the rise in recentweeks but borrow is readily available at GC rates.Fixed IncomeThe Prime Brokerage fixed income short book was netcovered for a third consecutive month. Only two sectors –basic materials and energy – saw an increase in the netmarket value of shorts. However, with Treasury yieldsnearing their lowest levels of the past nine months, there wasa substantial increase in Treasury shorts with a heavyconcentration in the 10-year. J.P. Morgan is now forecastingthat yields on the 10-year will begin to rise towards 2%.Accordingly, activity around Treasuries in the PrimeBrokerage book is likely to continue. Convertibles remainactive in event driven credits; Lam Research (LRCX),Newmont Mining (NEM) and Priceline (PCLN) all continueto see strong flows. In high yield, coal mining, basicmaterials and energy names continue to garner stronginterest. Most of the Prime Brokerage flows with respect tohigh grade have been concentrated in credits with exposure toheadline risk. Active names include Arch Coal Inc. (ACI),AK Steel (AKS), Alpha Natural Resources (ANR), Dell Inc.(DELL), Cliff Natural Resources Inc. (CLF), J.C. Penney(JCP) and United States Steel Corp (X).
Prime Brokerage Global Hedge Fund Trends – Securities Lending7 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 April 2013 unless otherwise stated. Figure 11: Cumulative net activityMarket value change of activity across equities, ETFs, and fixed incomeSource: J.P. Morgan Securities LendingFigure 12: Rolling 1-month daily short flowDaily Activity Relative to 30-Day Average (LHS) and S&P 500 Index (RHS)Source: Bloomberg, J.P. Morgan Securities LendingTable 4: U.S. securities lending trends by sectorFor the month of April 20135 Day 30 Day 90 DayPriceChangePositionChange(shares)PriceChangePositionChange(shares)PriceChangePositionChange(shares)Consumer, Non-cyclical 0.3% -0.6% 2.3% -2.3% 9.7% -6.7%Financial 2.0% 1.1% 2.0% -1.5% 7.8% -5.8%Technology 4.5% -1.5% -1.9% 22.0% -1.3% 27.1%Energy 2.7% -1.3% -2.4% -0.4% 1.5% 1.6%Communications 0.6% -0.6% 2.0% -7.1% 6.3% 0.1%Industrial 2.3% -1.0% -2.2% -6.8% 1.9% -2.2%Consumer, Cyclical 3.1% -1.1% 4.6% -5.4% 10.6% -8.5%Basic Materials 5.4% 0.4% -0.7% 6.0% -9.3% 14.6%Utilities 1.3% -3.5% 5.2% -11.1% 13.4% -19.2%Source: J.P. Morgan Securities LendingTable 5: U.S. securities lending trends by ETFsFor the month of April 20135 Day 30 Day 90 DayPriceChangePositionChange(shares)PriceChangePositionChange(shares)PriceChangePositionChange(shares)SPDR S&P 500 ETF TRUST 1.2% -1.6% 1.9% -6.9% 7.0% 28.9%ISHARES RUSSELL 2000 1.9% 7.8% -0.3% 23.5% 5.3% 10.0%ENERGY SELECT SECTORSPDR2.7% 0.0% -1.1% 30.4% 3.0% 18.2%ISHARES MSCI EMERGINGMARKETS INDEX3.2% 82.5% 1.0% 73.5% -1.4% 51.6%ISHARES IBOXX H/Y CORPBOND1.0% -10.6% 1.8% -8.9% 0.8% -4.5%FINANCIAL SELECTSECTOR SPDR1.6% 13.6% 2.6% 9.5% 7.6% 58.4%INDUSTRIAL SELECTSECTOR SPDR1.8% -0.6% -0.9% -8.8% 3.1% 38.5%MARKET VECTORS OILSERVICE3.9% -10.9% -0.4% 106.8% 0.7% 303.7%CONSUMER STAPLESSPDR-1.2% -4.1% 2.9% 10.5% 12.0% -15.8%SPDR BARCLAYS HIGHYIELD BOND0.8% -11.2% 1.5% -4.4% 0.4% 83.8%Source: J.P. Morgan Securities Lending ‐$10.0‐$8.0‐$6.0‐$4.0‐$2.0$0.0$2.0$4.0$6.0$8.01-May 31-May 30-Jun 30-Jul 29-Aug 28-Sep 28-Oct 27-Nov 27-Dec 26-Jan 25-Feb 27-Mar 26-AprEquity ETF Fixed Income Net Activity1,5001,5251,5501,5751,600-300%-200%-100%0%100%200%300%01-Apr 08-Apr 15-Apr 22-Apr 29-AprNet Cover Activity (LHS) Net Short Activity (LHS) S&P 500 Index (RHS)
Prime Brokerage Global Hedge Fund Trends – Securities Lending8 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 April 2013 unless otherwise stated. International Securities LendingEMEAAs in prior months, capital raising events were the maindriver for borrow demand in April. There was significantinterest in Commerzbank AG (CBK GY), Koninklijke KPNN.V. (KPN NA), Bankia SA (BKIA SM) and Meyer BurgerTechnology AG (MBTN SW). The spread for theKoninklijke rights arbitrage grew sufficiently wide to driveborrow rates higher, with lenders looking for re-rates. Therehas been significant recall activity for Bankia, an alreadycrowded borrow. Its stock price therefore spiked during therights trading period. The same is true for Meyer Burger forwhich there have been heavy recalls and re-rates. That wasespecially true once the stock began trading ex dividendrights.In April, Kier Group Plc (KIE LN) announced its proposedacquisition of May Gurney Integrated Services Plc (MAYGLN). Borrow for Kier Group subsequently spiked to 4%.With respect to flows, there has been considerable interest inBanca Monte dei Paschi di Siena (BMPS IM) for whichborrow tightened in April as lenders saw large sales andsubsequently recalled. There were also significant recalls forBMPS in anticipation of the annual general meeting (AGM).Interest also was heavy in Norsk Hydro ASA (NHY NO) aslocal lenders recalled stock for the AGM, thus puttingupward pressure on the borrow rate. Hedge funds also soughtborrow in April to increase their short exposure and maintainexcess to protect existing shorts.Finally, the Glencore/Xstrata merger is now complete.Consequently, the Prime Brokerage book is seeing borrow atGC rates.Asia Pacific Ex-JapanKoreaAs in March, flows remained light in Korea. April sawrenewed demand for Apple-related names. There was anuptick in short interest for LG Display Co. Ltd (034220 KS)and Hynix Semiconductor Inc. (000660 KS). Both namesremain highly liquid.TaiwanOnshore recalls continued into April as a result of impendingAGM dates. Borrow for stocks with mid-March record datesreturned to the market, which freed up some liquidity. HTCCorp. (2498 TW) remains a top short after having missedearnings expectations. However, hedge funds sought to avoidonshore supply given that it will be recalled again this yearfor an impending dividend record date. As in Korea, therewas a focus on Apple-related plays, including heighteneddemand for Largan Precision Co. Ltd. (3008 TW) andCatcher Technology Co. Ltd. (2474 TW).SingaporeDemand picked up in April after several months of lighteractivity. Fraser and Neave Ltd. (F99) generated significantinterest after the announcement that it would be removedfrom the MSCI. Demand also picked up in the shippingsector, with Sembcorp Marine Ltd. (SMM) leading the way.While borrow for Sembcorp historically has been liquid,heightened demand caused liquidity to tighten, with feesmoving north of 1%.Hong KongETFs again lead the way among short names. Sports apparelmakers lead the way among single names following a year-long trend as hedge funds have been scouring the consumersector for underperformance. Li Ning Co. Ltd. (2331 HK),which recently was deleted from the MSCI, and Anta Sports(2020 HK) were the top locates. Investors also are looking atshorts among Chinese financials. Along those lines, interestin China Minsheng Bank (1988 HK) increased through April.JapanThe Nikkei continued its strong rally in April, ending +11.7%month-over-month. Clients continued to unwind shortpositions owing to continued market strength. The Nikkeiplateaued in mid-April, which caused a number of hedgefunds to increase short positions opportunistically. Forexample, there was strong interest in automobile names,including Mazda Motor (7261 JP), Nissan (7201 JP) andSuzuki (7267 JP). In the real estate sector, short interest rosefor Sekisui House (1928 JP) and Daiwa Office (8976 JP).Among financials, there was heightened demand forconsumer finance-related names such as Aiful (8515 JP) andAcom (8572 JP) along with banks such as Mitsubishi UJF(8316 JP) and Sumitomo Mitsui Financial (8316JP). Finally,demand was acute for smartphone game-related Gungho(3765 JP) and Colopl (3668 JP).AustraliaA bearish outlook on rare earth materials prices caused anuptick in demand for Lynas Corp. Ltd. (LYC AU) at the startof April. Headlines out of China and Europe regardingpotential competitive threats put Cochlear (COH) in thecrosshairs of shortsellers. Weakness in gold prices drovedemand for Newcrest Mining Ltd. (NCM AU). Cutbacks in
Prime Brokerage Global Hedge Fund Trends – Securities Lending9 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 April 2013 unless otherwise stated. capex among mining companies drove increased interest forALS Ltd (ALQ AU), Ausdrill Ltd. (ASL AU) and WorleyParsons Ltd. (WOR). Rio Tinto Ltd. (RIO AU) borrow wastaken down in substantial size as the spread between the AUand LN listings diverged, providing opportunity for relativevalue investors. Prices for thermal coal continued their slideas a result of which demand for producer Whitehaven CoalLtd. (WHC AU) spiked because of mounting short interest.
Prime Brokerage Global Hedge Fund Trends – Institutional Investor Sentiment10 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 April 2013 unless otherwise stated.Institutional Investor SentimentNorth AmericaIn general, many investors seem to be on hold with respect tonew allocations, as they have done significant work over thelast 18 months and are now allowing their existing portfoliosto season. Correspondingly, the bar for investors to add newallocations is currently very high. In April, the CapitalIntroduction Group (CIG) held investor meetings in NorthCarolina, Portland, Dallas and Los Angeles. In NorthCarolina, investors are on hold with respect to newallocations, as several groups are in the process ofconcentrating their portfolios. Investors in Dallas wereinterested in learning about new launches, but solely forinformational purposes. In Portland, CIG met with severalregional consultants among which equity long short strategiesare currently in favor. While interest in new launches amongthose allocators was keen, early-stage investing is rare forthis group. In Los Angeles, finally, investors are moreinterested in fundamental strategies than systematicstrategies. Several allocators expressed a preference forsmaller managers, albeit with fee discounts and via separateaccounts.ConsultantsIn an effort to differentiate themselves, several consultantsare beginning to look further down the AUM spectrum andconsider emerging managers.Funds of Hedge Funds (FoFs)Among larger FoFs, interest in credit is declining, as equity-biased strategies are now in favor, including lower net andactivist managers.Endowments & Foundations (E&Fs)Long short and event driven equities are of primary interestamong E&Fs. Global macro is of secondary interest. CertainTri-State area E&Fs are taking a pause with respect to newinvestments, as those groups are giving recent allocationstime to season.Other Strategies of InterestCIG has received several requests regarding women- andminority-owned managers, socially responsible funds,reinsurance and longer-duration vehicles.EMEASeveral European investors have made inquiries regarding“differentiated” equity strategies, including managers withlonger-biased, concentrated portfolios and uncorrelated,trading-oriented equity funds. It should be noted though, thatnew allocation activity among European investors remainsmuted. Interest in structured credit continues to wane.Generally, European investors are not making any newallocations to this strategy and some investors are reducingsuch allocations. Several European investors, primarily FoFsand private banks, report that outflows have abated. Certainof those allocators have even started to see inflows.Asia PacificInvestor interest in equity-biased, directional strategies is onthe rise. Interest in structured credit among Asia Pacific-based investors also is increasing. There has also been anuptick in interest in Asia-based managers from consultants’clients in the region. Accordingly, consultants’ Asian officeshave started to increase staffing for local hedge fundresearch. Investors continue to seek out strategies that canprovide uncorrelated alpha.Notably, Albourne Partners’ Open Protocol Risk Aggregationsystem was endorsed by the Australian Prudential RegulatoryAuthority (APRA). Albourne’s system for reporting hedgefund holdings may therefore become more widely adopted inAustralia as the Stronger Super reforms are rolled out acrossthe country.Table 6: Investor strategies of interest by region5Americas Europe Asia-PacificDirection ofInterestLevel ofInterestDirection ofInterestLevel ofInterestDirection ofInterestLevel ofInterestConvertibleArbitrageNeutral Neutral NeutralDistressed Neutral Neutral NeutralEquity LongShortIncreasing Increasing IncreasingEventDrivenIncreasing Increasing NeutralMacro Neutral Neutral DecreasingCTA Decreasing Neutral NeutralMarketNeutralNeutral Neutral IncreasingStructuredCreditDecreasing Neutral IncreasingLegendLow InterestMedium InterestHigh InterestSource: J.P. Morgan Capital Introduction Group5This information comes from CIG conference calls and meetings with global hedgefund managers and institutional investors. This table represents views of the CIG teamand may not be completely exhaustive.
Prime Brokerage Global Hedge Fund Trends – Market Perspectives11 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 April 2013 unless otherwise stated.April CommentaryAlthough April delivered some disappointing economicnews, a number of data points emerged that bode well forgrowth in the U.S. (and, by extension, the global economy).For example, private final sales rose at an annualized rate of+3.3% and new home sales increased by another +1.5% inMarch. House prices are running 7% to 11% above theirlevels from a year ago as the recovery in residential realestate continues. The inventory of existing homes for sale, akey variable impacting house prices, remains close tohousing boom-era lows. Home price appreciation is thereforelikely to continue. The unemployment report for April alsodelivered positive news with 165,000 nonfarm payrollscreated, which caused the unemployment rate to drop to7.5%, its lowest level since the financial crisis. Additionally,real consumer spending rose at a robust +3.2% during thefirst quarter.However, real GDP rose at an annualized rate of only 2.5%in the first quarter. While that pace was much improved fromthe fourth quarter’s anemic 0.4%, it nonetheless fell belowexpectations by roughly half a percentage point. Earlier in theyear6, we noted that government cutbacks could exert a dragon growth, which is now occurring. During the first quarter,government spending contracted by -4.1%. Defense spendingfell by a much steeper -11.5% over the same period. Whilepredictions that sequestration would throw the economy intoa tailspin fortunately failed to materialize (particularly forcommercial air travelers), the pullback in federal outlays isserving as an unmistakable weight on the heels of whatremains a tepid recovery.Despite the sclerosis in Washington, a consensus seems tohave congealed among policymakers that federal spendingshould be curtailed to reduce the deficit in both the short runand over the long term. It seems, therefore, that governmentwill continue to exert a drag on growth in the coming years,potentially blunting the recovery.The following sections are excerpts from J.P. MorganResearch publications. The full publications can beaccessed via the sources provided in the footnotes below.6J.P. Morgan Prime Brokerage, Global Hedge Fund Trends, March 12, 2013.Key Currency Views: April 2013 7The aggressive monetary easing by the BoJ is expected topush the yen lower through (1) lower nominal JGB yields viaaggressive JGB purchases, and (2) higher inflationexpectation due to their strong commitment to a 2% inflationtarget. In theory, the combination of lower nominal rates andhigher inflation expectation means Japan’s real interest rateswould move much lower, resulting in a weaker JPY. The US-Japan real interest rate differential, which is calculated usingactual inflation rates in the US and Japan, has had a goodcorrelation with USD/JPY. This correlation suggests that ifthe market prices in 2% inflation in Japan, USD/JPY couldappreciate to around 105. Before the BoJ announcedaggressive easing on April 4, we had thought that it unlikelythat the market would price in 2% inflation, and thus unlikelythat USD/JPY would rally significantly above 100. However,after the aggressive easing on April 4th, the possibility thatthe market prices in 2% inflation seems to have heightened.Unprecedented monetary easing by the BoJ is expected topush long-end JGB yields lower (our JGB strategists expect10y JGB yield to decline to 0.25% in coming months). Thishas heightened speculation that Japanese investors will beforced to eventually shift their money abroad, as domesticinvestment conditions will become difficult given the superlow yields. W e are skeptical about this narration and believethat even if this materializes, FX impact would remainuncertain as lower JGB yields should make FX-hedgedforeign bond investments more attractive. However, it’slikely that this speculation will weigh on JPY for a while.Global Data Watch: EM Corporates Seem Sluggish8The global economy is in transition. Growth has picked upfrom a low base as drags from tightening credit outside theUS fade, easy money gains traction, and the removal ofsignificant tail risks bolsters sentiment. However, the damagefrom a prolonged period of subpar growth lingers in the formof a corporate margin squeeze. In addition, the phase of anintense developed market fiscal adjustment that began lastyear is continuing as the US is now absorbing a substantialfiscal drag. If we are right, these conflicting forces will allowa choppy return to trend growth to continue. To be sure, thelatest news has been disappointing and the risks to ourcurrent-quarter global GDP forecast of 2.7% (trend is 3%)7J.P. Morgan Global FX Strategy, Key Currency Views: April 2013, April 19, 2013,J.P. Morgan Markets, https://jpmm.com/research/content/GPS-1099959-0.8J.P. Morgan Economic Research, Global Data Watch, April 26, 2013, J.P. MorganMarkets, https://jpmm.com/research/content/GPS-1107480-0.
Prime Brokerage Global Hedge Fund Trends – Market Perspectives12 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 April 2013 unless otherwise stated. have shifted to the downside. However, we do not see tailrisks on the horizon and the underlying dynamic in place—ofsupportive monetary policies, healing credit markets, andsoon-to-fade fiscal drags—remains consistent with a gradualtransition to stronger growthMost notable in the recent news is the downshift in theindustrial sector. A rebound in manufacturing output andbusiness surveys at the start of the year does not appear to bedelivering the above-trend 1Q GDP signaled by our nowcast.And while we have been looking for growth momentum towane, the message from the April surveys is weak. Flashmanufacturing PMI readings were lower than expected in theUS, China, and the Euro area and suggest that globalmanufacturing output might be stalling. A sharp up-and-down swing in global industry is not a particular concerngiven the volatility in inventory behavior in recent years, butthe drop in the orders-to-inventory ratio in the flash PMIsraises concern that final demand growth is growing moreslowly than anticipated.There is limited information available regarding thecomposition of final demand growth last quarter, but webelieve that sluggish EM business spending is the mainsource of disappointment. We have been highlighting thedamaging combination of subpar global growth andweakening pricing power in goods industries for EM profitmargins—particularly as labor costs continue to rise at arapid pace. Investment spending has been sluggish in recentquarters—in absolute terms and relative to consumerdemand—and does not appear to be lifting during 1H13 aswe had expected. Weaker-than-expected manufacturingsector investment and stockbuilding contributed to lastquarter’s growth disappointment in China, and we expect thispattern will be evident in GDP releases across the EM morebroadly.It would be wrong to expect a quick rebound in EM businessspending. The latest IIF survey of EM bank lending officers,conducted from mid-March through mid-April, found that amodest net majority of EM banks continue to tighten creditstandards. However, the survey also suggests that thepressure to tighten is easing. Banks no longer perceivefunding conditions as tight and a significant rise in NPLsappears to be leveling off. This improvement, if sustained,should give banks an incentive to stop tightening standards.Europe’s future will be shaped by politics in the South9European crisis management is centered on the principle ofconditionality—the application of macroeconomicadjustment by debtor countries in return for access to externalsupport. The German government’s commitment that therewill be “no liability without control” has become Europe’sguiding political maxim; an inter-state equivalent of “notaxation without representation.” This approach has becomeclearer than ever in the post-Cyprus world (see A. White, TheImportance of a Germany that can say no).The difficulty with this approach, in our view, is that itassumes that the debtor countries have the institutionalcapacity to consistently implement their side of the bargain. Italso assumes that the general public in the debtor countriesshares the same political and normative values as Germanyand the European North (or can be persuaded to acquiesce tothem) in a way that will embed the prevailing approach to themanagement of EMU. In reality, both assumptions arequestionable, in our opinion. Near term, the constitutionaland political settlement in the South has created impedimentsto the implementation of fiscal restraint. The region hasdemonstrated its capacity to address this through the use ofvarious “work-arounds,” including the imposition oftechnocratic administrations and rule by decree (both ofwhich have proved deeply unpopular).This approach appears to have been partly successful indelivering greater fiscal consolidation in the short term. In themedium term, however, the southern economies will likelyneed to embrace deeper structural reform if they are todeliver sustained growth. This will likely require a degree ofpolitical commitment that goes beyond what is achievablethrough the work-around approach. Finally, in the long term,we believe the South will need to internalize a vision of Euroarea management (EMU Mark II) that is largely based onnorthern European precepts. Without this, in our view, abroader clash of approaches to EMU will be hard to avoid(the German view is that domestic dysfunction within theperiphery must be addressed before more substantiveintegration can occur).The recent intervention by the Portuguese ConstitutionalCourt, which threw out aspects of the 2013 Budget, is a casein point. In our view, the near-term solution is for thePortuguese government to prepare additional measures that9J.P. Morgan Economic and Policy Research, Economic Research Note, April 26, 2013,J.P. Morgan Markets, https://jpmm.com/research/content/GPS-1106830-0.
Prime Brokerage Global Hedge Fund Trends – Market Perspectives13 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 April 2013 unless otherwise stated. meet the requirements of its assistance program and arecompatible with its constitution. Longer term, we believePortugal needs to ensure that its constitutional settlement andthe requirements of EMU membership—as well as broaderfiscal realities—are not in conflict. The European South stillhas a long political journey ahead of it, and we expect itsresponse will shape the region’s future in the short, medium,and long term.