JPM Prime Brokerage Global Hedge Fund Trends September 2013

J.P. Morgan Prime Brokerage Global Hedge Fund Trends
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 August 2013 unless otherwise stated.
September 16, 2013
Executive Summary
Risk assets1
sold off broadly in August, which was
characterized by a renewed focus on macro issues, with
weakness widespread across equities, fixed income and credit.
Hedge funds posted an aggregate loss of -0.73%2
with event
driven strategies posting the narrowest decline (-0.04%) and
global macro managers suffering most acutely (-1.20%).
Equity long short funds posted an aggregate monthly decline
of -0.69%.
Leverage
For all accounts in the Prime Brokerage portfolio, gross
leverage3
fell from 1.84 to 1.82 (-0.84%) in August. For
equity-biased strategies, net exposure4
declined from 0.78 to
0.74 (-5.62%). Net leverage also declined, falling from 0.66 to
0.63 (-4.92%) and is just below its 52-week average of 0.64.
Securities Lending
Even with the decline in equity markets, conviction levels on
the short side were low in August. Clients added shorts via
ETFs while single name equities ended the month flat. The
U.S. Prime Brokerage portfolio ended August net shorted for
only the second time in the last six months. Merger arbitrage
and special situations trading was active in Europe. Flows
were light in Asia.
Institutional Investor Sentiment
Equity long short and equity-biased event driven remain the
strategies of most interest among institutional allocators.
Several endowments are in the process of shifting their
exposures from hedge funds to long only strategies as they
seek to isolate the alpha generation from such managers.
Market Perspectives
There are fissures emanating from Europe that could lead to
heightened volatility, including (1) the German Constitutional
Court’s impending ruling on the Outright Monetary
Transactions (OMT), (2) the upcoming parliamentary
elections in Germany and (3) the destabilizing effect from the
tax fraud conviction of former Italian PM Silvio Berlusconi on
the Italian government.
1
Assets other than cash and government fixed income securities.
2
Hedge fund strategy returns are based on data supplied by Hedge Fund Research.
3
Gross leverage is the total market value of long and short positions divided by clients'
equity in J.P. Morgan’s Prime Brokerage portfolio.
4
Calculated for Equity Long Short and Market Neutral funds on J.P. Morgan’s Prime
Brokerage platform only. Net leverage is defined as the market value of long positions
(LMV) minus the market value of short positions (SMV), divided by clients’ equity (Eq).
Net exposure is defined as the ratio of LMV and SMV, minus one.
Figure 1: August 2013 performance
HFRI and Market Indices. Monthly Returns
Source: Bloomberg, Hedge Fund Research
Table 1: Performance of hedge fund strategies and asset classes
HFRI and Market Indices5
Aug-13 Year-to-Date
HF Index -0.73% 3.87%
Equity LS -0.69% 6.72%
Event Driven -0.04% 6.88%
Macro -1.20% -2.28%
Relative Value -0.46% 3.13%
S&P 500 -2.90% 16.15%
Fixed Income -0.33% -5.03%
CMDTY 2.88% 1.62%
USD 0.78% 2.91%
Credit -0.62% -2.76%
Figure 2: Hedge fund beta to equities
Rolling 21-day beta of HFRX equal-weighted index returns to the S&P 500 Total Return
Index
5
Market indices from Bloomberg are as follows: S&P 500 (SPTR Index), Fixed Income
(JPMGGLBL Index), CMDTY (SPGSCI Index), USD (DXY Index), and Credit (JULIR
Index).
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
HF IndexEquity LS Event
Driven
Macro Rel Value S&P 500 Fixed
Income
CMDTY USD Credit
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
0.01
0.03
0.05
0.07
0.09
0.11
0.13
0.15
0.17
0.19
Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13
Equity Beta (LHS) S&P 500 Total Return Index (RHS)

Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures
2
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 Overview6
In contrast to the July rally, risk assets sold off during
August. The month was characterized by a renewed focus on
macro issues, including tensions in the Middle East centered
on Egypt and Syria, heightened volatility in emerging
markets, continued uncertainty over the prospect and timing
of Federal Reserve tapering, the choice of Ben Bernanke’s
successor and upcoming federal elections in Germany slated
for September 22. These factors helped drive uncertainty in
markets. Partly as a consequence, equity markets sold off
both in the U.S. and internationally. The S&P 500 Index7
fell
-3.13% on the month with weakness across key sectors and
notable underperformance in the Financial (-5.22%) and
Utilities (-5.52%) sectors. August therefore marked the worst
month-over-month performance for the S&P 500 all year.
The picture was no brighter for equities internationally. The
MSCI World Index dropped -2.1% in August with losses
across sectors save for Materials (+1.3%), which was the sole
bright spot. The Nikkei was off -2.04%, the Hang Seng
declined -0.7% and the MSCI Europe Index also fell -0.9%.
Losses were not confined to equities. Most fixed income
assets posted negative returns as yields continued to back up.
For example, the 10-Year Treasury was down -1.21% month-
over-month with the yield now hovering just below 3.0%.
Conditions also continued to weaken for credit in August.
High yield fell -0.7%8
and investment grade credit was down
-0.62%.9
Along with the overall choppiness in markets, volatility once
again began to rise in August across all asset classes (See
Figure 3). Implied volatility for front month S&P 500
notched up to 15% (compared to 8.7% in July) and front
month implied volatility for EM equities (as measured by the
MSCI EM Index), at 25%,10
is now close to a year-to-date
high of 28%.
6
Hedge fund strategy returns are based on data supplied by Hedge Fund Research.
7
Reference is to the SPX Index, not the SPTR Index, as in Table 1.
8
Source: US Corp HY.
9
Source: JULIR Index.
10
As of September 26, 2013.
Figure 3: Average implied volatility across five asset classes
Average of five asset classes (equities, FX, commodities, credit and rates)
Source: CFTC, J.P. Morgan Global Asset Allocation
Composite Hedge Fund Performance
While the S&P 500 declined -3.13%, hedge funds suffered an
aggregate decline of -0.73%. August marks only the second
month of negative performance over the preceding ten
months. While all of the major hedge fund strategies suffered
negative performance in August, global macro (-1.20%) was
most adversely impacted.
Event Driven
Event driven strategies delivered a narrow aggregate loss in
August (-0.04%). Despite broader market declines, corporate
transaction and event activity continued apace. As a result,
event driven managers’ losses were small relative to other
strategies. Event driven managers have delivered positive
aggregate performance in thirteen of the last fifteen months
with a year-to-date return of +6.88%. Merger arbitrage
managers were down -0.11%. By contrast, distressed debt
managers posted a narrow overall gain of +0.08%.
Relative Value
Relative value managers posted a month-over-month
aggregate decline of -0.46%. Structured credit managers
delivered aggregate gains of +0.15%, aided by the continued
U.S. housing recovery and declining loan severities.
Convertible arbitrage managers were up +0.22%. However,
relative value multi-strategy funds declined (-0.54%). August
saw continued widening in credit spreads along with
10
15
20
25
30
35
40
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13

3
weakening conditions for positions with interest rate
sensitivity.
Equity Hedge
Equity long short and market neutral strategies were down
-0.69% in August. Although short biased (+0.58%),
Technology/Healthcare-focused (+0.29%) and Energy/Basic
Materials-specific (+0.26%) funds posted gains, every major
sector, both defensive and cyclical, experienced declines as
shown in Figure 4 below. Globally, however, Materials
outperformed, with the MSCI World Materials Index up
+1.3% on the month. (All other sectors in the MSCI World
ended August in negative territory.)
Figure 4: Sector performance (S&P 500 Index), August 2013
Source: Bloomberg, Standard & Poor’s
Global Macro
Global macro strategies suffered the steepest monthly decline
(-1.20%) among the main hedge fund strategies. Losses were
acute for managers with emerging markets exposure in
August. The HFRI Emerging Markets Index fell -0.77%, with
losses across regions. Declines were most acute among
managers with Latin America, Middle East and India
exposure. Systematic managers – particularly medium-term
trend followers – experienced significant aggregate losses on
the month (-1.84%) partly as a result of pronounced intra-
month currency fluctuations (See Figure 5). More
specifically, emerging markets currencies tumbled against the
U.S. Dollar. The pressure was heaviest on currencies that
have been dependent on inflows resulting from developed
market central bank easing (and which are therefore most
vulnerable as rates back up). The Indian Rupee and the
Indonesian Rupiah both fell over -8.0% in August compared
to 11% and 5% over the preceding three months, respectively
(See Figure 6). The Dollar also strengthened considerably
against currencies in Latin America. Countries with large
internal and external imbalances such as Brazil suffered
most. As the Dollar rose sharply against such currencies,
managers with short Dollar trades were hurt.
August also saw wide dispersions among developed market
currencies. For instance, both the Canadian and Australian
dollars drifted lower against the U.S. Dollar while the Euro
gained. Such dispersions also contributed to systematic
managers’ losses.
Figure 5: Rolling 3-month EM currency volatility
Average 3-month rolling realized volatility of EM Asia (Indian Rupee, Indonesian
Rupiah, Malaysian Ringgit) and Latin America (Brazilian Real, Mexican Peso,
Peruvian Nuevo Sol) currencies based on daily returns against the U.S. Dollar
Source: Bloomberg, J.P. Morgan
Figure 6: Year-to-date EM currency performance
Year-to-date performance of EM Asia (Indian Rupee, Indonesian Rupiah, Malaysian
Ringgit) and Latin America (Brazilian Real, Mexican Peso, Peruvian Nuevo Sol)
currencies against the U.S. Dollar
Source: Bloomberg, J.P. Morgan
-0.19%
-0.84%
-2.08%
-2.76%
-3.00%
-3.63%
-4.14%
-4.54%
-5.22%
-5.52%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13
Asian Currencies Latin America Currencies
70
75
80
85
90
95
100
105
110
115
120
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13
INR IDR BRL

4
Leverage and Risk Exposures
Gross Leverage
Gross leverage for all accounts in the Prime Brokerage
portfolio fell from 1.84 to 1.82 (-0.84%) (See Figure 7).
Gross leverage of levered accounts in the Prime Brokerage
portfolio declined from 2.54 to 2.47 (-2.89%) (See Figure 8).
The decreasing leverage levels were partly the result of an
uptick in volatility – and thus less risk appetite – fueled by
declining emerging markets, escalating tensions in the
Middle East and concerns around monetary policy.
Figure 7: Daily gross leverage and the S&P 500 Index
Source: Bloomberg, J.P. Morgan Prime Brokerage
Figure 8: Gross leverage (levered accounts) 5-day moving
average and the S&P 500 Index
Figure 9: 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 by Strategy
High Grade Fixed Income and Multi-Strategy saw increases
in gross leverage month-over-month, rising +15.90% and
+2.35%, respectively. All other strategies experienced a
decrease in gross leverage in August. All strategies except for
High Grade Fixed Income are running gross leverage above
their two-year averages.
Figure 10: Gross leverage by strategy
Source: J.P. Morgan Prime Brokerage
1.75
1.80
1.85
1.90
1.95
1,300
1,350
1,400
1,450
1,500
1,550
1,600
1,650
1,700
1,750
Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13
S&P 500 Index (LHS) Gross Leverage (RHS)
2.4
2.5
2.6
2.7
1,300
1,350
1,400
1,450
1,500
1,550
1,600
1,650
1,700
1,750
Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13
S&P 500 Index (LHS) Gross Leverage (Levered Account s - RHS)
-2.0
-1.5
-1.0
-0.5
0.0
0.5
Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13
Difference between gross leverage and S&P 500 Index Z-scores
3.89
1.96
1.77
3.72
2.22
1.42
0
1
2
3
4
5
Market Neutral Equity Long
Short
Multi-Strategy Convertible
Arbitrage
High Grade
Fixed Income
High Yield
Fixed Income
Jun-13 Jul-13 Aug-13

5
Table 2: Gross leverage by strategy
Average and first quartile calculated for the period of August 2011 to August 2013
Net Exposure and Net Leverage
Net exposure for equity-biased funds fell in August,
declining from 0.78 to 0.74 (-5.62%), the second consecutive
monthly decrease. Net leverage also declined, falling from
0.66 to 0.63 (-4.92%). The month-over-month decrease in net
leverage coincided with the -3.13% decrease in the S&P 500
while the decline in net exposure was driven largely by a
pullback in clients’ long exposures. Short exposures also fell
on the month but by far less than longs.
Figure 11: Net exposure and net leverage
Equity Long Short and Market Neutral funds on the Prime Brokerage platform only.
LMV: Market value of long positions. SMV: Market value of short positions.
Eq: Equity in the clients’ accounts
Sector Exposures
The largest month-over-month increases in the long Prime
Brokerage portfolio were in the Communications (+0.3%)
and Technology (+0.3%) sectors. The largest decline was in
the Financial sector (-1.1%).
The largest increase in the Prime Brokerage short portfolio
was in the Financial (+0.4%) sector. The most substantial
decreases in short exposure occurred in Non sector-specific
ETFs (-0.5%) – though short macro hedges remain elevated –
and the Energy (-0.4%) sector.
The Prime Brokerage portfolio may have become more
bullish on the Communications Energy and Technology
sectors, which experienced month-over-month increases in
long exposure and decreases in short exposure. By contrast,
the Prime Brokerage portfolio may have become less bullish
on the Financial sector, which saw a month-over-month
decline in long exposure and an uptick in short exposure.
Table 3: Long and short exposures by sector
Long (Short) exposure by sector as a percentage of total client long (short) exposure in
Prime Brokerage portfolio
Long exposure Short exposure
Aug-12 Jul-13 Aug-13 Aug-12 Jul-13 Aug-13
Basic Materials 5.1% 4.4% 4.4% 5.3% 5.4% 5.3%
Communications 12.3% 13.7% 14.0% 7.3% 5.8% 5.7%
Consumer, Cyclical 10.8% 11.7% 11.7% 8.7% 8.1% 8.0%
Consumer, Non-
cyclical
15.6% 16.5% 16.6% 10.5% 11.0% 11.0%
Diversified 0.3% 0.4% 0.3% 0.1% 0.0% 0.1%
Energy 8.1% 8.2% 8.3% 6.5% 6.9% 6.5%
Non sector-specific
ETF
3.9% 1.9% 1.9% 17.4% 19.4% 18.9%
Financial 18.8% 18.1% 17.0% 11.3% 9.0% 9.4%
Industrial 6.0% 6.6% 6.5% 5.9% 7.3% 7.2%
Technology 5.5% 4.9% 5.2% 5.2% 6.7% 6.6%
Utilities 1.8% 1.3% 1.2% 1.3% 1.6% 1.6%
Government 5.4% 7.2% 7.7% 10.1% 6.8% 6.8%
Other 6.2% 5.1% 5.1% 10.3% 12.1% 12.9%
Jun-13 Jul-13 Aug-13 Average First
Quartile
% Change
Market Neut 4.08 4.15 3.89 3.80 3.54 -6.3%
Equity Long 1.97 1.99 1.96 1.83 1.72 -1.7%
Multi-Strateg 1.72 1.73 1.77 1.76 1.73 2.3%
Convertible A 3.62 3.81 3.72 3.69 3.50 -2.6%
High Grade F 2.08 1.92 2.22 2.46 2.22 15.9%
High Yield F 1.41 1.48 1.42 1.25 1.16 -4.4%
PB Portfolio 2.41 2.54 2.47 2.51 2.47 -2.9%
0.4
0.7
1.0
Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13
Net Exposure (LMV/SMV)-1 Net Leverage (LMV-SMV)/Eq

Prime Brokerage Global Hedge Fund Trends – Securities Lending
6
North America Securities Lending
Equities
The U.S. Prime Brokerage book ended August net shorted for
only the second time during the last six months. However,
conviction levels appeared to be low, as short exposure was
added via ETFs while single name equity activity ended the
month flat. Gross volume in August was lower than the 2013
monthly average amidst overall thin trading volumes during
the summer season. From a sector perspective, shorting was
most concentrated in Communications, Technology and
Industrials, while covering was most pronounced in Basic
Materials and Financials.
ETFs
ETFs were net short in August and drove the overall U.S.
short book. Fixed income ETFs were particularly active with
new shorts in HYG (iShares iBoxx High Yield Corp Bond
ETF) and TLT (iShares 20+ Year Treasury Bond ETF).
Additionally, sector ETFs XLE (Energy Select Sector SPDR
ETF), XLP (Consumer Staples Select Sector SPDR ETF) and
XLI (Industrial Select Sector SPDR Fund) saw notable
shorting. Moving against the trend, EEM (iShares MSCI
Emerging Markets Index ETF), IWM (iShares Russell 2000
ETF) and XOP (SPDR S&P Oil & Gas Exploration &
Production ETF) saw the largest covering in
August. Although relatively unreported, SPY (SPDR S&P
500 ETF Trust) experienced a large drop in shares
outstanding with approximately $14 billion leaving the fund,
a sign that investors are scaling back long exposure to the
S&P.
Event Driven
• Perrigo Company (PRGO) and Elan Corporation,
plc (ELN) announced an agreement pursuant to which
Elan will be acquired. Elan shareholders will receive
$6.25 in cash and 0.07636 shares of new Perrigo stock
for each Elan share held. The purchase price represents
an approximate 10.5% premium for Elan shareholders.
The proposed transaction has been approved by both
boards and is expected to close by the end of 2013. We
have seen moderate demand for Perrigo borrow since the
merger announcement, but shares remain easy to borrow.
• Community Health Systems, Inc. (CYH) announced it
will acquire Health Management Associates, Inc. (HMA)
for a mix of stock and cash. Health Management
shareholders will receive $10.50 in cash, 0.06942 shares
of Community Health Systems, and one contingent value
right for each Health Management share held. The
contingent right could yield up to an additional $1.00 per
share based upon the outcome of previously disclosed
legal proceedings on the part of Health Management.
The merger is expected to close by the end of Q1 2014,
and is subject to the approval of 70% of Health
Management stockholders. Demand for Community
Health Systems has been relatively light and borrow
remains at GC levels.
Fixed Income
The Prime Brokerage fixed income book ended August net
covered. This represents the sixth month of net covering in
the past eight months, exceptions being January and July.
Despite the overall trend, the Basic Materials, Diversified,
Industrial and Financial sectors all saw market value
increases on the short side. Similarly, U.S. Treasuries
experienced a continued increase in activity and in net shorts.
Names that saw significant activity throughout the month
included Cliffs Natural Resources Inc. (CLF), Dell Inc.
(DELL), Fortescue Metals Group Limited (FMG) and Walter
Energy, Inc. (WLT).
Convertible bonds mirrored the overall trend of net covering
with Archer Daniels (ADM 0.875% 02/15/14) and
Priceline.com, Inc. (PCLN 1% 03/15/18) in the lead.
International Game Technology (IGT 3.25% 05/01/14), Intel
Corp. (INTC 2.95% 12/15/2035), Lam Research Corp.
(LRCX 1.25% 05/15/18) and Newmont Mining Corp. (NEM
1.625% 07/15/17) were exceptions to the trend of net
covering and remain active with continued interest in new
shorts.

7
Figure 12: Cumulative net activity
Market value change of activity across equities, ETFs, and fixed income
Source: J.P. Morgan Securities Lending
Figure 13: Rolling 1-month daily short flow
Daily Activity Relative to 30-Day Average (LHS) and S&P 500 Index (RHS)
Source: Bloomberg, J.P. Morgan Securities Lending
Table 4: U.S. securities lending trends by sector
For the month of August 2013
5 Day 30 Day 90 Day
Price
Change
Position
Change
(shares)
Price
Change
Position
Change
(shares)
Price
Change
Position
Change
(shares)
Consumer, Non-cyclical (1.4%) 0.3% (3.0%) 0.3% 3.8% (0.6%)
Financial (2.0%) (0.2%) (5.5%) (3.0%) (2.3%) (10.3%)
Technology (0.4%) 2.0% (1.3%) 3.0% 0.6% 4.5%
Energy (0.1%) 0.6% (2.3%) 1.0% (1.4%) 3.6%
Communications (1.1%) (1.0%) (2.4%) 3.6% 3.9% 7.0%
Industrial (2.3%) (0.1%) (3.3%) 0.5% (1.7%) 5.9%
Consumer, Cyclical (1.3%) (2.1%) (3.5%) (4.2%) 0.3% (0.1%)
Basic Materials (2.7%) (2.1%) 1.6% (8.6%) (3.3%) (1.7%)
Utilities (1.7%) (4.7%) (7.4%) (4.7%) (6.6%) 15.8%
Table 5: U.S. securities lending trends by ETFs
For the month of August 2013
5 Day 30 Day 90 Day
Price
Change
Position
Change
(shares)
Price
Change
Position
Change
(shares)
Price
Change
Position
Change
(shares)
SPDR S&P 500 ETF TRUST (0.9%) 0.5% (3.6%) 24.0% (0.8%) 31.3%
ISHARES RUSSELL 2000 (2.0%) (0.4%) (3.7%) 1.0% 2.2% 10.0%
ENERGY SELECT SECTOR
SPDR
0.7% (12.1%) (1.8%) (4.3%) 0.3% (14.9%)
SPDR S&P RETAIL ETF (0.6%) 43.0% (5.6%) 104.1% 1.0% 295.0%
ISHRES US REAL ESTATE
ETF
(2.2%) 4.0% (6.7%) 37.5% (11.3%) (16.3%)
ISHARES MSCI BRAZIL
CAPPED (EWZ)
(0.3%) 6.0% (2.4%) 20.6% (18.9%) 138.8%
ISHARES MSCI EMERGING
MARKETS ETF
0.1% 0.2% (2.7%) (43.3%) (8.7%) 22.3%
POWERSHARES QQQ
TRUST, SERIES 1 (ETF)
(1.3%) 4.8% (0.8%) 28.7% 2.7% 57.7%
FINANCIAL SELECT
SECTOR SPDR
(1.9%) (2.3%) (6.1%) (7.3%) (2.8%) 29.0%
ISHARES IBOXX HIGH
YIELD CREDIT ETF
(1.2%) (17.9%) (1.3%) 24.0% (3.9%) 12.6%
-$18.0
-$16.0
-$14.0
-$12.0
-$10.0
-$8.0
-$6.0
-$4.0
-$2.0
$0.0
$2.0
$4.0
4-Sep 4-Oct 3-Nov 3-Dec 2-Jan 1-Feb 3-Mar 2-Apr 2-May 1-Jun 1-Jul 31-Jul 30-Aug
Equity ETF FixedIncome Net Activity
1,550
1,575
1,600
1,625
1,650
1,675
1,700
1,725
1,750
-150%
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
02-Aug 09-Aug 16-Aug 23-Aug 30-Aug
Net Cover Activity (LHS) Net Short Activity (LHS) S&P 500 Index (RHS)

8
International Securities Lending
EMEA
Merger arbitrage and special situations trading was
particularly active across our client base in August as a result
of deal flow. Further to Vodafone Group plc’s (VOD) bid for
Kabel Deutschland Holding AG (KD8 GR) in June, hedge
funds continued to increase positions in the German cable
operator as the September tender deadline approached.
Koninklijke KPN NV (KPN EN) was very active, with hedge
funds trading in and out of the name on the back of America
Movil’s (AMX) takeover bid.
Convertible bond issuance was limited in August. Renewable
Energy Group, Inc. (REGI) issued $110 million of 2018
convertibles replacing an existing 2014 issue. Convertible
arbitrage managers continued to trade around Alcatel Lucent
(ALU FP), Nokia Corp. (NOK), and Emaar MGF Land
Limited (EMAAR) convertible paper. Borrow liquidity
increased and costs fell for both Nokia and Alcatel Lucent as
directional managers began to close short positions.
Directional trading across equity long short funds was mixed,
with net selling in Insurance, Consumers and Chemicals
versus net buying in Financials, Industrials and
Telecoms. Among the most crowded shorts, borrow in K+S
AG (SDF) tightened following news that competitor Uralkali
OJSC (URKA) was exiting the market. Short positions
continued to build in Banca Monte Dei Paschi Siena (BMPS
MI) and New World Resources (NWR LN) but borrow
liquidity remained limited. The Prime Brokerage short
interest radar illustrated a significant rise in Kone OYJ
(KNEBV FH), with the short base doubling throughout the
month. Italian equities saw reduced overall volumes as
investors considered the economic implications of the
Financial Transaction Charges on derivatives.
Asia Pacific Ex-Japan
Taiwan
HTC Corp. (2498 TT HTC) short interest regained traction in
August with funds adding to existing short positions.
Onshore borrow became available after the dividend recalls.
MediaTek Inc. (2454 TT) also saw renewed demand after it
was announced that MediaTek’s acquisition of MStar
Semiconductor Inc. (3697 TT) would be approved. Borrow
for MediaTek has ebbed and flowed over the last year though
the recent news sparked renewed demand.
Hong Kong
Although volumes were light as is typical in August, to the
extent there was demand it was driven by recently announced
results. Geely Automobile Holdings Ltd. (175 HK) saw large
shorting into month-end although results beat expectations.
However, there has been minimal covering and borrow
remains liquid. Guangzhou R&F Properties Co. Ltd. (2777
HK) results were announced mid-month and the stock
slumped 3.4% post announcement as shorting rose.
Maanshan Iron & Steel (323 HK) experienced a rise in
demand although supply is likely to be unsustainable. This
name has been active for the past year as has its competitor,
Angang Steel Co. Ltd. (347 HK). Both names remain
difficult to locate in size.
Korea
Flows were light in August. One name of note was Celltrion
Inc. (068270 KO), which experienced heightened demand
after reports that it may be purchased by AstraZeneca. The
stock fell nearly 30% during the month. August also saw
interest in Doosan Heavy Industries & Construction Co. Ltd.
(034020 KO) after the company announced it is considering a
global depository receipt.
Japan
August witnessed a marked drop in momentum in the
Japanese market as the impact of Abenomics softened.
Although flows were down, borrow interest increased in
Gree, Inc. (3632 JP), Dena Co. Ltd. (2432 JP), and GungHo
Online Entertainment Inc. (3765 JP). There was also
scattered borrow activity in the retail broker names, with
locates in SBI Holdings (8473 JP), Monex Group, Inc. (8698
JP), and kabu.com Securities Co. Ltd. (8703 JP).
Australia
Covering was the trend in August as shorts declined by 56%.
The Consumer, Discretionary, Financial and Materials
sectors benefitted most throughout the reporting season.
Longstanding shorts in electrical retailers JB Hi-Fi Ltd (JBH
AU) and Harvey Norman Holdings Ltd. (HVN AU) reported
sizeable covering with shorts coming in by 46% and 23%,
respectively. The market’s most popular short, Flight Centre
Ltd. (FLT AU), also saw 35% of its shorts covered.
Banks and mining companies such as Australia & New
Zealand Banking Group Ltd (ANZ AU), Westpac Banking
Corp. (WBC AU), Commonwealth Bank of Australia (CBA
AU), BHP Billiton Ltd. (BHP AU) and Rio Tinto Ltd. (RIO
AU) also experienced covering.

Prime Brokerage Global Hedge Fund Trends – Institutional Investor Sentiment
9
Institutional Investor Sentiment
North America
As the doldrums of August set in, last month was relatively
quiet in terms of institutional investor activity. The Capital
Introduction Group (CIG) met with several funds and
allocators in Chicago this month. Activity among the family
office and endowment/foundation segments is minimal. By
contrast, the consultants and funds of hedge funds (FoF) are
quite active in their due diligence efforts. To the extent that
FoF investors are experiencing demand, it is with respect to
customized products and solutions, not co-mingled vehicles.
Certain of those FoFs are interested in new launches and will
consider “Day 1” investments, albeit through founders share
classes or similarly beneficial economic arrangements.
With respect to specific strategies, equity long short and
equity-biased event driven are of most interest among
allocators in North America. FoFs with exposure to
structured credit are beginning to take profits selectively from
such managers. Certain of those FoFs are replacing their
structured credit allocations with equity-focused strategies. A
number of multi-strategy managers also have started to
benefit from the rotation away from structured credit.
In keeping with the overall trend, a number of endowments
are in the process of shifting their exposures to equity
strategies, including long-only. Consequently, certain hedge
fund managers either have or are considering long-only
offerings in order to exploit the growing demand for such
products.
EMEA
During August, CIG met with a number of UK pensions that
are undergoing personnel changes and restricting their
portfolios. Certain of those pensions are disappointed with
performance in the hedge funds with which they are invested.
As a result, the pensions are concentrating their hedge fund
portfolios with higher conviction managers. In some
instances, the pensions are simply redeeming from certain
strategies that have failed to meet expectations. Additionally,
fee pressure remains an ongoing trend among UK-based
pensions.
European investors remain most interested in equity-focused
strategies. There has also been a slight uptick in interest in
discretionary global macro. Interest in CTAs and convertible
arbitrage remains low.
Asia Pacific
August was a quiet month in the APAC region, with little
change month-over-month. Consequently, Asia Pacific-based
investors are still showing the most interest in equity long
short.
As in July, Asian investors continue to rotate out of credit-
biased strategies, particularly structured credit, in favor of
equities and event driven managers. Demand for strategies
with de minimis correlation remains stable.
Table 6: Investor strategies of interest by region11
North America EMEA Asia Pacific
Direction of
Interest
Level of
Interest
Direction of
Interest
Level of
Interest
Direction of
Interest
Level of
Interest
Convertible
Arbitrage
Neutral Neutral Neutral
Corporate
Credit
Neutral Neutral Neutral
Equity Long
Short
Neutral Neutral Increasing
Event
Driven
Neutral Increasing Increasing
Macro Neutral Increasing Decreasing
CTA Decreasing Neutral Neutral
Market
Neutral
Neutral Neutral Increasing
Structured
Credit
Decreasing Neutral Decreasing
Legend
Low Interest
Medium Interest
High Interest
Source: J.P. Morgan Capital Introduction Group
11
This information comes from CIG conference calls and meetings with global hedge
fund managers and institutional investors. This table represents views of the CIG team
and may not be completely exhaustive.

Prime Brokerage Global Hedge Fund Trends – Market Perspectives
10
August Commentary
At this time last year, Europe was viewed as a significant
source of macroeconomic event risk, as a Greek exit from the
European Monetary Union (EMU) seemed not only plausible
but potentially imminent. Then, in September 2012, Mario
Draghi announced the Outright Monetary Transactions
(OMT), the European Central Bank’s plan for unlimited
purchases of Eurozone government bonds. With the
announcement, Draghi mitigated the tail risk from a potential
dissolution of the Euro and the implosion of the EMU.
One year later, in terms of potential event risk, all eyes have
been focused on the prospect and timing of Federal Reserve
“tapering” and, more recently, Syria. Once again, however,
there are fissures emanating from Europe that, while mild at
the moment, have serious implications and could cause a
pronounced spike in volatility. The risks stem from (1) the
German Constitutional Court’s impending ruling on the
OMT, (2) the upcoming parliamentary elections in Germany
and (3) the destabilizing effect from the tax fraud conviction
of former Italian PM Silvio Berlusconi on the Italian
government.
The German Constitutional Court will soon issue a ruling on
whether the OMT compromised Germany’s ability to control
its own public finances. If the Court imposes extensive
limitations on the OMT, the program’s future effectiveness in
improving Euro area financial market conditions and making
it resilient to shocks could be hampered. Draghi’s rhetorical
bulwark from one year ago, when he pledged to do “whatever
it takes” to keep the EMU intact, could thus lose its
resonance. Therefore, as the decision draws near, the extent
of the Court’s ruling will likely become an increasing
concern for investors.
Germany’s federal election on September 22 will also be a
key event. Chancellor Angela Merkel still enjoys widespread
approval for her management of the Eurozone crisis.
Accordingly, the most likely electoral outcome is a “grand
coalition” of Merkel’s ruling Christian Democratic Union
with the opposition Social Democrats. The process of
forming a new government will not be easy and could cause
uncertainty, as prior governments have taken upwards of
three weeks to take shape. Markets, like politics, abhor a
vacuum.
Finally, on August 1, Italy’s Court of Cassation upheld a tax
fraud conviction against Silvio Berlusconi, which will make
it harder for the fractious coalition government, comprised in
part of Berlusconi’s PDL party, to remain intact. Increasing
divisions within the government could lead to policy
paralysis and derail structural reforms. Markets have
shrugged off this development so far. That could change as
tensions within the coalition government increase, with the
potential effect of rising yields on Italian government bonds.
How these events unfold could thus have a material impact
on financial markets in the weeks to come.
The following sections are excerpts from J.P. Morgan
Research publications. The full publications can be
accessed via the sources provided in the footnotes below.
The 2016 problem 12
The Fed faces an interesting situation at the September
FOMC meeting. At that meeting they will introduce their
2016 interest rate forecasts for the first time. The problem is
that at the end of 2016 their economic forecasts may well
show an economy that is close to full employment and price
stability. Normally in that situation one would expect the fed
funds rate to be close to neutral—which is somewhere close
to 4%. However, their end-of-2015 forecasts have a funds
rate forecast centered around 1%. An end-of-2016 funds rate
of 4%, which implies 300bp of tightening over the course of
2016, is well in excess of what the market is pricing in. If the
FOMC were to produce such a forecast, and if the market
were to take its cue from that forecast, then the ensuing
tightening in financial conditions would undo much of the
hard work the Fed has done in getting rates low enough to
support the recovery.
In some ways the Fed is at risk of being a victim of its own
success. After a few fits and starts, the Fed has finally
convinced the market it will keep rates low for a very long
time. However, the Fed’s ever-expanding embrace of
transparency means it now has to quantify how its verbal
attachment to accommodative policy translates into economic
and policy rate forecasts. For someone like Michael
Woodford, whose paper at last year's Jackson Hole
conference arguably had a meaningful impact on the policy
debate, such forecasts shouldn't have much of an influence on
financial conditions: after all, it is well known that the Fed
doesn’t have much of an advantage over the private sector in
forecasting accuracy.
12
J.P. Morgan North America Economic Research, The 2016 problem, August 14,
2013, https://jpmm.com/research/content/GPS-1191154-0.

Prime Brokerage Global Hedge Fund Trends – Market Perspectives
11
That being said, we do think the forecasts convey a policy
message, as they indicate how the Fed will react to a given
economic outcome. In particular, the 2015 forecasts are
already well below what most Taylor rules would prescribe.
We expect a similar gap for the 2016 forecasts, which would
leave the mid-point of those forecasts around 2.25%, or
perhaps a shade above. This would be somewhat above
where the market is now pricing the Fed, but not nearly as
much as if the funds rate went back to neutral. Such a
forecast, well below a Taylor rule, would continue to signal
that the Fed will remain “highly accommodative…even after
the economic recovery strengthens.” A risk to this outlook is
that not enough of the Committee “gets the memo,” so to
speak, and pencils in forecasts that are at odds with what the
leadership would probably like to see.
European High Yield Update13
Slowly but surely the three core strands of our 2013 Outlook
appear to be falling into place. Volatility has moderated, as
investors recalibrate to a new interest rate environment,
default rates remain subdued and, at last, Europe is lifting out
of recession.
Regarding the latter, it’s hard to portray economic recovery
right now as more than a fading of drags from fiscal
tightening, inflation, and inventories. Still, improvements are
visible across a broad set of data, evident right across the
region, rather than confined to the Core. The Euro area
composite PMI crossed 50, with a 2.5-point bounce in
manufacturing; economic sentiment rose sharply in Italy and
Spain in July and Euro area unemployment declined in June
for the first time in two years.
The return to growth has so far come about without the
contribution from improved financial market conditions
within the Periphery that our economists had hoped for.
There are tentative signs that credit conditions are starting to
ease, although the main potential catalyst for further
loosening – the EBA’s Asset Quality Review and subsequent
stress tests – remains some time away.
Despite the pick-up in growth, we no longer see interest rates
as the greatest near term risk factor for credit markets. There
has already been a sizeable upward move in yields since
May, and the Fed has so far been successful in guiding the
market through the exit process and timeframe. In Europe,
both the ECB and the BoE have sought to limit the spill-over
13
J.P. Morgan Europe Credit Research, European High Yield Update, August 9, 2013,
https://jpmm.com/research/content/GPS-1187720-0.
from the US with forward rate guidance. This has resulted in
European credit outperforming the US, both in spread and
total return terms, as we have been calling for.

Important Information and Disclaimers
12
This material (“Material”) is provided by J.P. Morgan’s Prime
Brokerage business for informational purposes only. It is not a
product of J.P. Morgan’s Research Departments. This Material
includes data and viewpoints from various departments and
businesses within JPMorgan Chase & Co., as well as from third
parties unaffiliated with JPMorgan Chase & Co. and its subsidiaries.
The generalized hedge fund and institutional investor information
presented in this Material, including trends referred to herein, are
not intended to be representative of the hedge fund and institutional
investor communities at large. This Material is provided directly to
professional and institutional investors and is not intended for nor
may it be provided to retail clients.
This Material has not been verified for accuracy or completeness by
JPMorgan Chase & Co. or by any of its subsidiaries, affiliates,
successors, assigns, agents, or by any of their respective officers,
directors, employees, agents or advisers (collectively, “JPMorgan”),
and JPMorgan does not guarantee this Material in any respect,
including but not limited to, its accuracy, completeness or
timeliness. Information for this Material was collected and compiled
during the stated timeframe, if applicable. Past performance is not a
guarantee of future results. JPMorgan has no obligation to update
any portion of this Material. This Material may not be relied upon as
definitive, and shall not form the basis of any decisions. It is the
user’s responsibility to independently confirm the information
presented in this Material, and to obtain any other information
deemed relevant to any decision made in connection with the
subject matter contained in this Material. Users of this Material are
encouraged to seek their own professional experts as they deem
appropriate including, but not limited to, tax, financial, legal,
investment or equivalent advisers, in relation to the subject matter
covered by this Material. JPMorgan makes no representations (and
to the extent permitted by law, all implied warranties and
representations are hereby excluded), and JPMorgan takes no
responsibility for the information presented in this Material. This
Material is provided for informational purposes only and for the
intended users’ use only, and no portion of this Material may be
reproduced or distributed for any purpose without the express
written permission of JPMorgan. The provision of this Material does
not constitute, and shall not be construed as constituting or be
deemed to constitute, a solicitation of, or offer or inducement to
provide or carry on, any type of investment service or activity by
JPMorgan. Under all applicable laws, including, but not limited to,
the US Employee Retirement Income Security Act of 1974, as
amended, or the US Internal Revenue Code of 1986 or the Financial
Services and Markets Act 2000 (Regulated Activities) Order 2001,
as amended, no portion of this Material shall constitute, or be
construed as constituting or be deemed to constitute “investment
advice” for any purpose, and JPMorgan shall not be considered as a
fiduciary of any person or institution for any purpose in relation to
Material. This Material shall not be construed as constituting or be
deemed to constitute an invitation to treat in respect of, an offer or a
solicitation of an offer to buy or sell any securities or constitute
advice to buy or sell any security. This Material is not intended as
tax, legal, financial or equivalent advice and should not be regarded
or used as such. The Material should not be relied upon for
compliance.
An investment in a hedge fund is speculative and involves a high
degree of risk, which each investor must carefully consider. Returns
generated from an investment in a hedge fund may not adequately
compensate investors for the business and financial risks assumed.
An investor in hedge funds could lose all or a substantial amount of
its investment. While hedge funds are subject to market risks
common to other types of investments, including market volatility,
hedge funds employ certain trading techniques, such as the use of
leveraging and other speculative investment practices that may
increase the risk of investment loss. Other risks associated with
hedge fund investments include, but are not limited to, the fact that
hedge funds: can be highly illiquid; are not required to provide
periodic pricing or valuation information to investors; may involve
complex tax structures and delays in distributing important tax
information; are not subject to the same regulatory requirements as
mutual funds; often charge higher fees and the high fees may offset
the fund’s trading profits; may have a limited operating history; can
have performance that is volatile; may have a fund manager who has
total trading authority over the fund and the use of a single adviser
applying generally similar trading programs could mean a lack of
diversification, and consequentially, higher risk; may not have a
secondary market for an investor’s interest in the fund and none may
be expected to develop; may have restrictions on transferring
interests in the fund; and may affect a substantial portion of its
trades on foreign exchanges.
JPMorgan may (as agent or principal) have positions (long or short),
effect transactions or make markets in securities or financial
instruments mentioned herein (or derivatives with respect thereto),
or provide advice or loans to, or participate in the underwriting or
restructuring of the obligations of, issuers mentioned herein.
JPMorgan may engage in transactions in a manner inconsistent with
the views discussed herein.
© 2013 JPMorgan Chase & Co. All rights reserved. All product
names, company names and logos mentioned herein are trademarks
or registered trademarks of their respective owners. Access to
financial products and execution services is offered through J.P.
Morgan Securities LLC (“JPMS”) and J.P. Morgan Securities plc
(“JPMS plc”). Clearing, prime brokerage and custody services are
provided by J.P. Morgan Clearing Corp. (“JPMCC”) in the US and
JPMS plc in the UK. JPMS and JPMCC are separately registered
US broker dealer affiliates of JPMorgan Chase & Co., and are each
members of FINRA, NYSE and SIPC. JPMS plc is authorized by
the Prudential Regulation Authority and regulated by the Financial
Conduct Authority and the Prudential Regulation Authority in the
UK. J.P. Morgan Securities (Asia Pacific) Limited is regulated by
the Hong Kong Monetary Authority and the Securities and Futures
Commission of Hong Kong.
Contact Us:
Alessandra Tocco
Alessandra.Tocco@jpmorgan.com
212-272-9132
Kenny King, CFA
Kenny.King@jpmorgan.com
212-622-5043
Christopher M. Evans
c.m.evans@jpmorgan.com
212-622-5693
Stacy Bartolomeo
Stacy.Bartolomeo@jpmorgan.com
212-272-3471

JPM Prime Brokerage Global Hedge Fund Trends September 2013

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to JPM Prime Brokerage Global Hedge Fund Trends September 2013

Similar to JPM Prime Brokerage Global Hedge Fund Trends September 2013 (20)

More from Brian Shapiro

More from Brian Shapiro (13)

Recently uploaded

Recently uploaded (20)

JPM Prime Brokerage Global Hedge Fund Trends September 2013