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Covid-19 Diligence Briefing

Our briefing for Tuesday August 4, 2020:

  • In the United States, President Donald Trump had a sit-down interview with Axios that aired on Monday night. In response to the interviewer’s question regarding the government’s handling of the coronavirus pandemic and its lack of apparent control, President Trump responded: Well, what’s your definition of control? I think it’s under control.” The interviewer countered that COVID-19 can’t be under control when 1,000 Americans are dying a day. The President’s response was the following: “They are dying. That’s true. And you – it is what it is… But that doesn’t mean we aren’t doing everything we can. It’s under control as much as you can control it.”

  • In Canada, public health officials and researchers are concerned about the growing online movement around disinformation regarding the COVID-19 pandemic in the country. For instance, conspiracy theories may lead more and more Canadians to avoid important safety measures, such as social distancing or wearing a mask. The CBC article noted a study from Carleton University back in May that 46% of Canadians believed in one of four unfounded COVID-19 theories: That the virus was engineered in a Chinese lab; the virus is being spread to cover up the effects of 5G wireless technology; drugs such as hydroxychloroquine could cure COVID-19 patients and that rinsing your nose with a saline solution could protect you from infection.

  • A study from the University College London and the London School of Hygiene and Tropical Medicine said the United Kingdom could face a second wave of COVID-19 twice as widespread as the initial outbreak. The study points that this result could happen without a more effective test-and-trace system in place as students are set to return to school in the fall. The study concluded a second wave could be prevented if 75% of those with symptoms were found and tested, along with 68% of their contacts being traced.

  • France’s medical officials are also sounding similar warning bells for the potential second wave. The country’s council of scientific advisers have warned that it’s highly probable a second epidemic wave will be observed in the fall or next winter. The infection rate in France has climbed back to levels last seen before a strict lockdown started to be lifted in May and government officials admit the situation is controlled, but fragile.

  • In the Philippines, tens of millions of people find themselves back in lockdown as the country struggles to contain the spread of COVID-19. Stay-at-home orders are now in place in Manila, along with four surrounding provinces on the island of Luzon for two weeks. The orders mean citizens in the area must stay home except for going out to buy essential goods, or exercise outdoors. Public transport has been suspended and domestic flights grounded. With only 24 hours notice of the new lockdown restrictions, many people found themselves stranded in the capital without any transportation to return to their hometowns.

  • Australia’s hard-hit Victoria state has put in more measures to try and help curb the spread of COVID-19. Victoria Premier Daniel Andrews’s government has banned people who should be self-isolating from exercising outside of their homes and introduced tougher fines for people infected with the coronavirus, but still continue to go to work. Failure to self-isolate will see fines rise from $1,652 AUS to $4,957 AUS. The most serious cases could be taken to court, where the fines could reach $20,000 AUS. The premier said military and health teams have knocked on the doors of more than 3,000 homes in the region, only to find more than 800 people who should been home awaiting a test result, or had tested positive for the coronavirus were nowhere to be found.

Covid-19 – Due Diligence And Asset Management

Record Cybersecurity Attacks Strike ‘Particularly Vulnerable’ Hedge Funds

Brief: Cybersecurity companies are warning that they’ve seen an exponential rise in attempted “phishing”, banking-email compromises, and illegal cryptocurrency mining. And it’s hedge funds that may be most vulnerable. “We’ve definitely seen an increase in phishing and crypto-mining, and an uptick in hacking attempts,” Ed Cowen, CEO of Remora, a cyber security consultancy which specialises in hedge fund and asset manager clients, told Financial News. “It’s part of an overall trend that has been accelerated by the digitisation of business and the evolution of crime. ”Soaring cases of cyberattacks have been plaguing every sector of the financial industry as the pandemic-driven lockdown forced workers to scatter beyond the firewalls of secure offices. But it’s an especially acute issue for hedge funds, given that many firms in the sector tend to lack the large-scale, in-house security of bigger firms. The rewards for crime are also high: hedge funds manage billions in assets, making them more exposed. “The real challenge for funds is that many of them are large micro-businesses,” Cowen said. “They have to look, talk and feel like they’re large corporations, but typically they’re between 10 and 20 people ... I don’t think funds and businesses in the UK are fully aware of the scale of cyber fraud. If a bank gets robbed, people talk about it; if the [hedge fund] office gets robbed, no one talks about it.”

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Investors Are Clinging to an Outdated Strategy – At the Worst Possible Time

Brief: Despite the longest economic expansion in U.S. history, the gap between the present value of liabilities and assets at U.S. state pensions is measured in trillions of dollars. To make matters worse, pensions are now faced with the reality that standard diversification — including extremely low-yielding bonds — may no longer serve as an effective hedge for equity risk. While I was at CalPERS, concerns arose in 2016 about the effectiveness of standard portfolio diversification as prescribed by Modern Portfolio Theory. We began to recognize that management of portfolio risk and equity tail risk, in particular, was the key driver of long-term compound returns. Subsequently, we began to explore alternatives to standard diversification, including tail-risk hedging. At present, the need to rethink basic portfolio construction and risk mitigation is even greater — as rising hope in Modern Monetary Theory to support financial markets is possibly misplaced. At the most recent peak in the U.S. equity market in February 2020, the average funded ratio for state pension funds was only 72 percent (ranging from 33 percent to 108 percent). That status undoubtedly has worsened with the recent turmoil in financial markets due to the global pandemic. How much further will it decline and to what extent pension contributions must be raised — at the worst possible time — remains to be seen if the economy is thrown into a prolonged recession.

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Four Shut Franklin Schemes Hit by Defaults

Brief:Four among the six shuttered debt schemes of Franklin TempletonMutual fund saw a fall in their Net Asset Values or NAVs after two entities - Nufuture Digital (India) Ltd (NDIL) and Future Ideas Co Ltd (FICL) – defaulted on payments. The net asset value of Franklin India Income Opportunities Fund fell by 4.73% on Friday. The NAV of Franklin India Credit Risk Fund also saw a dip of 2.28%, Franklin India Short Term Income Plan’s NAV dropped by 1.75% and Franklin India Dynamic Accrual dropped saw a fall of of 1.343%. “Due to default in payment, the securities of FICL and NDIL will be valued at zero basis AMFI standard hair cut matrix and interest accrued and due will be fully provided. Securities of RTVPL will continue to be valued at 75% basis recommended valuation,” Franklin Templeton MF said in a note. "This is a bad news for sure. A debt mutual fund investor has capital protection on his/her mind always. A 4.7% dip in NAV is huge. And when you can't pull out your money or do anything, it is worse. I believe this may lead to further fear psychosis in the minds of debt investors. In such situations, debt investors may report to redeeming from other debt schemes as well, which is not good," says Babu Krishnamoorthy, Chief Sherpa, FinSherpa InvestmentServices.

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ESG Funds Crowned Winners of COVID-19 Crisis

Brief: Australasian sustainable funds attracted inflows worth more than $207 million in the second quarter of 2020, with Australian Ethical and Dimensional reaping the majority of these rewards. Morningstar's latest Global Sustainable Fund Flows report, which examined 3432 sustainable open-end funds and exchange-traded funds (ETFs) across the globe in the second quarter of 2020, found that sustainable funds outperformed following the March market sell-off. Assets in Australasian sustainable funds increased substantially during the second quarter, up 18% from $14.9 billion (US$10.6 billion) at the close of the first quarter to $17.7 billion (US$12.6 billion). At the end of June, sustainable assets recorded one of their highest levels, only outpaced by their peak at December 2019. Morningstar found there are now 108 strategies in the Australasian sustainable fund universe, up from 86 at the close of the first quarter 2020. Interestingly, the Australian sustainable funds market is relatively concentrated, with the top 15 funds accounting for 60% of all assets in the sustainable fund arena.

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European ‘Zombie’ Companies Have Three to Six Months’ Runaway Before Defaults Rise, says Aviva Investors

Brief: Concern is growing over a likely spike in defaults among so-called ‘zombie’ companies that have stayed afloat during the coronavirus pandemic by relying on government stimulus and increasing their debt loads, but will struggle to keep servicing loans as government schemes roll back. ‘Zombie companies’ are indebted businesses that only generate enough cash to cover operational costs and interest payments on their loans, but not the debt itself. In the UK, financial services industry body The City UK estimates that businesses may build up GBP100 billion of debt by next March which they would be unable to repay, with 780,000 SMEs in danger of insolvency. A global forecast by fund manager Janus Henderson for overall corporate debt predicts a jump to a record USD9.3 trillion in 2020. Jub Hurren, senior portfolio manager of AIMS Fixed Income at Aviva Investors, says that many companies won’t fail immediately, thanks to supportive monetary policy: “The fact that interest rates are going to stay at extremely low levels means that even companies with low earnings can probably survive longer than they would otherwise because of the reduced burden in terms of servicing debt.”

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Property Fund Investors Should Wait Months for Cash to Avoid Exodus: UK Regulator

Brief: Investors in property funds should wait up to six months before they can get their money back to avoid a stampede for the exit leading to widespread suspensions in rocky markets, Britain’s Financial Conduct Authority proposed on Monday. UK-regulated open-ended property funds offer daily redemptions to entice investors, but nearly all those targeted by Monday’s proposal are suspended following market volatility in March due to the pandemic, trapping more than $7.5 billion in assets. Policymakers have warned that property funds should not be viewed like a bank account that can be tapped at will, given they contain “illiquid” assets such as commercial real estate that can take several months to sell even in normal market conditions. Concerns over daily redemptions began when several property funds were suspended after Britain voted in June 2016 to leave the European Union, as investors pulled out money. The Financial Conduct Authority (FCA) proposes that property funds publish a “notice period” or irrevocable pre-agreed gap of between 90 and 180 days from the request for a redemption to the return of cash. It would affect new and existing customers, but also mean that property funds don’t have to hold as much cash as they do now, the FCA said.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Friday July 31, 2020:

  • The United States has seen the worst economic plunge since 1947, the first year records were kept. Shrinking at a 32.9 per cent annual rate in the April-June quarter, the U.S. is facing a tough decision between economic gain and the safety of its citizens. The turmoil has American President Donald Trump calling for a postponement of the presidential elections in November. He argues that voting by mail – the most likely scenario for millions of Americans – will result in voter fraud. Delaying the vote would require an act of Congress and has been met with strong condemnation from members of both major U.S. political parties.

  • Reports of Americans vacationing in Canada has drawn the ire of the federal government. The so-called “Alaska Loophole” allows Americans to enter into Canada if they are returning to Alaska to reside or for work. Although all land borders between Canada and the United States have been closed since March 21st, there has been multiple cases of Americans stopping along the way for leisure activities. Starting Friday, people travelling to Alaska must do so at one of five designated border crossings and follow the most direct route to the state, reporting back to Canadian officials once they’ve arrived. They will also be given a tag to hang in their vehicle to identify them as foreign nationals.

  • In the United Kingdom new cases of COVID-19 are on the rise. The daily reported average is around 4900, up from 2000 in late June. This has caused Prime Minister Boris Johnson to pull back the easement of lockdown measures hours before they were slated to take effect. Now once again on hold are wedding receptions, theatre openings, and fans in stadium seating. Johnson has also extended mandatory face covering regulations on public transit, in galleries and places of worship. Areas in the north of England, where cases are surging, will once again have to abide by the single-family bubble. The restrictions come as scientists in the country can no longer confidently agree that the rate of infection is slowing.

  • Hong Kong leader Carrie Lam has postponed the legislative elections which were scheduled to take place on September 6th. The highly contested elections will now be held on the 5th of September 2021. Citing the spike of infections in the city, Lam has received backing from the Chinese government and said the decision to delay the election “is the most difficult decision I've had to make in the past seven months.” Pro-democracy lawmakers in opposition to the decision issued a statement saying that the government is using the pandemic as an excuse to delay the elections and quell the anti-government sentiments that have been rising in the city for months.

  • After 99 days without community transmission of the virus, Vietnam has recorded its 2nd death from COVID-19. The country has been a global success story, implementation of strict measures at the start of the pandemic has kept numbers in the country extremely low as the rest of the world struggles to flatten the curve. The deceased, a man in his 70s was being treated for kidney disease at the time of the infection. He was being treated at the Danang hospital, where last week, an outbreak caused authorities to reimpose a strict lockdown across the country. There are now 93 confirmed cases in multiple jurisdictions throughout the nation.

Covid-19 – Due Diligence And Asset Management

Pandemic boost for Big Tech set to drive Wall St higher

Brief: Wall Street was set to open higher on Friday after tech titans Apple, Amazon.com and Facebook posted blowout quarterly earnings, helping keep nagging pandemic nerves at bay. Apple Inc surged 7% premarket, setting the stock on course to open at a record high, as it delivered year-on-year revenue gains across every category and in every geography.
Amazon.com Inc jumped 6.2% after posting the biggest profit in its 26-year history, while Facebook Inc gained 6.7% as it reported better-than-expected revenue. Trading in Alphabet Inc was more subdued as quarterly sales fell for the first time in its 16 years as a public company.

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Despite rules, global firms are making money on America’s virus crisis

Brief: Pacific Investment Management Co. runs a hedge fund registered in the Cayman Islands, a common structure for avoiding certain U.S. taxes. But when a profit opportunity arose from the ashes of America’s coronavirus crisis, that international location did not stop it from seizing the moment. The Federal Reserve opened a highly anticipated emergency lending program in June, a revamped version of one it used during the 2008 financial crisis. This time around, Congress stipulated that only American companies could participate as borrowers in such programs. Despite being offshore, Pimco’s fund had an easy way to benefit. The offshore fund is invested in an entity registered in Delaware. That entity can be used by investment managers to buy and sell bonds. The Delaware operation borrowed $13.1 million from the Fed program by pledging a bundle of debt as collateral. Investors in the Cayman-based hedge fund ultimately stand to profit from the transaction.

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‘Unsexy’ stock proves a pandemic winner for this equity veteran

Brief: The Covid-19 pandemic has produced winners from a wide array of sectors, with technology leading the charge, but there are several surprising stories that have come to the fore. Citywire + rated manager Raphael Pitoun, who runs two equity funds at CQS Investment Management, told Citywire Selector about one area that has proven its worth for his portfolios – pest control. Pitoun said Rollins Inc is a market leader in pest control but showed its ability to pivot during the crisis, switching from dealing solely with pests to redeploying its workforce to aid in the major drive to improve workplace hygiene. ‘It’s typically a business that is not particularly sexy or maybe it is less flashy than the likes of Tesla or the other Faangs [Facebook, Amazon, Apple, Netflix and Google],’ he said. ‘It’s a business that exists for a very long time with a good amount of growth. What we learned over the last few years is that people that have a leadership position in one market they tend to accentuate this position and do little else

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Principal Financial Adjusts COVID-19 Impact Formula

Brief: Principal Financial Group has discovered that COVID-19-related deaths are only about half as damaging to earnings as the company once expected. The Des Moines, Iowa-based insurer has been trying to estimate how much COVID-19 will affect after-tax operating earnings. The company has now cut the predicted impact to a $10 million reduction in operating earnings per 100,000 U.S. COVID-19-related deaths. Earlier in the year, the company had estimated it might face $20 million in impact per 100,000 U.S. COVID-19-related deaths. “This reduction reflects a lower incidence of COVID-related deaths in our insured population,” Deanna Strable, Principal’s chief financial officer, said Tuesday during a conference call.

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Lazard second-quarter earnings fall amid COVID-19 slump in dealmaking

Brief: Investment bank Lazard Ltd (LAZ.N) on Friday reported an 8% fall in second-quarter adjusted earnings per share, a smaller drop than analysts had expected, as the slowdown in corporate dealmaking due to the COVID-19 pandemic weighed. The slump came as global M&A activity, one of Lazard’s main revenue drivers, tumbled to its lowest level in more than a decade in the second quarter, as companies gave up on expansion plans to focus on protecting their balance sheets and employees in the wake of the coronavirus outbreak.
Larger M&A activity has shown signs of picking up in the third quarter with 40 deals worth at least $1 billion announced during this month, down almost one third on July, 2019 but up 29% from June, according to Refinitiv data. “The one thing we’ve learned from this pandemic is that it’s reasonably difficult to predict the future. That said, it feels like Q2 probably turns out to be the low (M&A activity),” Lazard Chairman and Chief Executive Kenneth Jacobs said in an interview.

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Here's What Hedge Funds Have Been Saying About COVID-19

Brief: We're starting to get second-quarter investor letters from hedge funds, and as would be expected, COVID-19 features prominently in them. One fund manager pointed out that despite the recession caused by COVID-19, the bulls are running in the market. Other fund managers have highlighted the opportunities presented by share price dislocation due to the coronavirus. At least one fund manager firmly believes the concerns around COVID-19 are overdone despite the running of the bulls in the market. Bull Market Coincides With Recession: Jacobs Asset Management Managing Partner Sy Jacobs said in his second-quarter letter to investors that it's strange how the bull market has continued despite the recession triggered by COVID-19. He said a short list of story, momentum and growth stocks has been leading the bull market.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Thursday July 30, 2020:

  • In the United States, where more than 150,000 people have died from the novel coronavirus, the White House COVID-19 task force is urging governors in the midwestern states to get ahead of the curve by issuing mandatory mask protocols and closing non-essential services. Ohio, Indiana, Kentucky and Tennessee are all seeing increases of positive tests as the virus ravages states in the west and south of the country. Dr. Anthony Fauci says that if governors don’t get protocols in place soon it will be harder to cope with new cases when they arrive. "Before you know it, two to three weeks down the pike, you're in trouble," he said.

  • In an informal survey issued by CBC Montreal, most medical experts in Canada believe that a second wave of COVID-19 is inevitable. Out of the 170 people polled, 114 of believe a second wave of the virus is “very likely” and another 40 believe that it is “somewhat likely.” Mark Goldberg, an environmental epidemiologist at McGill University says that as cases rise in Quebec, a second wave may be imminent. "If it starts increasing and not coming down over the next two weeks, I would say we'd be into a second wave," he said. Experts have said that the second wave of the pandemic may, however, be less severe than the first as more is known about the virus and the precautions that need to be taken to stop the spread.

  • U.K. Prime Minister Boris Johnson has told Britons not to “delude themselves” into thinking that the pandemic is over and acknowledged that the virus is “bubbling up” in roughly 30 areas. The U.K. has had the most excessive deaths from coronavirus in the world, meaning that the death rate has exceeded the level of previous years by the highest margin. At 7.5 per cent more deaths than the yearly average, the U.K. has surpassed Spain at 6.7 per cent and Scotland at 5.1 per cent. The Prime Minister added that the country has "to continue our work in driving the virus down.”

  • Despite being the first European nation to be hit with the virus, Italy has proven that strict contact-tracing and elaborate social measures can contain new outbreaks of COVID-19. After being hit hard in March and April, Italy began to ease lockdown restrictions in May, while new cases of the virus were still numbering in the thousands. Paling in comparison to the previous months, the average new cases in the country remains around 300 daily. Italy’s prime minister Giuseppe Conte has extended the state of emergency until October and intends to keep most restrictions in place while neighboring countries experience a strong uptick in cases.
      
  • The Philippines have reached a new record for daily infections for the fourth time this month, as many hospitals in the capital of Manilla have intensive care units reaching capacity. On Thursday, the country confirmed nearly 4000 new cases as President Rodrigo Duterte announced a major shift in his governments approach to the virus. Duterte intends increase tests to 10 million by next year, so far, the country has tested just over a tenth of that number. The government is now planning to build multiple quarantine facilities to house patients with mild or no symptoms while they recover in order to avoid widespread infections in the community.

Covid-19 – Due Diligence And Asset Management

BNP Paribas Personal Finance, Experian, Aryza help customers through the Covid-19 pandemic

Brief: BNP Paribas Personal Finance has announced that it will use Experian’s Open Banking technology and Aryza’s Debtsense digital platform to provide online account reviews to customers who have been affected by the Covid-19 pandemic. Debtsense from Aryza uses Experian’s Open Banking service to allow people to share their account and transaction data, giving a clear and detailed picture of affordability, financial circumstances and commitments. The insights will enable BNP Paribas Personal Finance to assess people whose finances have been affected by the pandemic and who may now be vulnerable. They can then be offered a payment break or an affordable payment plan based on their specific circumstances. The app uses the lender’s credit decision policy rules to create a personalised payment plan. More than 200 organisations are currently using Experian’s Open Banking service, many to help resolve financial hardship as a result of Covid-19 pandemic. Charities including Citizens Advice Liverpool and Mental Health & Money Advice are using the service to support clients through the pandemic, tailoring advice based on the individual’s situation.

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Macquarie CEO warns COVID turmoil to hit asset sales

Brief: Macquarie Group chief executive Shemara Wikramanayake says the turmoil unleashed by the coronavirus will make it tougher for the company to reap the benefits of asset sales, as profits dipped and it warned of extreme uncertainty. The financial group on Thursday highlighted challenging conditions across all of its businesses, with the banking division hit by rising provisions for bad loans and the global recession hampering deal-making. As the company faced shareholders for a virtual annual meeting, chairman Peter Warne also said there was a possibility it would resume dividend payments to the group from the banking division, which had been paused, but this was not certain. Macquarie is a major investor in infrastructure projects and part of its business model involves selling assets to realise the gains from these investments.

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‘The War On Covid Is Almost Over,’ Says Former Hedge Fund Manager

Brief: The evolution of media has led to a “disconnect” between the reality of coronavirus and public perception of the pandemic, according to Enrique Abeyta of Empire Financial Research. The reality: The coronavirus crisis is in the “seventh inning,” Abeyta said on the Contrarian Investor Podcast. In six weeks, or by mid-September, there will be “maybe less than 50” daily fatalities from COVID-19, corresponding to about one 10th current levels, he says. “I think the war on COVID is almost over.” This clashes with the perception reported by media, that the U.S. doesn’t have COVID-19 under control. Cases and deaths are growing, states are forced to shut down, and the situation is spiraling out of control. So goes the narrative. This narrative misses several key facts, according to Abeyta. In the U.S., the virus has hit different regions at different times: first New York, where mortality rates were “awful,” and more recently states like Florida, Arizona, California, and Texas (the FACT states).

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Bitcoin's Hedge Fund Sharks Are Swimming With The Whales

Brief: Bitcoin is doing that thing again. After a 50% slump in the cryptocurrency’s price to about $4,000 in mid-March, when Covid-19 panic was gripping the financial markets, it has bounced back to trade at about $11,200. Veteran crypto-watchers have seen this rapid shift from fear to greed many times before, and know it can have painful consequences. The first time Bitcoin’s price went past five figures in 2017, it fueled a speculative frenzy that ended almost as soon as it began, leading to an 80% slump over 12 months. And when Bitcoin rose above $10,000 in February this year, any hope for a rally was snuffed out by Covid. The subsequent mad rush to trade digital coins for cash was made worse by the fact that many people were using large amounts of debt to back their trading. Several crypto hedge funds closed. Is anything different this time? Bitcoin’s wild price swings undermine its case as a reliable store of value or safe haven. It’s still 43% below its high of almost $20,000. But as a “store of fear” — Warren Buffett’s description of the short-term pessimism that pushes investors into cryptocurrency — it has its fans.

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New Data Shows Private Equity Industry Overwhelmingly Focused on Portfolio Company Growth, Not Cost Cutting

Brief: Private Equity Advisor, BluWave, Finds 71% of Private Equity Resources Devoted to Portfolio Companies Was Spent on Value Creation Initiatives During the Second Quarter of 2020 BluWave, a private equity-focused advisory firm, today released new data on how private equity funds are allocating resources. The results demonstrate that in the immediate aftermath of the COVID-19 pandemic, the private equity industry was far more focused on investing in portfolio companies than slashing jobs or cutting costs. Among the most common investments at portfolio companies were human capital and digitization. “We’ve seen a clear trend toward value creation over the past two years,” says Sean Mooney, CEO of BluWave. “That trend has accelerated following the outbreak of the COVID-19 pandemic. Although many assumed the pandemic would force private equity funds to focus on operational efficiency, cost cutting and layoffs, what we’ve actually seen is agility and a focus on valuation creation that has spurred new investment in human capital, IT and software strategy, and data-driven decision making.”

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Hedge fund giant Man Group sees assets fall 8 per cent in first half, as coronavirus crisis creates performance challenges

Brief: Man Group has seen its funds under management tumble 8 per cent this year, as investment performance took a hit and investor redemptions spiked during the coronavirus crisis - but CEO Luke Ellis says the London-headquartered publicly-traded hedge fund group remains well-positioned despite 2020’s ongoing challenges. Man’s funds under management fell to USD108.3 billion in the first six months of the year, down from USD117.7 billion at the start of January. The drop stemmed from investment performance losses of USD5.4 billion, together with USD1.2 billion of investor outflows. Negative FX translations and other movements wiped off another USD2.8 billion. Man CEO Luke Ellis conceded the first half of 2020 was a “challenging time” for the group. Man, which runs a wide assortment of discretionary and systematic investment funds across hedge fund and long-only strategies, is often considered a barometer for the UK’s broader alternative asset management industry.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Wednesday July 29, 2020:

  • The United States recorded its largest single day increase in deaths from COVID-19 since May. California, Florida and Texas, the nation’s three most populace states, accounted for more than half of the 1300 fatalities. In the Central Valley agriculture region of California, the Latino community has been hit hard, overwhelming local hospitals. In the most populated U.S. state, Latinos make up 56 per cent of those infected with the virus and 46 per cent of deaths. As the infections spike around the country, President Trump compared his dropping popularity with that of top infectious disease specialist Dr. Anthony Fauci. Trump jeered “nobody likes me” brushing off his handling of the pandemic as the reason, he added, “It can only be my personality.”

  • European airline officials have urged the Canadian government to ease what they call “problematic” coronavirus air travel restrictions. They are calling for a safe restoration of travel between Canada and Europe. A letter sent to the Canadian government from more than 12 international airlines states that “Canada’s continued entry restriction and quarantine requirements are becoming problematic.” For airlines in the European Union and Switzerland, regulations require reciprocity for air travel to resume, with the two-week quarantine required by all non-essential travelers entering the country, Canada and the EU are at a stalemate.

  • Only 49 per cent of U.K. companies expect to return to pre-pandemic quality of business by the latter half of 2021. A survey from Deloitte suggests that slightly less than half of businesses do not expect the country to make a speedy recovery. Of the companies polled, the majority of them feel negatively towards the prospect of adding jobs and further investments. “Major corporates are expecting a long haul back to pre-COVID levels of revenue,” said Ian Stewart, Deloitte’s chief economist. Likewise, more than 53 per cent of manufacturers in the U.K. intend to make redundancies in the next year according to a survey by manufacturing trade body Make UK.

  • Spanish authorities have backtracked on a controversial “immunity card” that would allow people exhibiting specific anti-bodies to frequent high-traffic areas such as gyms and bars. The previously announced card has now been squashed by the government after backlash from epidemiologists, politicians and civil rights groups. In a press conference after a cabinet meeting, deputy for the Madrid authority, Ignacio Aguado conceded that due to its swift condemnation, the cards would not be issued. In the past week Spain has seen a drastic surge in infections with nearly 1200 new cases being reported on Wednesday.
      
  • Russia is slated to approve its first coronavirus vaccine by early August and will be administering it to hospitals and front-line workers later that month. Kirill Dmitriev, head of the Russian Direct Investment Fund that is providing financing for the vaccine has previously claimed it is safe, despite multiple assertions that it is being rushed into distribution. With new cases numbering at roughly 5000 a day, Russian President Vladimir Putin has said that the country is preparing for a second wave, suggesting that the situation “may worsen.”  The country has reported over 828,000 cases of the virus since the pandemic began.

Covid-19 – Due Diligence And Asset Management

High-end Dialogue Between Shi Bo of Southern Asset Management and Blackstone CEO Stephen Schwarzman

Brief: On July 21, 2020, Caixin International Roundtable invited Mr. Stephen A. Schwarzman, Chairman, CEO & Co-founder of The Blackstone Group, to the High-end Dialogue. Mr. Shi Bo, Deputy General Manager & Chief Investment Officer (Equity) of Southern Asset Management, had a dialogue with Mr. Schwarzman on the topic “What It Takes in a Post-Pandemic World”. During the dialogue session at the roundtable, Mr. Schwarzman introduced how Blackstone navigated the coronavirus crisis, attributed the success of Blackstone to timely learning from mistakes and resolutely capturing opportunities over the past 35 years and also shared his current focus of investment. Mr. Shi commented that Mr. Schwarzman is successful because he is contrarian and open-minded, giving him enough foresight to predict how to make the right investment. And, these two factors can also help us seek out opportunities from a crisis and thus invest successfully. Besides, Mr. Shi talked with Mr. Schwarzman on other issues, including the rationale behind Blackstone’s real estate investment, China’s real estate sector outlook and possible changes in the post-pandemic business models.

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How COVID-19 has exposed the perils of for-profit seniors’ housing

Brief: In May 2020, Orchard Villa, a long-term-care home in Pickering, made headlines for a bad COVID-19 outbreak. Just two months into Ontario’s lockdown, 77 patients in the 233-bed home had died. A report by Canada’s military revealed horrifying conditions, short staffing, and neglect. Some family members blamed for-profit ownership, arguing that COVID-19 had simply exposed, in tragic fashion, the impact of prioritizing profits in the operation of seniors’ housing. Notably, Orchard Villa had been purchased in 2015 by private-equity firm Southbridge Capital, adding it to Canada’s growing stock of “financialized” seniors’ housing — bought by financial firms as an investment product. This has followed the trend of what’s known as financialization in the global economy, in which finance has come to dominate in the operations of capitalism, prioritizing investor profits over social, environmental, and other goals. In seniors’ housing, financialization has arguably intensified the profit-seeking approach of private owners, with harmful outcomes for residents and workers alike.

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Will COVID-19 Ignite Private Equity's Dry Powder?

Brief: The COVID-19 pandemic has pushed global financial markets into a prolonged period of volatility and uncertainty, reminiscent of the 2007-08 financial crisis. Many businesses have languished since March. Private equity professionals are optimistic for the industry to adapt and play a meaningful role in a global economic recovery. Takeaways: Private equity firms are sitting on a highly concentrated source of capital available for deployment given fruitful fundraising efforts in recent years. The pandemic has spawned a number of potential investment opportunities from: (a) assisting existing portfolio businesses; (b) investing in emerging industries that have thrived in light of the current economic conditions; and (c) purchasing distressed assets or providing businesses with additional capital. Powder Reserves: Generally speaking, liquidity becomes a primary concern during market turmoil as financial institutions begin to retreat from their traditional role as market makers for bonds and financial assets. The "Big Five" banks of Canada have recently announced billions set aside during the second quarter of 2020 as loan loss provisions, concentrating on helping existing borrowers avoid default instead of extending further credit.

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Northern Trust Universe Data: Institutional Investment Returns Rebound Amid COVID-19 Market Recovery

Brief: Institutional plan sponsors saw significant investment gains during the second quarter of 2020, according to the Northern Trust Universe, with a median plan return of 10.6% as markets rebounded from a massive sell-off in equities at the start of the COVID-19 pandemic in the first quarter of the year. The Northern Trust Universe tracks the performance of more than 320 large U.S. institutional investment plans, with a combined asset value of more than $1 trillion, which subscribe to performance measurement services as part of Northern Trust's asset servicing offerings. Public Funds had a median return of 11.14% for the second quarter, outpacing the other institutional segments tracked by Northern Trust. Corporate ERISA pension plans returned 10.55% at the median and Foundations and Endowments produced a 9.24% median return in the quarter ending June 30, 2020. "Investors’ willingness to take on additional risk propelled returns in the equity and corporate fixed income sectors, bringing those markets close to their all-time highs by the end of the second quarter," said Mark Bovier, regional head of Investment Risk and Analytical Services at Northern Trust.

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Fintech Funding Slides as Coronavirus Casts a Chill with Venture Capitalists

Brief: Aritra Chakravarty, founder of London-based online accounts and investments provider Dozens, admits it’s a tough time to be seeking up to 15 million pounds ($19 million) for a start-up. “It’s definitely a bearish market” said Chakravarty, who is seeking funding for Project Imagine, the company behind his fintech ventures. He is looking to crowd funding and government-backed COVID 19-support schemes for technology firms to make up for any reticence from venture capital investors. Data suggest his caution is warranted. Fintechs, which have been one of the hottest draws for venture capitalists in recent years, raised $6.3 billion in the second quarter, down 41% on the year, according to data from analysts at Forrester shared with Reuters. Investors and entrepreneurs say that while the COVID-19 pandemic has boosted demand for fintechs in areas such as digital payments and online trading, it has hurt more vulnerable sectors such as online lending.

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COVID-19 took a bite out of Canada's startup M&A, but deals may be coming soon

Brief: The number of deals are down, but the chatter’s not. The COVID-19 pandemic and the accompanying economic crisis have significantly reduced the number of merger and acquisition deals, especially in the Canadian startup space. But some investors and experts speaking to the Financial Post say pent-up demand and economic upheaval could lead to a wave of activity in the next little while. “There’s no question that the M&A market is heating up,” said Rick Nathan, senior managing partner with Kensington Capital, a Toronto-based investment firm that pursues a mix of venture capital investment and private equity. Kensington has backed such Canadian tech firms as D-Wave, TouchBistro and Pandora. “I certainly can’t get into anything specific, but I can tell you that several of our portfolio companies are actively considering different kinds of M&A. That could be bulking up by buying something, or it could be that they are thinking about putting themselves in play to sell the company.” Nathan said three companies in Kensington’s portfolio have been involved in M&A activity in just the past six weeks.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Tuesday July 28, 2020:

  • Republicans in the United States have unveiled their proposed $1trillion dollar COVID-19 relief bill. The contents of the bill include lowering the weekly emergency unemployment benefit payments from $600 to $200. The bill would also authorize a second round of $1200 stimulus checks. Senate Democrats are battling against lowering the unemployment benefits and would see payments remain at $600, a vote is scheduled for the upcoming days. Furthermore, President Trump’s national security adviser, Robert C. O’Brien has tested positive for the virus marking the highest-ranking official to have contracted COVID-19 thus far.

  • For the first time, Canada has approved the use of a drug to treat patients infected with COVID-19. Remdesivir, an antiviral drug manufactured under the brand name Veklury, by Gilead Sciences Canada Inc. has been approved for treatment of patients with severe symptoms caused by the virus. Remdesivir is mainly used treat those suffering from pneumonia and require extra oxygen, or a ventilator to breath. According to a Health Canada news release, the drug has been in the trial stages for six weeks and determined the “benefits outweigh its risks.” The treatment can only be applied to patients aged 12 and older, while under strict supervision from health professionals.

  • Prime Minister Boris Johnson is once again on the defensive as the U.K. reported 119 new deaths from COVID-19 on Tuesday. He warns that although the number of new cases has dipped in Britain, the rest of Europe may be seeing signs of a resurgence. Speaking to reporters in Nottinghamshire the Prime Minister said, “amongst some of our European friends, I'm afraid you are starting to see in some places the signs of a second wave of the pandemic." The United Kingdom continues to require anyone returning from travel outside of the country to quarantine for 14 days, although he added, “we are always looking at ways in which we can mitigate the impact of the quarantine.”

  • In Japan, thousands of companies are still waiting for their coronavirus stimulus payments to come through, forcing many business owners and their employees to find part-time work. Prime Minister Shinzo Abe's ruling Liberal Democratic Party promised more than $20 billion in relief payments, however, some Japanese citizens are skeptical and believe that funds are being mishandled. Dentsu Group Inc., one of Japans most influential companies with ties to Abe’s government, won the tender to distribute the relief payments but have since outsourced most of the job to smaller companies causing a delay in distributions.

  • South Africans worried about contracting the virus are avoiding hospitals even as the number of fatalities in country appear to be quite low. Just under two per cent of people who have contracted COVID-19 have died, while that stat looks impressive, authorities are saying it may be skewed. Almost every province in the country is using a different metric to track new cases and deaths, so without a uniform system of reporting “it becomes meaningless," University of Witwatersrand vaccine expert Prof Shabir Madhin says. In Port Elizabeth a new field hospital has been erected by the private sector, however, only 30 of its 1200 beds are in use.

Covid-19 – Due Diligence And Asset Management

Even Trading Floor Diehards Are Now Embracing Work From Home

Brief: For a sense of how dramatically perceptions of remote work are changing in the coronavirus era, consider Koji Motokawa. Like many traders in office-obsessed Japan, the deputy head of fixed income at Mizuho Securities Co. had never even considered working from home until the pandemic hit. Now, for the first time since he stepped onto the trading floor 25 years ago, Motokawa spends at least one day a week outside the office and plans to keep it up. “My initial thinking was that it was going to be pretty difficult given the way markets operate,” he said. “The reality is it’s actually doable.” As Covid-19 forces financial professionals around the world to re-examine the way they operate, anecdotal evidence from Japan -- ranked last among developed markets by the OECD for work-life balance -- suggests the move toward more remote work could be widespread and enduring. Tokyo-based brokerage employees from Goldman Sachs Group Inc. to CLSA Ltd. report a similar shift in attitudes that they expect will outlast the pandemic. Motokawa says Mizuho has gradually beefed up its infrastructure for remote bond trading, including distributing extra screens and computers. In Tokyo, which has recorded more than 10,000 coronavirus cases, authorities have urged residents to avoid unnecessary trips outdoors but haven’t imposed blanket restrictions on working in offices.

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Invesco Earnings Falter in a Year Ravaged by the Pandemic

Brief: Invesco Ltd. is having a tough year, even by 2020 standards. Investors continued to yank money from the asset manager’s funds in the second quarter, bringing total first-half net outflows to about $31.6 billion, according to a statement Tuesday. The stock has tumbled more than 40% this year, versus a roughly 9% drop for an S&P industry index, putting it well below peers. Fee pressure and a move away from active management has hurt the Atlanta-based firm in recent years. While senior executives made a series of bets to keep pace in a changing industry, some have yet to pay off, creating concern among clients and investors. Invesco has aggressively pursued acquisitions ever since Chief Executive Officer Martin Flanagan, 60, joined from Franklin Resources Inc. in 2005. The moves helped boost assets under management to about $1.1 trillion, but two years of outflows put Invesco in a tougher position than peers, even before the crisis triggered by the Covid-19 pandemic. “They came into this downturn more vulnerable,” said Bloomberg Intelligence analyst Alison Williams. On Tuesday, the firm reported second-quarter adjusted earnings of 35 cents a share, short of the average estimate of 43 cents by analysts in a Bloomberg survey. The stock slid 2.9% at 11:34 a.m. in New York.

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Boaz Weinstein Piles Up 90% Gain in Hamptons, Bets on More Chaos

Brief: It’s a hedge-fund summer idyll: Chickens strut, tomatoes grow ripe and the Atlantic breeze floats over this Hamptons refuge like a sweet balm. Here, in socially distanced splendor, Boaz Weinstein is printing money. As the pandemic consumes the outside world, Weinstein has repaired to his gated estate in Sagaponack, replete with tennis court, pool and a Vegas-style card room. When New York shut down, he left his office in the Chrysler Building and decamped to Long Island, like others from high-caste Manhattan. Unlike much of that crowd, however, Weinstein has settled here to make money -- lots of it. He’s added to his profits every month this year, trading credit and derivatives of companies including Wirecard AG, retailers Staples Inc. and Macy’s Inc. and loading up on cheap closed-end mutual funds. That’s helped him outperform all of his hedge fund peers, generating an eye-popping 90% gain in his main fund after years of uneven returns. He’s attracting new money, pulling in $1 billion to his now $3 billion Saba Capital Management. And he sees room to profit, even as stocks and bonds rebound. “Markets are at an unstable place right now. I look out at the next five months, and there are lots of known unknowns,” he said in a phone interview, pointing to everything from the course of the pandemic to the U.S. election and relations with China.

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Hedge Funds in North America Attract Investors Seeking Haven

Brief: Hedge funds based in North America are providing a haven to investors grappling with rising U.S.-China tensions and a global economy stalled by the Covid-19 pandemic. About 32% of allocators plan to increase investments to North America-based managers, compared with 18% at the start of the year, a JPMorgan Chase & Co. survey found. Most other regions, including Asia-Pacific, saw decreased interest. “Covid has created a lot more investment opportunities,” said Michael Monforth, global head of capital advisory at JPMorgan. “In some respects, there is a safe haven element to investors wanting to invest in the U.S., but it’s also being driven by the investment opportunity.” Investors are betting on hedge funds headquartered in North America as the world deals with a pandemic that’s halted commerce and sparked turbulence across markets. Escalating Chinese-American tensions remain a concern as the two superpowers have clashed on issues ranging from trade to the early handling of the coronavirus.

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World’s largest hedge fund, based in Connecticut, cuts dozens from staff as coronavirus takes toll

Brief: Bridgewater Associates, the world’s largest hedge fund, has laid off dozens of employees as the pandemic has hit the company’s bottom line. In an emailed statement, Bridgewater, based in Westport, said employees will be working more from home “so we won’t need the same number of support people, new technologies are changing what type of people we need and how we serve our clients, and we also want to become more efficient.” As a result, the shifts “will produce more than normal attrition in terms of people leaving the firm this year,” but it won’t be “greatly more than normal,” it said. Those leaving Bridgewater will receive “generous severance and extended health coverage,” according to the statement. The statement did not detail how many employees are affected, but The Wall Street Journal, which first reported the layoffs Friday, said several dozen were involved. Those cut worked in the research, client-services and recruiting, according to the newspaper.

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Private Equity and COVID-19: Lessons From the Global Financial Crisis

Brief: As businesses seek to address both the immediate and long-term effects of COVID-19 on their operations, the reinsurance industry is at the forefront of conversations to create a forward-looking solution for pandemic risk in conjunction with policyholders, insurance markets and key policymakers. Countries across the developed and emerging world are trying to manage the severe economic short-term impacts of the COVID-19 crisis. Given the immense uncertainty, it will take much longer to even begin to assess the permanent implications for the world’s populations, companies and economies. The ultimate effects will, in large part, be dependent on the duration of the crisis, the length and depth of which is currently generating speculations and requires substantial analysis, according to William T. Charlton, Jr., PhD., CFA, Global Head of Private Markets Data Analytics and Research at Mercer. Mercer is an affiliate of Guy Carpenter. Due to the inherent lag in private market reporting, even the initial impact on private markets will take considerable time to fully evaluate. However, the behavior of private markets during the Global Financial Crisis (GFC) may provide some insight into the potential short-term and long-term expectations of private markets in the current crisis.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Monday July 27, 2020:

  • In the last week, eighteen states in America have shattered records for new daily cases of the novel-coronavirus, COVID-19. The United States has now reached over 150,000 deaths due to complications surrounding the virus. Starting Monday, the country has begun the first Phase 3 clinical trials for a vaccine. According to biotechnology company Moderna and the National Institute of Allergy and Infectious Diseases, part of the National Institutes of Health, the trial will be administered to 30,000 adults at nearly 100 different research sites. Each participant will be given two 100-microgram injections of the vaccine or a placebo roughly 28 days apart. Results indicated the Phase 1 and Phase 2 vaccinations proved to induce immune responses in all of the participants and are viewed as safe for further study.

  • It’s been just over 6 months since the first case of COVID-19 was diagnosed in Canada. Since then more than 110,000 cases have been confirmed in the country and over 9000 deaths have been recorded to due complications associated with the virus. Leading health officials in the country unanimously agree that on average, Canada has fared better than most of the world in terms of dealing with the pandemic. Dr. Sumon Chakrabarti, an infectious disease specialist based in Mississauga, Ontario said that the majority of Canadian hospitals were not wholly overwhelmed, “we never were at a point where we felt appreciably out of control.”

  • In the United Kingdom, prohibitions have been put in place for travelers looking for a summer escape. The U.K. will no longer allow its residents to travel to Spain for vacations as the number of new Spanish cases rose to 12,166 last week. Nearly 10,000 flights were scheduled to fly from Britain to Spain in the coming weeks. The Spanish government is now urging the U.K. to reconsider its quarantine of the Balearic and Canary islands, where cases are low but are now once again on the rise.

  • Despite having the third highest number of cases globally, Indian Prime Minister Narendra Modi claims that the country has “proved the world wrong,” but conceded “we need to remain vigilant. We have to remember that coronavirus is still as dangerous as it was in the beginning.” The number of new cases in India rose to 48,661 on Sunday and is particularly prevalent in Delhi, the country worst hit city. The state government has increased testing in the area and has begun to adapt thousands of train coaches to house make-shift hospital beds.

  • The government of Hong Kong has imposed a ban on gatherings larger than two people as a reaction to surging cases in the region. It is now mandatory to wear a mask in both indoor and outdoor spaces with fines for failing to do so will range up to 5000 Hong Kong dollars or $645 dollars U.S. The city is now facing what residents are calling a third wave, with a new makeshift hospital being set up near the airport. Since the beginning of the pandemic only 20 people have died in the city, but officials are taking precautions as cases are climbing by more than 100 a day. The relatively low case load has been attributed to strict rules preventing non-residents from entering the city.

Covid-19 – Due Diligence And Asset Management

Hazeltree and Northern Trust Collaborate to Analyze the Impact of COVID-19 on Alternative Asset Managers

Brief: Hazeltree, a leading provider of cloud-based treasury management and portfolio finance solutions, and Northern Trust Alternative Fund Services (NTAFS) today published a report, “Weathering the 2020 Storm: Market Volatility, Location Disruption and Record Volumes.” The analysis examines the market impact of COVID-19, highlighting new operational challenges facing investment managers that require immediate attention. The analysis observes trends across both NTAFS and Hazeltree clients and: compares liquidity metrics experienced in March/April 2020 versus prior periods as tracked by NTAFS and Hazeltree.  Highlights the emphasis placed upon cash and liquidity management practices during these uncertain times. Details a new range of concerns from investors, introducing questions managers can expect during investor operational due diligence reviews. Stresses the importance of robust processes and technology to effectively manage cash, liquidity and collateral during this new “work from home” operating model.“Asset managers faced pressure beginning in March, not only from market volatility, but also from needing to execute on critical operational functions in a work-from-home environment,” said Peter Sanchez, Head of Alternative Fund and Omnium Business Services, Northern Trust. “The challenges highlight the importance for alternative fund managers to have the scalability, security and systems to operationally manage such a crisis – whether in-house or through a partnership with a Fund Administrator or another provider.”

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Koch online toolkit helping businesses reopen after Covid-19

Brief: A major Koch Industries Inc. subsidiary has created an online toolkit for businesses wanted to reopen safely after pandemic-related closures. The platform is called Hygiene Ready and was developed by GP PRO, the commercial division of Georgia-Pacific. It pulls from resources made available by the Centers for Disease Control and Prevention (CDC), Occupational Safety and Health Administration (OSHA) and the World Health Organization. The GP PRO team began putting Hygiene Ready together in March and its Wichita-based parent company, Koch, highlighted those efforts in a recent article on its website. The company says that the toolkit is geared toward any business looking to safely reopen, including restaurants, retail stores, event venues and industrial facilities. It also includes training materials and updated links to Covid-19 news and guidance.

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Wells Fargo Scales Back Business

Brief: Wells Fargo & Co. is slashing costs, cutting staff and tightening up on lending to ride out the coronavirus recession. Its rivals might not be too far behind. The fourth-largest U.S. lender entered the pandemic in worse shape than its peers. The bank is still clawing its way back from a 2016 fake-account scandal that put it on the wrong side of customers and regulators. Revenue has fallen for two years in a row, and the bank recently reported its first quarterly loss since 2008. "We have not done what is necessary to run an efficient company," Chief Executive Charles Scharf said in a memo to employees this month. Wells's mix of challenges is forcing it to cut costs first, but it might not be the last. The bank's approach to belt- tightening could offer some clues about what is to come for the rest of the industry. Other big banks cut billions of dollars in costs and laid off thousands of employees after the last financial crisis, putting them in a better position to withstand this one. Some have pledged not to lay off employees in 2020. Whether they are forced to make cuts later on will depend on the length and severity of the recession.

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Covid-19 could be trigger for widespread mandate losses

Brief: Investment managers with poorer performance through the Covid-19 crisis are set to see a high number of mandate losses, research suggests. Investors in hedge funds and smart beta were among the most dissatisfied with recent performance. In a survey of 368 institutional investors and family offices, 48% said they were disappointed with hedge fund returns and 64% said the same for ‘alternative risk premia’, which is usually known as smart beta. Emerging market debt also disappointed 53% of investors, the Bfinance research showed. As much as 54% of the asset owners are terminating or likely to terminate managers based primarily on their 2020 performance, including more than 80% of family offices. Apart from hedge funds, smart beta and emerging market bonds, active strategies received positive feedback, Bfinance said, and the vast majority of investors – or 82% - said they were satisfied with how their portfolios had performed.

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Hedge Fund Fees in Free Fall Is the New Reality For a Humbled Industry

Brief: Hedge-fund fees had already been shrinking before the pandemic ripped through global markets. Now, they’re in terminal decline. One of London’s fastest-growing hedge funds is enticing new investors by agreeing to forgo performance fees until returns hit a key threshold. In Hong Kong, a fund boss is offering to cover all losses, a concession that’s almost unheard of in this rarefied world. And famed investor Kyle Bass has told clients he’ll charge his usual 20% cut of profits only if he earns triple-digit returns in a new fund he has started. Long notorious for charging high fees, the $3 trillion industry runs portfolios that are generally open only to institutions and affluent individuals. It’s going to extraordinary lengths to attract new money as the coronavirus pandemic triggers losses and accelerates an investor exodus that has plagued the industry for years. Many of the world’s most prominent managers have come to the stark realization that they need to upend the “two and-twenty” fee model that’s been a fixture for decades if they want to expand. For some smaller firms, the goal isn’t growth. It’s survival.

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Economic slowdown hits the alternative lending business

Brief: The coronavirus pandemic is hitting alternative lenders hard, with business down substantially, a handful of mortgage investment corporations stopping investors from redeeming their funds and others trying to offload their portfolios of home loans. In Ontario, mortgage registrations by private lenders fell 26 per cent in June over the same month last year, according to Teranet, which operates the province’s electronic land registry system. That followed a 45-per-cent decline in May and a 29-per-cent drop in April, when real estate sales plunged, and private lenders halted loans to assess the economic rout. Industry experts say the downturn will reveal where the weaknesses are in the sector. “The tide is going out right now. We’ll see very quickly who was naked this whole time in the private mortgage world,” said Dustin Van Der Hout, investment adviser with Richardson GMP Ltd.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Friday July 24, 2020:

  • The United States has recorded 1100 deaths for the third straight day as much of the country remains open to non-essential services like bars, shopping malls and salons. More 150 medical experts, scientists, teachers and nurses have signed a letter to political leaders asking them to shut down the country and start anew in an attempt to slow the surging COVID-19 virus. The letter states that the country is on track to lose 200,000 lives by November 1st. In Texas, one the hardest-hit states, the numbers are plateauing. A shelter-at-home order made by a judge in Starr County has gone into effect this morning and will last through August 11th.  

  • In Canada, the number of asylum seekers has gone up. There were 1500 reports of people seeking asylum in Canada in June up slightly from 1400 in May. This comes as the country tightens its land and marine borders with the United States. On Wednesday a Supreme Court decision stated that the Safe Third Country Agreement between Canada and the US violates the Canadian Charter of Rights and Freedoms. As part of precautionary measures due to COVID-19, all persons arriving at the Canadian border from the US will be turned away. However, persons already inside Canada are still able to apply for asylum.

  • Despite having the third highest death toll in the world, the United Kingdom eased major lockdown restrictions on Friday. Prime Minister Boris Johnson said that people will no longer be told to work from home or avoid public transit. Starting August 1st, Britons will be asked to return to work if possible and all bans on non-essential public transit will be lifted. The Prime Minister is putting the onus on individual businesses to take precautions in a “COVID-secure way” and says that his government is now “preparing for the worst” if a spike in cases is seen during the winter months.

  • India recorded its highest number of confirmed cases Friday with 49,000 and 740 new deaths. It is the biggest daily surge in infections the country has seen since the beginning of the pandemic. The total number of cases in the country is over 1.3 million with new test results showing that nearly one in four people in the capital of New Delhi have been infected with COVID-19. A survey tested blood samples of 21,387 people across Delhi. Among them, 23.48% were found to have COVID-19 antibodies, indicating past exposure to the coronavirus.

  • In a virtual gathering China’s Foreign Minister Wang Yi announced a $1 billion loan to Latin America and the Caribbean to allow the region access to a Covid-19 vaccine when it becomes available. A statement from the Mexican Foreign Affairs Ministry stated "China's Foreign Minister said that the vaccine developed in his country will be a public benefit of universal access, and that his country will designate a loan of $1 billion to support access [to the vaccine] for the nations of the region." Mexican President Andrés Manuel López Obrador said "we're very grateful to China, with the Chinese government, [and] the President.”

  • South Korean baseball fans will be allowed back in the stands starting Sunday despite an uptick of cases in Seoul. Initially baseball and soccer stadiums will be allowed to sell only 10 per cent of their normal tickets as social distancing must be continued in the normally condensed seating areas. Professional golf, however, will continue without spectators for the time being as health authorities begin to develop plans for crowded courses. New daily cases dropped below 50 in the country on Friday and have stayed between 20 and 60 since South Korea eased social distancing measures in May.

Covid-19 – Due Diligence And Asset Management

CFTC Postpones Prosecution of US Coin Bullion Due to Coronavirus

Brief: The US Commodity Futures Trading Commission seeks to postpone the trial of two brothers who defrauded some 150 customers of more than $8 million due to precautions over the novel coronavirus. Salvatore and Joseph Esposito, the owners of precious metals investment firm U.S. Coin Bullion pleaded guilty in October 2019 on charges of conspiracy to commit wire fraud and mail fraud. Salvatore Esposito, 48, was sentenced to seven years and three months in prison, and his younger brother Joseph, 44, to a little less than six years. In a parallel case, the CFTC filed its civil enforcement action charging US Coin Bullion and its operatives with misappropriating customer funds and engaging in fraudulent solicitations. From 2014 to mid-2019, the Espositos engaged in a phony gold business, convincing victims to invest their savings to purchase precious metals and promising big payoffs. The CFTC seeks to retrieve the money that the Orlando brothers misappropriated from clients, but it’s unclear if that will happen, as most was lost.

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Bill Ackman responds to critics of 'hell is coming' TV interview and $2.6B windfall

Brief: Hedge fund manager Bill Ackman said on Thursday that critics of his "hell is coming" declaration on CNBC and $2.6 billion windfall that appeared to follow don't understand the timing. Ackman was accused of playing up coronavirus fears after making a $27 million bet against the market that paid off big-time. "We made $2.6 billion prior six days prior to my coming on CNBC. I gave a message of optimism," Ackman told "Mornings with Maria." "We did hedge our portfolio ... to protect our investors, which is our fiduciary obligation. We didn't sell our stocks, actually. That enabled us to benefit from a recovery." Ackman said he has been "long-term bullish" on the U.S. economy. "My view was, as long as you start shutting down the country, the market will recover," he said. "The day after the appearance on CNBC, California shut down. ... New York shut down, then every state in the country, effectively almost every state, went through the shutdown process."

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Teachers pension fund sues AllianzGI over Covid-induced losses

Brief: The Arkansas Teacher Retirement System claims that AllianzGI's 'market-neutral' Structured Alpha funds put bets in place earlier in the year against the S&P 500 index falling further as the pandemic began to rear its head, shortly before it tumbled 8.5% in February then by a further 12.5% in March. The pension fund claims that, by doubling down on unprofitable trades, Allianz's investors became "dangerously exposed to even the slightest increase in market volatility or decline in equity prices", despite the vehicles being advertised as being able to protect investors during falling market conditions - including during "a severe downside market move, such as the Black Monday of 1987", according to marketing material. As detailed in the lawsuit filed on Monday, the Alpha 250 fund has lost more than 43%, Alpha 350 is down 56% an Alpha 500 has tumbled by 75%. The Arkansas Teacher Retirement System alleges the shorts against market volatility were placed in a bid for Allianz to earn its management fees in the case that February's losses were crystalised. In a statement given to the Financial Times, AllianzGI said that "while the losses suffered in the portfolio are deeply disappointing, there is no basis for legal liability".

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Secretive hedge fund boss Chris Rokos calls staff back to work in the office

Brief: The majority of Chris Rokos’ staff have returned to the hedge fund manager’s Mayfair offices following the lifting of UK coronavirus restrictions, Financial News can reveal. An email memo, sent to Rokos Capital Management’s nearly-200 employees and seen by FN, stated: “All [employees] are invited back, however only if the individual feels comfortable.” Although supposedly optional, most employees have now returned to Rokos’ office in Savile Row, according to a person familiar with the matter. The date of the return to the office is listed as 6 July. “The email was very much taken as an instruction for us to get back into the office and to stop working remotely,” the source said. A spokesman for Rokos Capital Management declined to comment. The hedge fund giant has given staff a £150 daily taxi budget. However, it added that employees who exceed the budget may be asked “to work from home until public transport is open”. The memo, sent in a Q&A format, discouraged staff to take public transport.

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Blackstone-backed quant gains 20% amid wild Covid-19 markets

Brief: A machine-learning hedge fund backed by Blackstone Group is enjoying a growth spurt after notching a 20% gain in this year’s wild pandemic markets. Bayforest Capital, which employs just five people in London, is set to oversee $235m in managed accounts over the coming month, compared to $45m at the end of 2019. It also plans to launch a fund for institutional investors later this year. A record of positive gains every month in this year’s cross-asset roller-coaster is drawing fresh client attention to the firm run by Theodoros Tsagaris, a quant with previous stints at Tudor Investment, GSA Capital and BlueCrest Capital Management. He credits Bayforest’s success to algorithms surfing fast shifts in capital flows in real time. With system trading futures based on the behaviour of different investors, and an average holding period of just eight days, the portfolio has managed to make money even as markets swing from despair to exuberance.

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Wells Fargo Pledges up to $20 Million to Support New York Economic Recovery Efforts

Brief: Wells Fargo & Company (NYSE: WFC) announced today that it pledged up to $20 million to support the New York Forward Loan Fund (NYFLF), an economic revitalization program across New York State. Initiated by New York Governor Andrew Cuomo, NYFLF is aimed at helping small businesses, nonprofits, and small landlords as they reopen following the COVID-19 pandemic. The fund purchased its first loans in July after pre-applications opened on May 26. A total of $100 million is expected to be available through NYFLF, which Wells Fargo is supporting along with other financial institutions and partners. Wells Fargo's commitment to NYFLF is the largest announced to date. NYFLF emphasizes supporting minority- and women-owned businesses and landlords who own small, multifamily properties in low- and moderate-income communities. The loans are intended to help with upfront costs related to reopening, such as inventory, marketing, or refitting for social distancing. Five Community Development Financial Institutions (CDFIs) are processing applications. NYFLF has funded 19 loans across 11 counties totaling $602,103, according to data through July 20. The average loan amount was $31,690. Seventeen loans were distributed to women- or minority-owned businesses and one loan was distributed to a veteran-owned business.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Thursday July 23, 2020:

  • With the United States surpassing the four million mark for coronavirus cases today - a quarter of that amount has come in just the past two weeks. “We’ve rolled back essentially two months’ worth of progress with what we’re seeing in number of cases in the United States,” said one American doctor. On Wednesday the COVID-19 hospital count in the country was 59.600 – roughly 300 short of America’s peak seen in mid-April.

  • A study released in the Canadian Medical Association Journal showed for-profit long-term care homes in Ontario saw significantly worse outbreaks of COVID-19 compared to their non-profit/municipality run counterparts. While profit status had no impact on whether a facility had a coronavirus outbreak, it did play a significant role on what happened once one occurred. In Ontario 57% of nursing homes are set-up to be profit-making – the highest rate in Canada.

  • In the United Kingdom, mandatory facial coverings are set to be in place as of Friday, although where they are necessary seems confusing. Citizens visiting shops/shopping centers, supermarkets, banks and take out restaurants will have to wear facial coverings. However, the public will not have to wear facial coverings in pubs, restaurants, hairdressers, movie theatres, or gyms. Enforcement of the rules will also be lax – it will be essentially up to the individual to make sure they are conforming to the new rules as businesses won’t be required to enforce them and police will only issue fines of up to £100 as a last resort for those who don’t comply.

  • European Union states have agreed on common hygiene standards for air travel. Measures include mouth-and-nose protection for passengers six years of age and older, social distancing at airports during security checks and check-in, and a high fresh-air quota in airplanes must be guaranteed. However, the social distancing plan seems to stop once you are up in the air as the middle seat does not have to remain free.

  • India reported an all-time high of nearly 45,600 coronavirus infections over the last 24 hours. As the virus continues to increase at a record pace across the country, Prime Minister Narendra Modi has tried to focus India’s attention to their relatively low death rate. However, public health experts believe the death toll is much worse than reported. A Financial Times article noted in some states, hospitals and officials have been under intense pressure to attribute the deaths of coronavirus patients to other underlying health issues such as diabetes to help keep the official COVID-19 death toll down.

  • Tokyo, Japan recorded 300+ new cases in a single day for the first time on Thursday. This news prompted Tokyo Governor Yuriko Koike to say, “I think we can consider this to be a warning that strong public cooperation is needed.” There were 920 new daily infections on Thursday across Japan, which set a record for the second straight day. The rise in infections are likely to hurt the government’s state sponsored “Go To Travel” tourism initiative as the country heads into its first long weekend since the incentive program set to boost the economy was launched.

Covid-19 – Due Diligence And Asset Management

Hedge Funds Gain Favor in Latest Sign of Rebound

Brief: Big investors including pensions and family offices are taking another look at hedge funds, as they navigate the market turbulence sparked by the Covid-19 pandemic. While the industry was hit with yet another quarter of outflows -- its ninth in a row -- the results of a Bloomberg Mandates survey suggest better times are ahead. This comes weeks after a Credit Suisse Group AG poll found a similar trend: Net demand for hedge funds was the highest in at least five years, with interest in the industry outranking others. The findings are the latest signal of a turnaround for the beleaguered industry, which has faced a tough capital-raising environment for much of the last decade as investors revolted over high fees and mediocre returns. Prominent names including George Soros’s family office and the Texas pension fund are leading the charge, pumping cash into managers in the past few months to diversify assets. Bloomberg’s mandates group surveyed 50 institutional allocators from May 14 to June 10. About half of those polled managed more than $1 billion. Here’s a look at the findings: Almost half of institutional investors re-positioning their portfolios boosted allocations to hedge funds or plan to this year. The industry emerged as the top pick among six major alternative asset classes, followed by private debt.

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U.S. SEC Chief ‘Worries’ About Retail Investors Trying to Get Rich Quick

Brief: The head of the U.S. Securities and Exchange Commission (SEC) on Thursday said he is worried about the risks to retail investors who are increasingly making short-term bets via low-cost trading platforms rather than sticking to long-term investments. “We’re seeing significant inflows from retail investors who conduct more trading than investing,” Jay Clayton said in a Thursday interview on CNBC’s “Squawk Box.” The rise of new, low-cost, easy-to-use trading apps combined with ultra-low interest rates has unleashed a flood of retail money into stocks from investors looking to cash in on the market rally. That money has often flowed into highly risky trades, including stocks that have filed for bankruptcy. Robinhood Markets Inc came under here criticism in June when a 20-year-old customer took his own life after believing he incurred a large loss using the free trading app. The firm has since expanded its educational content for options trading.“I encourage people to educate themselves, but short-term trading is more risky than long-term investing and I do worry about this risk investors take,” Clayton told CNBC.He also defended a recent agency proposal to significantly raise the reporting threshold for large institutional investment managers after critics said it would reduce market transparency.

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Commentary: Keep Emerging – and Diverse-Manager Programs on Track Amid COVID-19 Disruption

Brief: At a congressional hearing on diverse asset managers before the Committee on Financial Services in June 2019, Rep. Maxine Waters drew a line in the sand. She noted that in the past, when diversity efforts in financial services failed to gain traction, "we let it go," but she insisted that in the future, "It won't be that way anymore." She was speaking of the need to not merely discuss investing in diverse managers, but to begin taking concrete actions that will see asset owners and institutional investors actually deploy capital.Fast forward one year and attention in Washington has since turned to other pressing matters — from the upcoming election to, more recently, the response to the COVID-19 pandemic and ongoing social unrest.The attention deficit seems to underscore that while awareness can certainly help, progress will ultimately be found through a market that doesn't just recognize the challenges confronting diverse managers, but takes the necessary steps to eliminate the barriers. The data suggest investors will be rewarded for doing so, in the form of alpha and fund manager outperformance. The question facing the industry, however, is whether the market will revert to old habits and old standbys against a suddenly uncertain backdrop in which asset owners now have to contend with volatility that upsets target allocations, creates possible liquidity issues (particularly among endowments), and imposes significant due diligence challenges in a shelter-in-place world.

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Asset Managers Got Opportunistic – With Each Other

Brief: Investments in asset and wealth managers exploded, even though activity slowed substantially during March and April — the height of the economic shutdown. The PwC report looked at U.S. managers acquired by other American firms and foreign companies. Gregory McGahan, PwC financial services deals leader and a report author, expects that M&A will continue to flourish in the second half of the year. With the economic slowdown and uncertainty over the future, investors have kept up pressure on managers over fees. Managers are also racing to buy firms with some of the asset classes that have done well recently, including private credit. PwC argued that investors had the temerity to circumvent travel restrictions and other logistical problems because market volatility, economic uncertainty, and investor redemptions posed a bigger problem long term. “Some buyers swooped in on opportunities that emerged as Covid-19 intensified new or persistent problems in the market, including fee compression,” wrote McGahan and Arjun Saxena, deals strategy leader for financial services. The quest for scale and products such as ESG (environmental, social and governance) oriented strategies will drive transaction, the authors predicted. 

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Real Estate: ‘The Office is not Dead Yet’

Brief: As the prospect of a second wave of coronavirus still looms, many parts of the world are slowly reopening and people are returning to their workplaces, ever-changing social distancing measures in place. For many office-based businesses, this poses a challenge – it’s not always easy to maintain your personal space in a lift heading up to the tenth floor. But in the midst of an accelerated trend towards more flexible working, offices are not dying out just yet. It’s the way companies will use them that is likely to change, according to Paul Kennedy, head of strategy and portfolio manager for real estate in Europe at JP Morgan Asset Management (JPMAM). The future of city office lets is a major topic, he tells Funds Europe. This is not a new trend, he says.  “There’s been a trend towards flexible working, towards more technology-based solutions for many years now. If we look back, if this crisis had happened five or ten years ago, the technology wouldn’t have stood up as much. I think the conclusion we’ve reached as a business is that we can all work from home – but we don’t want to.” Office rents can be pricey, though. Regardless of how governments lift lockdowns, companies will rethink how they manage their office space in terms of functionality and safety – and in terms of saving on capital costs.

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Distress Mounts in U.S. Real Estate Market Frozen by Pandemic

Brief:The U.S. commercial real estate market is showing ever greater signs of stress, but there are still few deals to be had. Transactions fell 68 per cent in the second quarter across all property types compared with 2019 as potential buyers and sellers remained far apart on the prices of buildings, according to data released Wednesday by Real Capital Analytics. The paralysis set in despite near-record amounts of capital ready to be deployed by some of the world’s biggest real estate investors. “The buyer and seller expectations are not aligned,” said Simon Mallinson, an executive managing director at RCA. “Sellers aren’t being forced to the market because there’s no realized distress and buyers are sitting on the sidelines thinking there’s going to be distress.” Second-quarter sales plunged 70 per cent for apartments, 71 per cent for offices, 73 per cent for retail and 91 per cent for hotels, according to RCA. Industrial property transactions were a brighter spot. Sales dropped only 50 per cent in the second quarter, as online shopping thrived and manufacturers leased space to avoid supply chain disruptions. For markets to function, there needs to be some agreement on what assets are worth. But the surging coronavirus outbreak is fueling uncertainty, making the outlook for commercial property just as cloudy as it was in March when lockdowns put the economy into deep freeze.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Wednesday July 22, 2020:

  • In the United States, the Trump administration has committed close to $2 billion to secure a potential COVID-19 vaccine. The $2 billion will secure 100 million doses developed by Germany’s BioNTech and United States pharmaceutical company Pfizer. The federal government would then distribute the potential vaccine free of charge to American citizens. The deal also includes the option for the White House to purchase a further 500 million doses, subject to the vaccine being granted regulatory approval.

  • In Canada, a document presented to parliament showed the country’s Defence Minister Harjit Sajjan was briefed about the COVID-19 crisis on January 17th. A medical unit with the Canadian Forces Intelligence Command briefed the Defence minister 17 days after the World Health Organization was informed of cases of pneumonia with an unknown cause in Wuhan, China. Canada’s government incident response group, which was led by Prime Minister Justin Trudeau, didn’t meet to discuss COVID-19 until 10 days later on January 27th. The Opposition Conservative government said the latest details are “just another example of how this Liberal government was slow to act” on COVID-19.

  • In the United Kingdom, the head of the country’s vaccine taskforce says there is a possibility a coronavirus vaccine could be rolled out by Christmas. While it usually takes up to two years for a new medicine to gain approval from the European Medicines Agency and the UK Medicines and Healthcare products Regulatory Agency, a coronavirus vaccine could be put into the “emergency use” category and become available early. This news comes after Oxford University scientists successfully completed the second phase of developing a potential COVID-19 vaccine.

  • A bizarre story out of Italy where seven police officers were arrested after allegedly helping drug dealers evade the country’s coronavirus lockdown a few months ago. The officers are accused of signing off on declarations that made it appear the drug dealers had been checked when moving about during the lockdown even though residents were only allowed to leave home for reasons of absolute necessity. The police officers connection with the organized crime syndicates went back as far as 2017.

  • Australia’s state of Victoria, home to the locked down city of Melbourne, reported a record 484 new cases on Wednesday. The city has been in lockdown for two weeks now and government officials had hoped the infection rate would begin to plateau. Chief Health Officer Brett Sutton said “we’re going to look at 500-600 cases per day. I absolutely don’t want us to go there.”

  • So much for just a little cold…. Brazilian President Jair Bolsonaro has tested positive for COVID-19 for a third time since falling ill with the virus on July 7th government officials confirmed on Wednesday. The latest test was carried out on July 21st and yielded the positive result, yet officials say Bolsonaro is still in good condition. According to media reports, Bolsonaro often strolls around his grounds of his presidential palace to greet supporters and has continued to do so since testing positive. President Bolsonaro also touted the malaria drug hydroxychloroquine for helping him through the process even though Brazil’s Infectious Diseases team published a report last week urging medical professionals to stop using the drug to treat coronavirus due to it being proven to be ineffective and causing collateral damage.

Covid-19 – Due Diligence And Asset Management

Teachers Pension Fund Sues AllianzGI Over Covid-Induced Losses

Brief: The Arkansas Teacher Retirement System claims that AllianzGI's 'market-neutral' Structured Alpha funds put bets in place earlier in the year against the S&P 500 index falling further as the pandemic began to rear its head, shortly before it tumbled 8.5% in February then by a further 12.5% in March. The pension fund claims that, by doubling down on unprofitable trades, Allianz's investors became "dangerously exposed to even the slightest increase in market volatility or decline in equity prices", despite the vehicles being advertised as being able to protect investors during falling market conditions - including during "a severe downside market move, such as the Black Monday of 1987", according to marketing material. As detailed in the lawsuit filed on Monday, the Alpha 250 fund has lost more than 43%, Alpha 350 is down 56% an Alpha 500 has tumbled by 75%. The Arkansas Teacher Retirement System alleges the shorts against market volatility were placed in a bid for Allianz to earn its management fees in the case that February's losses were crystalised. In a statement given to the Financial Times, AllianzGI said that "while the losses suffered in the portfolio are deeply disappointing, there is no basis for legal liability". It added that the lawsuit "mischaracterised" the products as they are not supposed to be market neutral, and as such the firm intends to "defend itself vigorously against these allegations".

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“A New Golden Age”: Why Industry Pioneer Dixon Board Believes Hedge Funds Are Now the Place to Be

Brief: For Dixon Boardman, the CEO and founder of Optima Asset Management and renowned fund-of-hedge funds pioneer, the dramatic turbulence that shocked markets earlier this year is unlike anything ever seen during his three decades-plus of investing. Boardman – an industry trailblazer who launched Optima back in 1988 – believes the spiralling Q1 drop was more sudden and swift than even the epochal Wall Street Crash of 1929, while the sharp rebound that sent stocks soaring despite the ongoing coronavirus crisis was almost as remarkable. “There’s never been anything like what happened in March,” says the industry veteran, reflecting on the 2020 turmoil. “It’s absolutely extraordinary - I’ve never known anything like it. We are, in a sense, in uncharted territory.” New York-based Optima manages money across an assortment of funds-of-funds, single-manager hedge funds, and multi-manager programmes built for institutional and high-net worth investors. The long-running firm was acquired last year by FWM Holdings, the parent of Forbes Family Trust, a global multi-family office group which originally managed the wealth of the Forbes family before expanding to other family offices and wealth groups. The group has some USD6 billion in assets under management. The current coronavirus-driven downturn is setting the scene for a substantially-altered investment landscape, says Boardman, offering up a wealth of lucrative investment themes and ideas to a hedge fund industry that has frequently struggled with decidedly lukewarm returns in recent years.

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Can You Invest Without Meeting Your Hedge Fund Manager? We Say No

Brief: With travel currently all but impossible, physical meetings severely restricted, and video conferencing tools ubiquitous, the question arises as to whether in-person meetings are still needed or even desirable. Will the current situation mean an end face to face meetings, and an end to the need for business travel? Clearly that isn’t the case. While telephone and video conferencing are great ways to communicate, and have led to incredible increases in productivity, they are still limited substitutes to in-person meetings. While it is true that a lot can be done remotely, especially gathering raw data, in our experience there always comes a point where only physical presence can provide the last, and often most important part of the equation. It is extremely difficult to establish deep, trusting relationships, without being able to really look your counterpart in the eyes. Non-verbal cues are very important and can easily be missed if one is limited to electronic means of communication. When it comes to investing, where understanding opportunities as well as clients’ needs in detail are paramount, not being able to have face to face meetings would be a major hindrance. This is particularly acute when it comes to due diligence. Split into an investment and an operational part, understanding both is an integral part of a well-structured investment process, and the current period should not warrant process adjustments.

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Hedge Fund Redemptions Down Again in May

Brief: Hedge fund redemptions continued to decline from their Covid-19 pandemic-fuelled peak of USD85.6 billion in March. Net redemptions in May were USD8.0 billion, 0.3 per cent of industry assets, according to the Barclay Fund Flow Indicator published by BarclayHedge, a division of Backstop Solutions. In spite of the redemptions, the hedge fund industry continued to grow. Assets under management rose to USD3.04 trillion, up from USD2.99 trillion a month earlier based on trading profits of USD49.9 billion in May. Data from 7,000 funds (excluding CTAs) in the BarclayHedge database showed funds in the US and its offshore islands again shaping the hedge fund industry flow trend in May, as funds in the region experienced more than USD8.5 billion in redemptions. Investors drew another USD1.2 billion from funds in the UK and its offshore islands. Elsewhere in the world, investors added nearly USD3.0 billion to funds. “As the Covid-19 pandemic spread, economies shut down, retail sales and services collapsed, unemployment levels stayed extremely high and many hedge fund investors chose to look for opportunities elsewhere,” says Sol Waksman, president of BarclayHedge.  Over the 12-month period through May, hedge funds experienced USD196.8 billion in redemptions. May’s USD49.9 billion trading profit brought the industry’s 12-month investment performance into positive territory with an USD8.5 billion profit. Total industry assets of USD3.04 trillion at the end of May were up from USD2.99 trillion at the end of April, though down from nearly USD3.07 trillion a year earlier.

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Coronavirus to Dampen Net Inflows Through 2024 – Report

Brief: Net inflows across investment strategies are expected to be muted until 2024 due to the impacts of the COVID-19 pandemic. A report by management consultant Oliver Wyman andMorgan Stanley, published Monday, forecast a drop in net inflows growth rate to between 2% and 2.5%, down from the growth rate of between 3% and 4% recorded in 2019.Key structural trends — including downward pressure on fees and increasing longevity — will continue to negatively affect net inflows and are expected to be accelerated by the pandemic.While the pandemic will also negatively affect money managers' revenues, the report showed that these revenues could continue to grow at 1% per year, boosted by increased allocation to actively managed strategies.Still, Oliver Wyman and Morgan Stanley also predicted that revenue streams associated with emerging markets and private markets strategies will grow at an annualized average of 7% through 2024."Leading up to the crisis, we were observing an acceleration of churn, with flows from active-to-active 2.9 times the level of inflows into passive. The major difference that we expect through the recovery is that the intensity of the shift to passive will be moderate for those that can demonstrate relative outperformance," the report said.

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The COVID-19 Crisis Could Launch a Wave of New Asset Managers

Brief: The end of the coronavirus pandemic could bring a large number of new asset managers. Data from eVestment show that the number of new firm launches tends to spike following economic crises. Here’s why, according to data firm: As markets contract, asset management employees may be laid off. Instead of seeking out a new job, they start their own firms. Additionally, some of these employees leave their jobs voluntarily, with the goal of taking a new investment approach presented by market turmoil. “You do a lot better when you’re a new young eager face when the times are tough,” John Alexander, director of consultants and investors at eVestment, said by phone. In addition to the post-crisis attitudes of potential investors, Alexander said that there is a generational opportunity for younger investors to step in. “Generationally, we’re kind of facing a weird brain drain in investment management,” Alexander said, pointing to aging executives who are contending with succession planning and firm continuity. According to eVestment’s data, over 300 new asset management firms launched in 2009, just after the financial crisis. This was the highest number of single-year launches recorded since 1954, eVestment said. Most of those launches were in the hedge fund and alternative investment sector. 

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Tuesday July 21, 2020:

  • After more than four days of negotiation and deliberation, the European Union struck a landmark deal on a coronavirus aid package for its member states. The €750 billion aid package is centered on a €390 billion programme of grants to economically weakened member states – this is down from the original €500 billion that was proposed back in May. EU leaders also signed off on the bloc’s next seven-year budget, worth a whopping €1.074 trillion. French President Emmanuel Macron, a key figure in the building of the package, called the result a “historic day for Europe.”

  • In the United States, the Republican controlled Senate and Democratic-led House of Representatives have less than two weeks to come together on a new coronavirus relief package of their own. The timing is due to the prior relief package and its aid running out for the enhanced unemployment benefits that were put in place when tens of millions of American lost their jobs during the pandemic. Congress so far has committed $3 trillion in relief, but much more is needed now as in the 12 weeks since United States President Donald Trump signed the bill into law, the number of American COVID-19 cases have tripled and are closing in on four million overall.

  • Canada’s good news story of flattening the curve is starting to show cracks as health experts believe lockdown fatigue, most notably in younger Canadians is leading to more COVID-19 cases. For instance, in British Columbia, a province that looked to be under control, experienced a surge in cases over the weekend noting 102 new cases. This has caused the province’s chief health official to sound the alarm and declare B.C. at a tipping point. Ontario also reported its most cases in three weeks as they try to slowly move the province into the last stage of reopening with close to 60% of those new cases in people 39 years old or younger.

  • In the United Kingdom, the public finances were exposed on Tuesday leading to what most already know: the government has been spending a lot of money during the coronavirus pandemic. Between April and June, the deficit of tax receipts over public spending was £174 billion. At the same time last year, that number was £20.3 billion and at the height of the 2009 global financial crisis it was £76.8 billion. In response to the numbers, Chancellor Rishi Sunak said the public finances would have been “far worse” if the government had not taken unprecedented action to protect incomes during the lockdown.

  • A new study is showing one of India’s hardest hit cities was exposed to more of the virus than originally thought.  Testing of close to 22,000 New Delhi residents was conducted between June 27th and July 10th. Of those sampled, 23.5% showed antibodies, which indicates past exposure to the virus. The results have now pitted public experts vs. health experts. The public experts believe the high amount showing antibodies is actually good news for possible herd immunity, which would make it harder for the virus to spread at a rapid rate. Health officials are pleading for continued isolation measures as a significant portion of the population are still vulnerable and there is not yet definitive proof that herd immunity actually exists.

  • The Philippines said they would ramp up testing for COVID-19 and President Rodrigo Duterte is talking tough for those who aren’t following government protocol. President Duterte threatened to arrest anyone who spread the virus, refused to wear masks or keep a safe distance from others. In an address on Tuesday, the president said it was a serious crime to spread COVID-19 and “we do not have any qualms in arresting people”. As bad as this might sound, it’s actually a step down in tone for President Duterte who warned back in April violators of lockdown rules could be shot for causing trouble.

Covid-19 – Due Diligence And Asset Management

Bernanke and Yellen Refocus Blame on Hedge Funds

Brief: Just a reminder from your friendly neighborhood former Federal Reserve Chairs: Hedge funds probably blew up the world’s biggest bond market in March and helped usher in unprecedented central bank action. Ben S. Bernanke and Janet Yellen, who combined led the Fed for more than a decade, delivered testimony last Friday to the House Select Subcommittee on the Coronavirus Crisis. Much of their remarks focused on the urgent need for Congress to take further fiscal action to offset the economic shock caused by the pandemic. However, in their writing on the Brookings Institution website, they also took some time to lay out their thoughts on steps taken by their successor, Jerome Powell, and his fellow central bankers. Here is how they described the market chaos in March: “Uncertainty about the pandemic led hedge funds and others to scramble to raise cash by selling longer-term securities. The upsurge in the supply of longer-term securities, including Treasuries, was more than dealers and other market-makers could handle. Key financial markets, including for Treasury securities, experienced substantial volatility. To stabilize these markets, which like the repo market play a critical role in our financial system, the Fed purchased large quantities of Treasuries and mortgage-backed securities, again serving as market maker of last resort…

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Game Changer? How the Recovery Fund Will Shake Up EU Bond Markets

Brief: The European Union is about to vault into the ranks of the world’s biggest supranational issuers after it gave the green light to a recovery fund financed via joint debt, a move that carries the potential to shake up euro debt markets. EU leaders have agreed a deal on a 750 billion euro ($858 billion) fund to address COVID-19 damage; together with its seven-year budget, that unlocks a total 1.8 trillion euro spending boost. Until now, the EU as an institution has contributed a fraction of the bloc’s roughly 8.5 trillion euro market of government and agency bonds. But the money it’s about to start raising could push its debt levels above that of member states such as Netherlands. “For the first time, the European Union will be a major force on sovereign debt markets,” said Berenberg chief economist Holger Schmieding. The EU currently has around 54 billion euros in outstanding debt, having borrowed nothing last year and just 5 billion euros in 2018. But if the entire 750 billion euros is raised on bond markets, issuance could amount to 262.5 billion euros next year and in 2022, with the remaining 225 billion euros coming in 2023, ING senior rates strategist Antoine Bouvet estimates.

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Secretive Hedge Fund Boss Chris Rokos Calls Staff Back to Work in the Office

Brief: The majority of Chris Rokos’ staff have returned to the hedge fund manager’s Mayfair offices following the lifting of UK coronavirus restrictions, Financial News can reveal. An email memo, sent to Rokos Capital Management’s nearly-200 employees and seen by FN, stated: “All [employees] are invited back, however only if the individual feels comfortable.” Although supposedly optional, most employees have now returned to Rokos’ office in Savile Row, according to a person familiar with the matter. The date of the return to the office is listed as 6 July. “The email was very much taken as an instruction for us to get back into the office and to stop working remotely,” the source said. A spokesman for Rokos Capital Management declined to comment. The hedge fund giant has given staff a £150 daily taxi budget. However, it added that employees who exceed the budget may be asked “to work from home until public transport is open”. The memo, sent in a Q&A format, discouraged staff to take public transport. Earlier this month, the UK government lifted lockdown restrictions and encouraged staff back to work by 1 August. The majority of employees at hedge funds are still continuing to work from home amid childcare and safety concerns over public transport.

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Brookfield Bets on Single-Family Rentals with US$300M Fund

Brief: Brookfield Asset Management Inc. is the latest Wall Street giant to plant its flag on Main Street lawns. Brookfield recently acquired a controlling stake in single-family landlord Conrex, which operates more than 10,000 rental homes across the Midwest and Southeastern U.S., according to people familiar with the matter who asked not to be named because the transaction isn’t public. In addition, Brookfield has raised US$300 million, including some of its own capital, for a vehicle called Brookfield Single Family Rental that will acquire and renovate homes. The firm intends to leverage the Conrex platform for that effort, one of the people added. A representative for Brookfield declined for comment. Conrex didn’t immediately respond to a request for comment. Wall Street discovered single-family rentals, once the domain of mom-and-pop landlords, in the aftermath of the U.S. foreclosure crisis, when firms like Blackstone Group Inc. and Starwood Property Trust Inc. spent billions buying up distressed assets. Rent collections on single-family homes have held up during the pandemic, and large investors have continued to ink deals for the properties. JPMorgan Chase & Co.’s asset-management more than doubled its investment in a joint venture to develop roughly 2,500 rental houses with landlord American Homes 4 Rent, according to a statement in May. That same month, Koch Industries Inc.’s real estate arm invested US$200 million in Amherst Holdings LLC’s single-family rental business.

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Hedge Fund Assets Surging as Investor Redemptions Ease Amid Performance Recovery

Brief: Hedge fund assets have risen sharply in the past three months, as strategy performance recovers and investors scramble to capitalise on opportunities emerging amid the post-Covid sell-off environment. The total amount of capital invested in hedge funds globally swelled by USD220 billion between April and June - a quarterly record – to reach some USD3.177 trillion overall, according to new data published by Hedge Fund Research. The surge was driven both by improving strategy performance – HFRI’s Fund Weighted Composite Index gained more than 9 per cent in Q2, its best quarterly performance since the global financial crisis – and falling investor redemptions, as outflows dropped 65 per cent between Q1 and Q2 this year. Following the pandemic-driven Q1 redemption bloodbath, when investors yanked more than USD33 billion from hedge funds, redemptions eased to USD12.2 billion (0.3 per cent of total industry capital) in Q2 this year, as markets rallied and hedge fund performance improved. HFR said investors rotated and rebalanced capital as a result of the pandemic, and are now positioning around opportunities in the second half of this year. “Extreme volatility in H120, including both the Q1 spike and Q2 reversal, represents a sharp and dramatic contrast to the beta-driven, risk-on sentiment which dominated 2019, creating an opportunity-rich environment for long/short hedge fund performance generation,” HFR president Kenneth Heinz said on Monday.

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Markets Are High on Stimulus, Not Health, Researchers Find

Brief: A new study shows that investors have every right to fear that the remarkable rebound in equity markets since March is from extraordinary government actions, not a return to economic health. StyleAnalytics, a quantitative research firm, evaluated the behavior of factors and subfactors in the second quarter, including value, yield, and growth. The firm found that factors, or stock characteristics, were not behaving like they have historically during enduring market recoveries. StyleAnalytics’ findings give pessimistic investors evidence that they’re correct to worry and that the rally may not have long-term legs.  The study “suggests the post-Covid [outbreak] market rally is not as much an expression of ‘getting back to normal’ as it is an expression of ‘the government stimulus is helping us get through this mess’.” Less a recovery and more a lifeline,” according to the two authors of the research, Damian Handzy, chief commercial officer, and Tom Idzal, managing director for North America. In the U.S., the Russell 3000 gained 22 percent in the second quarter, with most of the increase coming in April. Looking more closely, high volatility as well as growth stocks were the biggest winners. The biggest losers were value and dividend yielding stocks. That’s bad news for investors looking for signs of a real recovery. 

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