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Covid-19 Diligence Briefing

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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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 20, 2020:

  • In the United States, many places in the country are still struggling with containing the coronavirus. In Florida, the state has reported at least 10,000 COVID-19 cases in 10 of the past 11 days. According to data from a state agency, 49 hospitals in Florida had no ICU beds available over the weekend. The city of Los Angeles, California reported their highest number of hospitalizations in a day with 2,216, and on Sunday, half of the reported 2,848 new cases were people under 41 years old. Because of situations such as these, the White House administration, including President Donald Trump, will resume its daily coronavirus news briefings as of Tuesday.

  • In Canada, the House of Commons is in session with the hopes of pushing through the legislation of extending the wage subsidy until end of the year, while providing one-time payments to Canadians with disabilities struggling during the pandemic. The Bloc Quebecois is expected to support the bill, which gives the federal government enough votes to move forward. The Opposition Conservatives plan to push back, citing the scheme needs to be simplified.

  • In the United Kingdom, the  government’s health secretary made clear their goal is for global access to a coronavirus vaccine if/when one becomes available. UK Health Secretary Matt Hancock made the declaration during a House of Commons session on Monday as preliminary results from an Oxford University vaccine trial induced strong immunity response in patients. “The UK is not just developing world leading vaccines, we’re also putting more money into the global work for a vaccine than any other country. With likeminded partners, we’re working to ensure that whoever’s vaccine is approved first, the whole world can have access,” Hancock said.  

  • France’s new facial covering guidelines have been put in place as of today. As mentioned last week, the country moved up its initial plan of phasing in facial coverings from August 1st to Monday after seeing an uptick in cases. Masks are now required in France’s supermarkets, shopping malls, banks, stores and indoor markets. Facial coverings were already in place for public transport, museums and places of worship. A fine of €135 is in place for those who don’t comply.

  • Some possible good news coming out of the European Union (EU) national leaders summit. German officials have said a sketched framework with the new basis of a deal are being drawn up after four days of painful negotiations. Media reports had French President Emmanuel Macron losing patience and angrily banging his fist against the table due to the “sterile blockages” by the Netherlands, Sweden, Denmark and Austria. The recovery fund is set to be €750 billion with €390 billion in grants, down from the initial €500 billion. The four days mark the bloc’s longest ever summit.

  • The rescheduled 2020 Olympics to be held in Tokyo, Japan are still close to a year away, but a recent survey shows citizens want no part of it. A Kyodo news survey showed only 23.9 % are in favour of holding the Olympic and Paralympic Games as scheduled next summer. Thirty-six percent think the Olympics should be postponed again, while 33.7% think they should be outright canceled. The Olympics is just another knock against the Shinzo Abe government as they deal with frustrated citizens on their initial handling of the coronavirus pandemic, and its plan to boost the economy with a travel domestic plan.

  • Australia’s acting chief medical officer has said it could take weeks to subside a surge in COVID-19 cases in Melbourne. The state of Victoria, whose capital Melbourne is in a partial lockdown, reported 275 cases on Monday, down from the record 438 three days earlier. The lockdown of Melbourne shows how easily this virus can throw a country’s plan into chaos. Just one month ago, Australia was discussing a possible travel bubble with neighbouring New Zealand and how the country essentially eradicated the coronavirus. Victorian Premier Daniel Andrews has said it’s too soon to declare measures such as the lockdown and telling residents to cover their faces when they leave their home has flattened the outbreak.

Covid-19 – Due Diligence And Asset Management

KKR Raises $950 Million for Fund Dedicated to Riskiest CMBS

Brief: KKR & Co. has raised $950 million for a fund dedicated to buying the riskiest slices of new commercial mortgage-backed securities as it expands in a part of the market that has been battered by the Covid-19 pandemic. The firm closed KKR Real Estate Credit Opportunity Partners II, a successor fund to a $1.1 billion vehicle it raised in 2017 to buy so-called “B-pieces” of CMBS. Such slices are the first to take losses when mortgages underpinning the securities sour. KKR is among the most active buyers of B-pieces, which banks and other financial institutions often seek to offload at steep discounts. Risk-retention regulations mandated by the 2010 Dodd-Frank Act require market participants to keep slices of CMBS as a form of “skin in the game,” though they’re allowed to sell the portions to third parties like KKR that hold the securities on their behalf. In the first half of 2020, B-piece buyers purchased about 60% of deals’ required risk-retention portions. KKR has invested more than $1.25 billion in the securities since 2017. Junior portions of CMBS have dropped this year as investors fret about the future of commercial real estate amid a pandemic-induced economic slowdown.

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Hedge Funds Stick to the Sidelines on Oil: John Kemp

Brief: Hedge fund position-taking in crude and products remains desultory as uncertainty about the future direction of prices and the course of the coronavirus pandemic compounds the normal summer-time trading slowdown. Hedge funds and other money managers purchased the equivalent of 24 million barrels of futures and options in the six most important oil futures and options contracts in the week ending on July 14. Purchases reversed sales of 21 million barrels the previous week, extending a slight rise in petroleum positions evident over the last month, after a much stronger upward trend over the previous two months. Last week’s purchases were concentrated in Brent (+11 million barrels) and European gasoil (+7 million) with smaller buying in NYMEX and ICE WTI (+1 million), U.S. gasoline (+5 million) and U.S. diesel (+1 million). The European focus may reflect concerns about the resurgence of coronavirus and its potential impact on oil consumption in the United States.

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Fund Managers Navigate ‘Night of the Living Dead’ in Small Caps

Brief: Investors are searching for bargains in the world of U.S. small-caps, as the beaten-down asset class prepares for what may be the worst earnings season in its history amid a resurgent coronavirus pandemic. Small-cap companies are expected to post a year-over-year earnings declines of approximately 90% as companies report their second-quarter results over the next several weeks, compared to a 67% hit for mid-caps and 44% for large-caps, according to Jefferies. That would be the largest drop since the fourth quarter of 2008, data from S&P Dow Jones Indices showed. While some investors had counted on a third-quarter rebound, many are now concerned that potential coronavirus-fueled economic shutdowns in California, Florida and Texas will deal a disproportionate hit to smaller firms, which are more directly tied to domestic spending and have been among the biggest beneficiaries of stimulus measures delivered by the Federal Reserve and Congress. People fear a “‘Night of the Living Dead’ of small-cap companies that would otherwise go bankrupt without the benefit of the stimulus and record-low interest rates,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management.

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Global Real Estate Investment Plunges 33% Amid Covid Pandemic

Brief: Global real estate investment fell by 33% in the first half as the coronavirus pandemic battered economies and disrupted deals. The Asia-Pacific region took the biggest hit, with volumes down 45% from the year-earlier period, because it was the first struck by the outbreak, according to a report from broker Savills Plc. Investment dropped by 36% in the Americas and 19% in Europe, the Middle East and Africa. With the tourism industry shut down for months by government lockdowns, hotels saw investment decline by 59% in the first half of the year, followed by a 41% drop for retail properties, according to the Savills report. Industrial and residential properties fared better. Investment is “expected to remain well below pre-pandemic levels for the rest of 2020 as investors wait for market clarity,” Simon Hope, Savills head of global capital markets, said in a statement on Monday. “However, certain sectors are expected to outperform as investors focus on secure assets, namely logistics, residential and life sciences.” The International Monetary Fund has forecast that global gross domestic product will shrink 4.9% this year as the pandemic wears on. IMF chief economist Gita Gopinath has said the cumulative loss for the world economy this year and next as a result of the recession is expected to reach $12.5 trillion.

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Jamie Dimon’s Warning for the U.S. Economy – Nobody Knows What Comes Next

Brief: Attempting to forecast the path of the American economy right now is like peering into a dark well — nobody knows how deep the hole goes. Even Jamie Dimon, CEO of JPMorgan Chase and veteran prognosticator of all things financial, is flummoxed. As head of the financial system’s bellwether, a bank with $3.2 trillion in assets that serves almost half of U.S. households and a wide swath of its businesses, Dimon has a unique vantage on the world’s largest economy.“The word unprecedented is rarely used properly,” Dimon said this week after JPMorgan reported second-quarter earnings.  “This time, it’s being used properly. It’s unprecedented what’s going on around the world, and obviously Covid itself is a main attribute.” More than four months into the coronavirus pandemic, the financial damage wrought by the outbreak has yet to fully register. Take JPMorgan, for instance: The bank added $15.7 billion to reserves for expected loan losses in the first half of this year. But second-quarter loan charge-offs in its sprawling retail bank actually declined 3% to $1.28 billion, or roughly the same level seen before the virus.That’s because the $2.2 trillion CARES Act injected billions of dollars into households and businesses, masking the impact of widespread closures. As key components of that law begin to phase out, the true pain may begin.

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Private Equity-Owner Companies Fuel Surge in Defaults

Brief: Private equity-backed companies are driving defaults in the Covid-19 recession, with companies owned by Blackstone Group, KKR & Co., and Apollo Global Management among those that have run into trouble, according to Moody’s Investors Service. More than half of companies that defaulted in the second quarter are owned by private equity firms, Moody’s said in a report this week. For example, Blackstone-backed Gavilan Resources and Apollo’s CEC Entertainment filed for bankruptcy, while KKR’s Envision Healthcare Corp. defaulted through a distressed debt exchange. U.S. defaults have more than tripled since the end of the first quarter, as companies with buyout debt proved vulnerable in the downturn, according to Moody’s. The credit rater expects the default rate to keep rising to about 12 percent next year as it continues to be fueled by private equity-owned borrowers, according to Moody’s analyst Julia Chursin, who spoke toII by phone Friday. Chursin said that private equity firms, being skillful financial engineers, will try to avoid bankruptcy through distressed debt exchanges. While still constituting a default, debt swaps can help buyout firms salvage their equity stakes as the company’s lenders take a haircut.

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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 17, 2020:

  • Starting with some good news from the United Kingdom as Captain Tom Moore will now be forever known as Captain Sir Tom Moore after being knighted on Friday. The 100-year-old became a national celebrity during the coronavirus pandemic raising close to £33M walking laps in his backyard. The knighting ceremony also marked the Queen’s return to public duties after the pandemic forced her to cancel almost all of her engagements.

  • In the United States, CNN is reporting an unpublished document prepared for the White House coronavirus task force recommended that 18 states in the “red zone” should roll back reopening measures amid surging cases. The “red zone” as outlined in the 350+ page document are states that report new cases above 100 per 100,000 population and a diagnostic positive test above 10%. California, Florida, Arizona and Texas are some of the states that fall into this category. Roll back measures suggested includes closing bars and gyms and wearing a mask at all times outside of the home while maintaining social distancing.

  • In Canada, its most populous province is starting to move into its final stage of reopening. Twenty-four of Ontario’s thirty-four public health units as of Friday will allow restaurants to resume indoor service while businesses such as bars, gyms and theatres can also welcome back customers. However, the heavily populated areas of Toronto, Hamilton, Niagara and Windsor-Essex will have to remain in stage 2 as they are still trying to reduce their COVID-19 numbers. Ontario reported 111 new cases on Friday.

  • Spain are urging the Catalonia region, home to four million people, including residents of Barcelona to stay home as they have seen an increase in COVID-19 cases. The stay-at-home order is one stop short of a mandatory confinement but marks the strongest measure the Spanish government has made since emerging from its lockdown last month. The country reported 628 new cases on Friday, the most since the beginning of May.

  • Israel is reimposing restrictions as the country sees a continued rise in new cases. As of Friday, gyms and exercise studios will closed to the public, as well as indoor dining in restaurants. Tighter restrictions will also happen over the weekend with the closure of stores (pharmacies + grocery stores exempted), beauty salons, museums and tourist attractions. The government also announced later in the month beaches will be closed to the public on weekends. Israel reported 1,800 new cases on Thursday and the government is facing heightened pushback from the public, including demonstrations outside the Prime Minister’s residence.

  • India and Brazil have both crossed COVID-19 milestones that neither wished they would have had to reach. India now has more than one million coronavirus cases, joining Brazil and the United States as the only countries to do so. Several Indian states are imposing focused lockdowns as government officials try to protect their areas and economies. Meanwhile, in Brazil, their health ministry announced the country has reached two million cases. The country has also reported 76,688 deaths and have recorded more than 1,000 daily COVID-19 deaths on average.

Covid-19 – Due Diligence And Asset Management

CEO of World’s Biggest Money Manager Says Wearing Masks Will Help Economy Avoid Another Shutdown

Brief: BlackRock CEO Larry Fink told CNBC on Friday that wearing masks is critical to helping the U.S. economy recover from the damage caused by forced business closures because of the coronavirus. “We are witnessing many, many states reopening, but reopening without wearing masks. We need a world of compassion and that compassion is meaning wearing a mask,” Fink said on “Squawk Box.” “If we all wore masks, if we all cared about our fellow citizens a little more, we will be resolving this crisis much sooner.” However, a failure to wear masks and take other precautions may allow the virus to continue to spread and potentially necessitate more strict mitigation measures, he said. “If the disease continues to grow, if mortality rates grow from where they are today, then we’re going to have to see another shutdown of parts of our economy, and then the small and medium business … are going to have a harder time,” Fink said. In states such as Texas and California, parts of their reopening plans have already been pulled back or paused due to record-breaking Covid-19 case increases and spiking hospitalizations. Daily coronavirus cases in the U.S. hit another record, topping 77,000 on Thursday, according to data from Johns Hopkins University.

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BlackRock Profit Beats Street Estimates as Markets Rebound

Brief: BlackRock Inc’s (BLK.N) results topped Wall Street estimates on Friday, helped by investors flocking to the world’s largest asset manager’s bond funds in the second quarter as global financial markets rebounded strongly from a COVID-sparked brutal selloff in March. BlackRock ended the quarter with $7.32 trillion in assets under management, up from $6.84 trillion a year earlier. The S&P 500.SPX rose 20% in the second quarter after falling by that amount in the first three months of 2020 as the coronavirus pandemic slammed the economy.“We had more conversations with our clients in the last six months than we have probably had in aggregate in years,” Chief Executive Larry Fink said in an interview. “Clients are looking to BlackRock more than ever before.”BlackRock reported a 21% jump in quarterly profit as investors poured money into its fixed-income funds and cash management services.The New York-based company's net income rose to $1.21 billion, or $7.85 per share. Analysts had expected a profit of $6.99 per share, according to IBES data from Refinitiv. (bit.ly/2ZEPkNv)

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U.S. Bank CEOs Warn of Tougher Economic Road After Recent Gains

Brief: The road to recovery for the U.S. economy will be uneven, unclear and uncertain as the coronavirus retains its hold on business and Americans’ everyday activities, according to the heads of the nation’s biggest banks. In the wake of brighter data on employment, retail sales and housing over the last two months, most financial-institution executives curbed their enthusiasm about the economy during the kickoff to the latest earnings season -- even as some of their own profits rose. “There is no question as reopening has occurred, we’ve seen a pickup in that activity,” David Solomon, chief executive officer at Goldman Sachs Group Inc., said on the firm’s July 15 earnings call. But with a recent uptick in Covid-19 cases in several states “and this uncertainty persisting, I think you’ll see a flattening in that economic pickup and that will slow the progress we make.” JPMorgan Chase & Co. CEO Jamie Dimon was just, if not more, skeptical that the recent pace of improvement in the economy will endure. “You’re going to have a much murkier economic environment going forward than you had in May and June,” Dimon said on JPMorgan’s July 14 call. “You are going to have a lot of ins and out. You are going to have people scared about Covid. They’re going to be scared about the economy, small businesses, big companies, bankruptcies, emerging markets. So it just could be murky.”

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Global Hedge Fund Industry Buffeted by Headwinds, says New Report

Brief: The global hedge fund industry is currently facing a number of headwinds, from fee pressure, increased redemptions and liquidations, to the decreasing new fund launches  as investors around the world look towards defensive strategies, according to a new report from ResearchAndMarkets.com. But despite the tough times, the industry saw a double-digit annualised return in 2019 for the first time in the past six years. The Global Hedge Fund Industry: Growth, Trends and Forecasts 2020-2025 report highlights that the United States currently accounts for three-quarters of assets under management globally in the sector. Despite hedge fund activity in other regions globally expanding alongside that of the United States, the country also accounts for 3,405 of the 5,523 institutional investors active in hedge funds and 3,319 of the 5,383 active hedge fund managers. The report also takes a look at fees and how due to investor pressure, fund managers in some places have given up the traditional 2-20 fee structure for 0 per cent management fee and 30 per cent performance fee. 

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Credit Managers Pessimistic on Global Economy

Brief:Credit portfolio managers remain cynical on the global economy despite the recovery of equity markets since March, according to the second-quarter survey from the International Association of Credit Portfolio Managers. The vast majority of surveyed credit managers, 87%, forecast rising loan defaults over the next 12 months globally. By region, 95% see defaults rising in North America, 91% in Europe, and 82% in Australia. The least negative region appears to be Asia, with 67% of surveyed managers believing corporate defaults will rise in that region over the next 12 months. "I think that's a reflection that Asian countries have managed the (COVID-19) pandemic in a way that they look significantly better, but of course things change day to day," said Som-lok Leung, IACPM's executive director, in a telephone interview.Mr. Leung said credit managers feel there is a disconnect between equity markets and what they are dealing with on a day-to-day basis. "Most of the IACPM members are banks," he said. "These people are managing bank portfolios which are primarily corporate credit loans." Those companies are in distress, he said, "dealing with their lines of credits, asking for amendments, extensions, all these kinds of things to weather the current storm."

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Private Equity Hitting the Breaks on Outside Legal Spending

Brief: Private equity firms in the U.S. and the U.K. are cutting back on outside legal spending amid an M&A slowdown that began even before the coronavirus pandemic, according to a May 2020 survey conducted by Apperio, a U.K.-based legal spend analysis company. Nearly all U.S. respondents - 98% - anticipated a decline in spending, the report found, with 83% expecting outside legal spending to contract by 6% or more.

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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 16, 2020:

  • In the United States, it was announced earlier in the week that the government was rerouting coronavirus information such as hospital data directly to them instead of first going to the Centers for Disease Control and Prevention (CDC). Some of the information no longer available on the CDC website includes the current inpatient and intensive care unit bed occupancy, health care worker staffing and personal protective equipment supply status and availability. The government’s Department of Health and Human Services (HHS) says the CDC’s way of gathering hospital information is out of date and inadequate in today’s day and age. Critics of the Trump administration point out having the data go directly through a government filter first threatens to undermine medical data as being presented free of political bias.

  • In Canada, rumours of Atlantic Canada extending their travel bubble to the rest of the country are indeed just that: rumours. The Atlantic travel bubble of Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador has been operating since July 3rd and fairly successful with no major outbreaks. Newfoundland’s Premier had floated the idea of opening the borders to rest of the country as of this Friday, but now admits that was just a rough estimate. The farthest any of the four provincial leaders are willing to go is New Brunswick Premier Blaine Higgs who is considering loosening the restrictions to Quebec residents who live close to their border.

  • In the United Kingdom, the first clinical trials from Oxford’s University COVID-19 vaccine are set to be published in a medical journal on Monday. According to a report from the Financial Times, a senior Oxford scientist said the vaccine gave a double boost to the immune system of 1,000 trial volunteers, without significant side-effects. The full research backed by pharmaceutical company AstraZeneca is set to appear in The Lancet.

  • After seeing signs of an increase in coronavirus infections in Paris and some other regions, France will be moving up their mask-wearing order to begin next week. During France’s Bastille Day holiday, President Emmanuel Macron announced face masks in public indoor spaces were set to be enforced starting August 1st. Up until now, France had only required people to wear face coverings on public transport, or in public spaces where social distancing wasn’t possible.

  • A Russia-backed hacker group has been accused of trying to steal COVID-19 related vaccine research from Canada, the United Kingdom and the United States. All three country’s intelligence agencies said the group, APT29 – also known as Cozy Bear and the Dukes are behind the activity. The same group was accused of hacking the Democratic National Committee before the 2016 U.S. election. A Russian Kremlin spokesperson said Russia “has nothing to do” with the hacking attacks.

  • India reported a new daily record of 32,695 coronavirus cases as the national count inches closer to one million. The Indian Medical Association said 99 doctors have died, while another 1,302 are infected with COVID-19. The association is calling for shorter work hours for health care workers following safety concerns as the fatality rate for doctors (7.6%) is three times higher than the national average of 2.5%.

  • In Japan, Tokyo has raised its coronavirus level to the highest “red” level as the Governor describes the situation in the country’s capital as “rather severe”. Health experts have noted infections among young people and asymptomatic cases are rising in Tokyo. Fearing a second wave in the country, rural municipalities are asking the central government to suspend a major “Go To” travel aid campaign, aimed to boost domestic tourism. The government though plans to move forward, citing caution and fear that the world’s number three economy is set to shrink at its fastest pace in decades.

Covid-19 – Due Diligence And Asset Management

Private Equity Titans Turn to Europe for Mega-Deals

Brief: The U.S. is no longer the center of the private equity universe. Firms announced $143 billion of deals outside the U.S. in the first half, or almost 60% of the world total, according to data compiled by Bloomberg. That’s on track for the highest full-year proportion in almost two decades. And for the first time since 2003, no U.S. targets were among the five largest deals. As the U.S. grapples with a pandemic that’s still infecting thousands by the day, private equity firms are taking longer to do business, with dealmakers unable to meet in person and companies in hibernation. Meanwhile, a relative winner is emerging from the crisis: About half of this year’s non-U.S. activity came from Europe. “This points to the long-term trend for larger deals outside the U.S. as international markets mature,” said Scott Moeller, director of the M&A Research Centre at City, University of London. “It also appears Covid-19 is hitting the U.S. more strongly, which is impacting the ability to do deals despite the large amounts of unspent money available to PE funds.” Private equity started 2020 with more cash on hand than ever, according to data provider Preqin, and dry powder rose to nearly $1.5 trillion as of June 30 as dealmaking slowed. Capital-raising also dropped in the second quarter as lockdowns kept investors at home.

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Morgan Stanley Posts Record Profit on Trading Boom

Brief: Morgan Stanley posted a record quarterly profit on Thursday that blew past analysts’ expectations as another of Wall Street’s big investment banks gained from huge swings in financial markets due to the coronavirus crisis. The bank wrapped up second-quarter results for the big U.S. lenders that shook out along expected lines. Trading powerhouses Morgan Stanley and Goldman Sachs performed better than Main Street rivals JPMorgan Chase, Bank of America and Citigroup, which had to build massive reserves for loans that may go bust. A hallmark of Gorman’s tenure as CEO has been the bank’s decade-long expansion into wealth and asset management, businesses that diversified the bank’s revenue streams and provide balance against the unpredictability of its trading business. Gorman said the decision to keep the bank’s consumer loan business small also helped this quarter. Credit cards and small business loans are expected to be badly hit by the COVID-19 pandemic, and rival bank Goldman Sachs had to set aside $1.6 billion for loans that could go bad.

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Ray Dalio’s Bridgewater Flagship Fund Tanks 21% as Quants Resume Slump

Brief: Machines are continuing to feel the pain. Morgan Stanley’s latest Quant Trends report lays bare that quantitative hedge funds — systematic macro and commodity trading advisers, which trade futures, securities and currencies — are still lagging after failing to capitalise on the volatility caused by the Covid-19 induced market turmoil. Quant Trends, a 69-page report seen by Financial News, found that Bridgewater Associates, the world’s biggest hedge fund, also continues to struggle in 2020. Bridgewater’s Pure Alpha strategy was down 20.6% this year to the end of May. But according to a source close to the situation, Bridgewater's All Weather fund – its risk parity strategy – is faring relatively better, down only 2.8% in the year to date. The report also found Quant hedge fund heavyweight Renaissance Technologies’ Renaissance Institutional Equities Fund is down 10.9% in 2020 until the end of May. AHL Dimension, the multi-strategy hedge fund run by listed hedge fund Man Group, fell 5.6% for the year ending May 2020. Man Group’s AHL Alpha quant fund is up 2.9% over the same period, a person familiar with the matter told FN. Quant firms were hit badly by the March market meltdown, particularly caught off guard by a spike in fixed-income volatility. Data from Morgan Stanley shows many leading quants have failed to improve their performance subsequently.

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Some Managers See Return to the Office; Others Aren’t so Sure

Brief: Abrupt shelter-in-place mandates in March aimed at slowing the spread of COVID-19 sent millions of office workers home to work remotely. Now, more than three months later, many plan to eventually be back in the office — but more than a few are still uncertain of when (or if) their offices will reopen .A Callan survey of investment managers, published in late June, found 57% of those polled planned to be back in the office in the months before October, with one-quarter expecting a return in September and 17% expecting a July return. But 41% were noncommittal and didn't have a set return date.Some saw a few positions permanently working remotely, with 79% seeing up to a quarter of their workforce staying home full time. At the time of the survey, 87% of managers surveyed said at least 90% of their employees were working remotely. Since the survey's publication, however, there has been a surge in COVID-19 cases as the summer weather coaxed more people outdoors. Should a second wave of cases arise in the fall, the number of firms opting to have their employees work remotely will likely increase.

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World’s Wealthiest Lower Their Private Equity Expectations

Brief: As the pandemic was unfolding earlier this year, the world’s wealthiest families began doubting that private equity investments could beat gains from stocks, according to a new report from UBS Group.The Swiss bank probed global family offices worth an average $1.6 billion during the three weeks from February 19 to March 13 as stocks were plummeting on Covid-19 fears— and again in May as they were rebounding in the pandemic. Fifty-one percent of wealthy families said in May that they expected private equity to outperform public investments, down from 73 percent in early March.“At the height of the crisis when liquidity was everything, family offices’ immediate reaction was to view private equity with greater caution,” UBS said in the report. “After economies locked down, family offices’ expectations for returns declined.”Private equity has been a favored alternative investment of family offices, with a majority viewing it as an important driver of returns, according to the survey. Institutional investors such as pensions also have been targeting the asset class, expecting a premium for the illiquidity risk they’re taking in locking up capital for years in private equity funds.

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Blackstone to Shutter Real Estate Fund That Held CMBS

Brief: Blackstone Group Inc. is closing a real estate fund that used leverage to load up on commercial mortgage backed securities, investments that have slumped during the Covid-19 pandemic. The Blackstone Real Estate Income Master Fund, with about $1.1 billion of total investments at year-end, including those purchased with leverage, will sell the assets and distribute the proceeds to shareholders, the company said in a regulatory filing this week. Its net assets have declined from almost $773 million at year-end to $553 million as of May 31. The fund suffered a 24% decline in March as markets swooned. It had generated an average annual return of 5.52% over five years through 2019.CMBS delinquencies in the U.S. surged to 3.59% in June from 1.46% in May, the largest month-over-month increase on record, according to Fitch Ratings. With consumers staying home and shopping online, hotels and mall-based retailers are missing mortgage and rent payments. “An orderly wind down” would provide shareholders with the “best path to maximize portfolio recovery” while also getting them some cash, Blackstone said in the filing late Monday. The funds recently built a strong cash position “and have begun to see a recovery in pricing since the recent trough related to the outbreak of Covid-19,” the firm said. As of May 31, almost 10% of the fund’s net assets were in cash, according to company documents. At year-end, the master fund held about $687 million of CMBS and an additional $227 million of residential mortgage backed securities, with both categories including debt bundled by government sponsored agencies as well as private issuers.

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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 14, 2020:

  • In the United States, California Governor Gavin Newsom reissued a new set of closures for his state. Bars and indoor restaurant dining will be banned throughout the state, while indoor religious services, gyms, hair and nail salons are once again off-limits in most of the state. Over the last two weeks, America’s most populous state has watched its counties coronavirus watch list rise from 19 to 30, which now accounts for 80% of California’s population. Elsewhere in the country, CDC Director Dr. Robert Redfield believes Americans are finally coming around to the idea of facial coverings. “If we all wore face coverings for the next four, six, eight, 12 weeks, across the nation, this virus transmission would stop, Redfield said on Tuesday.

  • In Canada, multiple news outlets are reporting the land border closure with the United States will be extended into August. As of right now, the agreement, which is reviewed each month, is set to expire on July 21st. According to the reports, Canadian senior government officials state the arrangement will be rolled over for another 30 days until August 21st. The news of the extension comes after Canadian Prime Minister Justin Trudeau and United States President Donald Trump had a phone conversation on Monday that covered a number of topics, including the border closure.

  • United Kingdom’s government will be adopting the measure of having the public wear face masks in shops and supermarkets. The new rules will come into effect as of July 24thand those failing to comply could face fines up to £100. A report from the Academy of Medical Sciences is also sounding the alarm that the UK must prepare for a potential new wave of the coronavirus that could lead to a “reasonable worst-case scenario” of 119,900 COVID-19 related deaths by June 2021. Medical experts are imploring the government and citizens to use the remaining summer months to reduce the risk of health services being overwhelmed to save lives in the winter.

  • As France celebrates Bastille Day, a national holiday in the country, President Emmanuel Macron also announced its government’s plan to have masks worn in public mandatory. On Tuesday, President Macron said the new measures will come into effect as of August 1st and will primarily target enclosed public spaces but could also apply to public events held outdoors. In the national television interview, Macron added that France will be among the first countries to have access to a potential coronavirus vaccine developed by French pharmaceutical company Sanofi with testing made available to all French citizens hopefully in the near future.

  • In the Philippines, police are set to conduct house-to-house operations to find COVID-19 patients under home quarantine and transfer them to isolation facilities. Government officials are also calling on the public to report those who they believe to be COVID-19 positive and are possibly hiding and report them to authorities. All of this news comes as a fresh lockdown has affected 250,000 in Navotas, one of 16 cities that make up Manila. Those living in one of the poorest areas in Manila will go into lockdown as of Wednesday or Thursday as a full set of guidelines are still being worked on.

  • Australian states are tightening restrictions on movement as the COVID-19 hotspot in the state of Victoria continues to show new cases. Active cases in the state rose to 2,000 with 270 detected in the last 24 hours. New South Wales, home to Sydney, are also seeing a spike in cases, so other states like South Australia have canceled their plans to reopen the border as of July 20th. Meanwhile, Queensland introduced a mandatory two-week quarantine for people who have visited two areas in Sydney’s western suburbs.

Covid-19 – Due Diligence And Asset Management

Wanted: Signs of V-Shaped Recovery In Earnings Reports

Brief: Equity investors are no longer losing sleep over the short-term hit to company earnings from coronavirus lockdowns, instead they are looking for early evidence to support the V-shaped recovery narrative that has lifted stocks out of their mid-March crash. As Europe Inc starts churning out trading updates expected to show a more than 50% dive on average in second-quarter profits, many investors are keen to see whether the market bounce back can be sustained. European stocks have on average risen a whopping 36% from March 16 lows sending their valuations soaring to over 17 times their projected annual profits, well above the historic average of 14 according to Refinitiv data, indicating investors are happy paying a premium to buy stocks despite the uncertainty. Many companies pulled their guidance during the peak of the coronavirus crisis, leaving investors in the dark for the rest of the year, prompting them to write off the first-half of 2020. “One of the things that we’re watching for most closely is those companies that did withdraw guidance, do they now feel that they have enough visibility to return (to) giving guidance”, said Sunil Krishnan, head of multi-asset funds at Aviva Investors.” Flying blind into the earnings season, investors are eager to get a concrete sense of how companies are coping on the ground.

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VC Fundraising Hasn’t Slowed Down – For the Big Funds

Brief: Venture capital funds closed in the first half of 2020 have boasted one of the largest fundraising totals in the past decade — raising more money in just six months than VCs in all of 2017, 2015, or the preceding years. This is according to the latest industry report from PitchBook and the National Venture Capital Association, which tracked venture capital activity through the end of June. The Silicon Valley Bank and compliance software firm Certent also contributed to the report. “While many of these funds likely began fundraising before the uncertainty of the pandemic affected the markets, closing these massive vehicles over the last two quarters remains an impressive feat,” the report stated.  Funds that closed during the first half of 2020 had raised a total of more than $42.7 billion — “which already surpasses the full-year total for every year of the decade apart from 2016, 2018, and 2019,” PitchBook and the NVCA said. This “lofty” total was largely driven by so-called mega funds, defined by the report as those with at least $500 million in assets. Of the 148 funds that closed in the six-month period, 24 were mega funds, according to PitchBook and the NVCA. “This explosion of outsized funds drove the 2020 median fund size back over $100 million for the first time since 2007,” the report stated. In 2019, by comparison, the median fund size was $50 million.

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Coronavirus: Virgin Atlantic Finalizes £1.2bn Rescue Deal

Brief: Troubled airline Virgin Atlantic has finalised a rescue deal worth £1.2bn. The package includes support from its main shareholder, Virgin Group, and loans from outside investors. It also includes deferring hundreds of millions of pounds owed both to Virgin Group and to fellow shareholder Delta Air Lines. Virgin Atlantic had initially hoped to obtain emergency funding from the government, but ministers said any subsidies would be a last resort. The funding comes largely from existing shareholders and a new investor, hedge fund Davidson Kempner Capital Management. The company said the plan paved the way for the airline to rebuild its balance sheet and return to profitability in 2022. The Covid-19 outbreak plunged Virgin Atlantic into an acute crisis. Like other airlines, it was forced to ground most of its fleet for months and is not due to resume services until next week. The company had initially hoped the government would step in, but ministers made it clear taxpayers' money could only be considered once all other options had been exhausted. Under the package announced on Tuesday, the airline will receive loans worth £170m from Davidson Kempner, while Virgin Group, its biggest shareholder, will put in a further £200m.

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Wall Street Signals Economic Worry With Rush to Defensive Assets

Brief: The constant refrain on Wall Street is that markets have broken from pandemic reality, yet the evidence keeps suggesting otherwise. The S&P 500 staged a late-session reversal on Monday on fresh virus fears that underscore the jitters behind the global rebound in risk. The latter keeps taking place alongside a historic bid for safety and elevated equity volatility. Those signals of investor fear are appearing in the highest quality bonds, where the more than $13 trillion pile of sub-zero yields has threatened to surpass the March peak. In the safest exchange-traded funds, which hold more gold than ever before. Under the equity surface, where valuations point not to exuberance but to continued defensiveness in favor of growth stocks. As companies prepare to report how they fared at the pandemic peak, this bifurcated market is one way to make sense of risk appetite that seems to defy economic logic. “The V-shaped equity market is deceptive,” said Erik Knutzen, the chief investment officer of multi-asset strategies at Neuberger Berman. “Far from a vote of confidence, the rally has been led by a handful of defensive, U.S. large-cap growth stocks, and it has not been backed up by a similar rebound in more economically sensitive sectors and regions or in Treasury yields.” Much has been made of the apparent disconnect between Main Street and Wall Street after stocks staged the fastest rally in history as the world’s largest economy sunk into recession. With the economic fallout of the coronavirus still unfolding, the fact that global equities trade at about 20 times their forward earnings is often a cause for worry.

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Hedge Fund Manager Singh Calls Trump’s Handling of Coronavirus ‘An Incredible Gift’

Brief: President Donald Trump’s handling of the coronavirus outbreak early this year was “an incredible gift” for investors because it kept markets stable long enough for some to protect their portfolios, Axon Capital co-founder Dinakar Singh told investors this month. Trump has justified his public assurances that the virus will quickly go away by arguing he needs to be “a cheerleader” for the United States to avoid creating “havoc and shock.” The United States has the highest number of confirmed coronavirus infections and deaths in the world. “We simply never believed ‘what happens in China stays in China,’” Singh wrote in a letter to investors last week that was seen by Reuters. “Trump talking down COVID-19 risk gave investors an incredible gift — it kept markets resilient much longer than they should have, and enabled us to ensure our portfolio was sensibly positioned.” The White House did not immediately respond to a request for comment. Axon, a 15-year-old hedge fund which oversees roughly $1 billion, gained 24.3% in the first half of the year, thanks to bets on technology giants, managed-care stocks and Japanese companies, according to the letter. In the last days Axon extended gains and is now up 30%.

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Investment Association Warns of New Scams Targeting Retail Investors

Brief: The Investment Association (IA) has warned that retail investors are facing new and sophisticated attempts by fraudsters to get them to invest in bogus investment products and disclose their personal details in the process. In a report on Tuesday, the IA said investment managers have reported that organised criminal gangs are impersonating their products, particularly bonds, and promoting them through fraudulent price comparison sites and cloning brands with fake documents. The gangs are also targeting potential victims through sponsored links on Facebook and Google. As well as using the names and addresses of staff at real investment management firms. The estimated loss to savers is currently estimated at around £4mln, with around 300 incidences reported to date. IA said reports of the scam had spiked around three months after the coronavirus lockdown, with many investors contacting firms to enquire about unreceived payments before realising they had been conned. The IA said retail investors should be on the lookout for the details of any contacts offered to them, as well as any instances of cold calls. The body also said investors should be wary if they are placed under time pressure to part with their cash, a common fraud tactic.

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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 13, 2020:

  • In the United States, Florida continues to be the new epicenter of the coronavirus in the country setting a single day record for coronavirus cases over the weekend. Florida health officials recorded 15,300 new cases on Sunday. According to data from Johns Hopkins University, if Florida was a country, the Sunshine State would rank fourth highest in reporting new cases and 10th overall in total cases. Florida has an estimated population of around 20 million people. At least 35 of America’s 50 states have seen a rise in new COVID-19 cases compared to the previous week.

  • Canadian Prime Minister Justin Trudeau announced on Monday that the federal government would be extending its emergency wage subsidy program until December 2020. The program covers 75% of wages up to a maximum of $847 for workers at eligible companies and non-profit organizations. According to a CBC report, the program’s uptake has not been as robust as the government had hoped. As of July 6th, the wage subsidy had paid out just over $18 billion to over 252,000+ companies. Elsewhere in the country, Quebec Premier Francois Legault announced Monday that as of Saturday July 18th, people must wear masks in all public indoor spaces. The province is leaving the enforcement up to merchants and owners of the indoor public spaces and those who don’t comply could face fines ranging from $400, to $6,000.

  • A United Kingdom study seems to mirror a study from Spain earlier in the month that suggests immunity to COVID-19 doesn’t last very long. The UK study released over the weekend noted antibody responses start to decline 20 to 30 days following the first symptoms of the coronavirus. The study’s sample size was fairly small taking into account 65 patients with confirmed COVID-19 up to 94 days after showing symptoms, along with 31 health care workers. The subjects had antibody tests conducted every one-to-two weeks between March and June.

  • The Spanish region of Catalonia has reported more than 1,000 coronavirus cases in the past two days in an apparent COVID-19 flare up in the country. The region, located in Spain’s northeast, is known for its agriculture and attracts thousands of seasonal workers from all over the country. Over the weekend, a judge rejected the regional government’s attempt to reimplement home isolation for the area stating the measures would be “indiscriminate” and “disproportionate”.

  • India has experienced four straight days of 26,000+ coronavirus cases. The increase of numbers has forced regions such as Kashmir and Bengaluru to reinforce lockdown restrictions. The country of over 1.3B people now has over 850,000 COVID-19 cases, which now includes three generations of Bollywood’s Bachchan family.

  • The Philippines reported their largest daily increase in coronavirus deaths on Monday. A health ministry official reported 162 deaths, the biggest single day jump in Southeast Asia to date, along with 2,100+ new infections. Since President Rodrigo Duterte eased one of the toughest and longest lockdowns back on June 1st, the number of COVID-19 infections have tripled to 56,259. Health officials have warned of a risk of further fatalities and infections as the country struggles to verify thousands of suspected cases.

  • In Brazil, President Jair Bolsonaro is adjusting to his first week of life with the coronavirus, trading in his rallies, mingling with local business owners and fans for isolation and video calls. President Bolsonaro received some good news though over the weekend as his wife and daughters have so far tested negative for the virus. According to a member of the presidential medical team, Bolsonaro took hydroxychloroquine last Monday to Friday. The drug touted by President Bolsonaro and United States President Donald Trump has no proven effect on the treatment of COVID-19 and its studies were recently put on hold by the World Health Organization (WHO). According to the WHO, Brazil and the United States have accounted for 50% of the world’s new coronavirus cases.

Covid-19 – Due Diligence And Asset Management

Wall Street Regulator Will Watch Markets From Home Until October

Brief: The U.S. Securities and Exchange Commission will allow most employees to continue working from home at least until October as the Wall Street regulator extends accommodations initiated in response to the coronavirus pandemic. SEC Chairman Jay Clayton said in an email to staff late last week that the agency had been functioning well with employees working remotely and that the extension would allow time to see how schools and other organizations approached reopening after the summer. The 4,000-person SEC in March was one of the first federal agencies to tell employees to stay home due to the public health emergency. “It makes sense to use our flexibility,” Clayton said in the July 10 email reviewed by Bloomberg News. “As just one of many potential examples, if in September your child’s school physically reopens in one form or another, I don’t want you to be unnecessarily distracted from dealing with that in the best way possible.” The move comes as schools grapple with how to resume classes in the face of a resurgence of Covid-19 infections across large swaths of the country. The SEC has offices in major cities including Washington, New York, Miami and Los Angeles. An SEC spokeswoman declined to comment.

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NYC Hedge Funds Angle for Work-From-Home Windfall on Their Taxes

Brief: Hedge fund managers who fled Manhattan to work from their second or third homes this year could end up saving millions of dollars -- and cost New York City dearly. Investment firms that pay the city’s unincorporated business tax -- a 4% levy that brought in more than $2 billion last year -- may be able to slash their bills because, for the first time, most of their income is being earned outside Manhattan. The UBT is assessed on the bottom lines of businesses operating in New York City that aren’t organized as corporations. “The UBT isn’t imposed on all of a business’s income,” said Timothy Noonan, a partner at the law firm Hodgson Russ. “It’s only imposed on the portion allocated to the city. For service businesses, the rule is simple: You look to where the services are being performed.” Right now, plenty of those services are being carried out in tony enclaves where portfolio managers, traders and analysts own homes and often live, usually part-time. Think Greenwich, Connecticut, or Palm Beach, Florida. For New York City, which is already facing a severe fiscal crisis --- revenue has plunged $9 billion since January -- that may mean yet another financial hit. The city’s Independent Budget Office forecasts revenue from the UBT will fall 17% this year to $1.7 billion, a decline that could accelerate if many of the city’s most profitable businesses use work-from-home policies to save on taxes.

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Amid Pandemic, Wealthy U.S. Families Approved for Government Loans

Brief: Private investment firms that manage the fortunes of wealthy individuals and their kin were approved for millions of dollars in taxpayer-funded relief loans designed to help small businesses weather the coronavirus lockdown, according to a review of recently released government data. The companies - often referred to as “family offices” - approved for the forgivable loans from the Small Business Administration (SBA) included those that oversee money for the family that co-owns the National Basketball Association’s Sacramento Kings; the former manager of a multi-billion dollar hedge fund firm; and a serial Las Vegas entrepreneur. The new data from the U.S. Treasury Department and SBA shows only that the loans were approved from the Paycheck Protection Program (PPP) but does not say how much was disbursed or if they had been returned or forgiven. Still, it was not always clear why the families found it necessary to apply for emergency cash, usually for less than $1 million, given the substantial funds available implied by having private investing vehicles. “The PPP was meant for struggling small businesses who aren’t able to operate at normal capacity,” said Andrew Park, senior policy analyst at Americans for Financial Reform. “This is akin to dipping their hands into a charity jar.”  Among those approved: Rothschild Capital Partners LLC, a New York-based firm that manages money for its chief executive, David D. Rothschild and others, got the go-ahead for a loan of up to $350,000 to retain eight jobs. 

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Pandemic Shifts Investor Perception of ESG and ‘Social’ Factor, Finds New Survey

Brief: Environmental, social, and governance (ESG) factors have grown more important since the onset of pandemic, with a new survey sponsored by BNP Paribas Asset Management showing the ‘social’ aspect coming into greater focus. The study, conducted by Greenwich Associates, showed that 81 per cent of respondents already take ESG considerations into account in all or part of their portfolios, with a further 16 per cent planning to do so. The leading reasons were to positively impact society or the environment (80 per cent), reduce risk (58 per cent) and meet stakeholder needs (47 per cent). Almost a quarter of respondents, 23 per cent, said that ESG has become ‘more of a focus/more important’ as a result of the Covid-19 crisis.  French respondents led the way, with 42 per cent thinking that ESG has become more important; whereas the proportion in Germany was notably low at just 3 per cent. The ‘social’ considerations were deemed significant, with 70 per cent of respondents expecting it to become extremely or very important as we move forward. The importance of social criteria rose 20 percentage points from before the crisis, closing the gap on Environmental (up 11 per cent to 74 per cent) and Governance (up 4 per cent to 76 per cent) factors. 

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Wealthy Investors Worry About Lack of Cash if Pandemic Returns

Brief:The fallout from coronavirus has provoked fears among the world’s wealthy, with the majority planning to curtail travel and move closer to family in a world they see permanently altered by the pandemic. More than half of respondents in a survey of wealthy investors by UBS Group AG said they feared not having enough liquidity in the event of another pandemic, while a similar percentage expressed worry about leaving sufficient money to their heirs. The crisis “feels very personal,” said Bonnie Park, head of wealth planning for UBS in the Americas. “In the U.S. specifically, 82% of investors feel their lives have changed permanently.” To be sure, the poor and working classes have borne the brunt of the economic fallout from Covid-19, which has triggered the worst economic contraction since the Great Depression and resulted in tens of millions of layoffs. Of the wealthy investors surveyed, 70% said they’d been financially affected by the pandemic, with 36% of those describing the impact as “significant.” Younger investors indicated they were disproportionately affected by Covid turmoil. More than 70% of wealthy millennials said their finances were impacted by the pandemic and a similar percentage said they anticipated having to work longer to make up for the losses, compared with just 34% of Baby Boomers. Millennials were also twice as likely as boomers to have extended financial support to family and friends.

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Wall Street Forges a New Relationship to Data in Coronavirus Age

Brief: Alternative data has been a buzzword on Wall Street for years. Never has demand been greater than during the coronavirus era. For many professionals, fundamental and technical stock analysis now take a back seat to epidemiological charts and real-time economic signals. Macro economists and money managers spend days tracking everything from Covid-19 reproduction rates to the number of restaurant reservations on OpenTable. When it comes to data on the virus itself, market operators have their own unique set of obsessions, often different than what the rest of the world is focused on. Relentlessly forward-looking, investors have become all but inured to the economic reports that once set Wall Street’s pulse. “Even though we’re going to have sharply down second-quarter GDP numbers, and down second-quarter earnings, people aren’t looking at the news that was. People are looking forward,” said Sandy Villere, a portfolio manager at Villere & Co. In 2020, that means new sources and new standards of interpretation. Following is a rundown of the coronavirus data investors say they’re most interested in, plus a sampling of high-frequency measures they track. And finally, views from a variety of strategists on why stocks haven’t turned south at the sight of rising Covid cases and a stalling real-time recovery.

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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 10, 2020:

  • In the United States, Florida, Texas and California – the three most populous states in America each experienced a record jump in the number of deaths on Thursday. During all of this, United States President Donald Trump is visiting Miami-Dade County on Friday in an attempt to shore up votes ahead of November’s election. Miami-Dade County is seen as the epicenter of the crisis in Florida right now with a 33% positivity rate. However, there might be some good news for America – the drug remdesivir has shown a 62% reduction in risk of death due to COVID-19 compared to standard care, according to a new study. Remdesivir was the drug the United States government recently purchased three months’ worth of, which was almost the entirety of Gilead Sciences production.

  • The Canadian government is saying any decision about the Canada-United States border will be made, “by Canadians, for Canadians”. The news comes after a bipartisan group of 29 lawmakers in the United States sent a letter to Canada’s Public Safety Minister Bill Blair and United States Acting Homeland Security Secretary Chad Wolf urging both countries to “immediately craft a comprehensive framework for phased reopening of the border.” The Canada-US land border has been shut down to all but essential travel since March 21st and will remain closed until at least July 21st.

  • During an online question and answer session with the public, United Kingdom Prime Minister Boris Johnson said the government will likely become increasingly insistent that citizens wear face masks in confined spaces but wants to return to a situation where people feel comfortable to shake hands again. While shaking hands in the near future might be wishful thinking, UK residents can go on vacation abroad if they so choose. As of Friday, quarantine measures for those travelling to the UK from around 70 countries have been lifted. Those arriving from high-risk countries still need to quarantine for 14 days, but with many destinations exempt, millions of Britons can take summer holidays without having to stay at home upon returning.

  • France’s prosecutors are launching an investigation into massive fraud of the country’s temporary unemployment scheme with criminals pocketing €1.7 million. Investigations first launched in the Toulouse and Limoges regions revealed 13 of the 16 offices “were confronted with massive fraud in the payment of compensation.” France had launched the unemployment scheme in late March with 13.6 million workers taking advantage of the program as of June 22nd.

  • Heading into the weekend, Japanese host and hostess clubs have been asked to ensure they abide by the rules to help stop the spread of the coronavirus. The nightlife spots in Tokyo have become the new hotspots in a resurgence of infections with a record high of 243 new cases in the area on Friday. COVID-19 infections in Tokyo have been slowly rising since the government lifted a state of emergency about a month ago.

  • Australia’s state of Victoria reported a record 288 new cases of COVID-19 on Friday. Brett Sutton, Victoria’s chief medical officer said the new record was “a pretty ugly number” and warned of higher tallies in the coming days. Sutton also urged Melbourne residents who are now in the midst of a six-week lockdown, to wear facial coverings in situations where physical distancing is impossible.

Covid-19 – Due Diligence And Asset Management

Financial PR Firms Took PPP Money. Do They Need It?

Brief: For the most part, hedge funds were not among the small businesses announced this week that qualified for the 4.9 million low-interest government loans granted so far under the Paycheck Protection Program. But several of the public relations firms they employ to burnish their brands and finesse negative headlines were. Among the recipients are Prosek Partners, which was approved for a loan of between $2 million and $5 million, according to data from the Small Business Administration; Gasthalter & Co., which was approved for between $150,000 and $350,000, Dukas Linden Public Relations, which was approved for between $350,000 and $1 million; and Peppercomm, which received between $350,000 and $1 million, according to the data.  Prosek’s clients include Bridgewater Associates — the largest hedge fund firm in the world, managing roughly $160 billion — while Gasthalter & Co. represents several other boldface hedge fund names. Asset managers have performed strongly relative to other industries amid the pandemic, thanks to solid profit margins and strong performance in some strategies. But executives at public relations firms that represent them say that their advisors and attorneys advised them to apply for the loans, given that they qualified under small business guidelines — and that the aid has enabled them to continue to service their clients without disruption.

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A $6 Billion UBS Hedge Fund Crushes Peers

Brief: A UBS Asset Management hedge fund beat peers in the first half with relative-value trades that shorted pandemic-struck stocks, and is now pouncing on the market’s next dislocations. The $2.2 billion UBS O’Connor multi-strategy fund gained 11.5% through the end of June, according to a person with knowledge of returns who declined to be identified as the data isn’t public. A spokesman for the firm declined to comment on performance. Funds that follow a multi-strategy relative value approach are down 0.7% over the same period, according to Hedge Fund Research Inc. Their relative-value trades offer a glimpse into survival strategies of hedge funds that rode the first half’s roller-coaster crisis markets. The UBS team paired securities of the same company up against one another, like shorting the stock of an airline while buying its credit. That paid off as the Federal Reserve dove into corporate bonds and stoked a rally that’s lifted the credit of the riskiest companies which are foundering in an uneven stock recovery. “We aggressively grossed up risk across all our credit strategies as the Fed embarked on its monetary policy support program,” Kevin Russell, the New York-based chief investment officer at UBS O’Connor which manages $6.1 billion overall, said in a phone interview.

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Hedge Fund Managers Grudgingly Accept Mayfair Life Will Stay in the ‘Zoomosphere’

Brief: For the $3tn hedge fund industry — which heavily revolves around networking, meetings, in-person conferences and events — remote working has been a wake-up call. Tech apps like Zoom, and the UK government’s easing of lockdowns and reopening of pubs and restaurants have come as little comfort to workers in one of the most relationship-dependent corners of the industry. “I’ve got no idea when I’ll attend my next event,” says a hedge fund manager, speaking on condition of anonymity. “Everything is so hard to arrange. When the pubs re-opened, a group of us who used to regularly meet at The Market Tavern [a pub in Shepherd Market in Mayfair] wanted to meet up during the week. But they told us there would be a limit of six people, we would have to sit at a reserved table and we couldn’t drink outside.” They ended up cancelling their plans: “It’s like, why bother meeting at the moment?” More are starting to accept that life will be slow to return to the old normal. While some hedge fund conference organisers are still holding out hope — Context Summits’ European Conference is still scheduled for late September at etc. venues in Liverpool Street — many in the industry are not holding their breath for the networking conferences carousel to resume.

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Hedge Fund Says Bonds Close to ‘Tipping Point’ After Debt Binge

Brief: The deluge of debt sold around the world is raising risks for bond buyers, according to Man Group Plc, the world’s largest publicly listed hedge fund firm. Companies around the globe have sold over $2 trillion of bonds this year, a 55% jump from the same period last year and a record tally, according to Bloomberg-compiled data. With Covid-19 wreaking havoc on the global economy, government and state-related agencies have also raised $1.6 trillion this year to fund stimulus spending, the most since 2009, the data showed. “Post the market selloff in March, the supply could be easily absorbed by demand as investors added risk back at cheaper valuations, but we think we may now be close to a tipping point,” said Lisa Chua, portfolio manager at Man GLG, a unit of Man Group, which had $104 billion of assets under management as of the end of March. Man Group joins other big funds such as Oaktree Capital Management in warning that markets could turn after a steep rally. Since March, when the Federal Reserve unveiled unprecedented steps including buying corporate bonds, risk assets from U.S. stocks to junk bonds have soared.

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Private Credit Lenders Seek Protection in Minimum Liquidity Protocol

Brief: Private credit firms are requiring their borrowers maintain a strong liquidity cushion as the coronavirus pandemic forces middle market companies to wrestle with spiking leverage levels and falling profits. These investors, also known as alternative lenders, are amending existing deals to put minimum liquidity covenants in credit agreements, provisions that require businesses to have a certain amount of cash on hand, as a way to safeguard their investments, according to several private credit sources. The covenant measures the amount of money a company needs to run its business and meet its financial obligations. The provision has increased in usage since the onset of the health crisis. Companies, reckoning with dwindling profit margins – often measured as earnings before interest, taxes, depreciation and amortization (Ebtida) – are seeking relief from tests in their credit agreements, noted law firm Ropes & Gray. As Ebitda falls, leverage can rise, making a borrower more likely to trip covenants, which are provisions to help keep the borrower on the financial straight and narrow.

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David M. Rubenstein Says the World Has “Changed Forever” and “We’re Going to be in a (non-technical) Recession for Quite a While”

Brief: The Carlyle Group Co-Founder and Co-Executive Chairman, David M. Rubenstein, says in the latest edition of CERAWeek Conversations that the United States is going to be in a (non-technical) recession for “quite a while” and that it is “going to be a different economy” when it comes back; that “you can’t have free money forever” and that when interest rates go up from near-zero levels it will precipitate some hard budgetary decisions. In a conversation with IHS Markit (NYSE: INFO) Vice Chairman Daniel Yergin, Rubenstein says that globalization has been “an overall plus” for the global economy but not everyone has benefited; that the deterioration in U.S.-China relations will take time to repair; he talks about his devotion to what he calls “patriotic philanthropy;” lessons in leadership, and more. In addition to his role at The Carlyle Group, David Rubenstein is chairman of the boards of trustees of the John F. Kennedy Center for the Performing Arts in Washington D.C. and the Council on Foreign Relations. Until recently, he was the chairman of the Smithsonian Institution. He hostsTheDavid Rubenstein Show: Peer to Peer Conversationson Bloomberg TV and PBS, andLeadership Live with David Rubensteinby Bloomberg Media. Along with medical research and education, he has focused his philanthropy on preserving the history of the United States via a practice he has coined “patriotic philanthropy”. The Carlyle Group is one of the world’s largest and most successful private investment firms, with investments in over 260 companies around the world and more than $215 billion under management. It was founded in 1987.

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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 9, 2020:

  • In the United States, Dr. Anthony Fauci told a Wall Street Journal podcast on Wednesday that states struggling with new surges should seriously consider a second lockdown. While making the media rounds on Thursday, Dr. Fauci tried to walk back that definitive statement, saying “I would hope we don’t have to resort to shut down. I think that would be something that is obviously an extreme.” As America struggles with coronavirus cases resurging, it is clear the health experts and government aren’t on the same page. For instance, earlier in the week President Donald Trump criticized the CDC’s guidelines on reopening schools in the fall. Vice President Mike Pence suggested the health body would reissue new guidelines next week. On Thursday, the CDC stated they wouldn’t be changing their guidelines despite the push from the White House.

  • In Canada, a report from a committee of senators says the country is ill-equipped to handle a second wave of COVID-19. The Senate’s social affairs committee report says the federal government needs to pay urgent attention to long-term care homes that suffered so badly during this first wave. The committee is also concerned about personal protective equipment that wasn’t managed well over the years, and now suffers from what they call “inconsistencies in international procurement.”

  • In the United Kingdom, reopening of services continue to happen in phases. As of this Monday (July 13th), beauticians, tattooists, spas, tanning salons and other close-contact services will be allowed to renew their businesses. As of July 25th, indoor gyms, swimming pools and sports facilities will follow suit. Government is calling on the public to do their part to ensure these new freedoms don’t compromise the country’s coronavirus strategies.

  • In her first trip to the European Union headquarters in Brussels since the pandemic began, German Chancellor Angela Merkel repeated her call for economic recovery from the coronavirus outbreak. Chancellor Merkel’s meeting took place ahead of next week’s summit involving the heads of all 27 member states of the European Union. Attention will be on what have been called the “frugal four” of the Netherlands, Sweden, Denmark and Austria who have opposed certain aspects of the €750 billion recovery package currently on the table.

  • According to India’s health ministry, the country has amassed 100,000 new cases of the coronavirus in the past five days, including a record of close to 25,000 new cases on Thursday. Research from Chennai has shown India’s production rate of the virus rose to 1.19 in the first week of July. It had been steadily falling from its peak of 1.83 in March. The rate needs to be below one for new cases to start falling.

  • Brazilian President Jair Bolsonaro has vetoed several points of a law aimed at protecting indigenous communities against COVID-19. President Bolsonaro vetoed points which assured access to drinking water, free distribution of hygiene products and the distribution of cleaning and disinfection materials to indigenous communities. He also vetoed a proposal ensuring mandatory emergency funds for indigenous people's healthcare. President Bolsonaro’s reasoning was the provisions were “against public interest” and “unconstitutional” by creating expenses without new sources of revenue to cover them. The president’s vetoes though are not final. The law’s text which was already approved by Brazil’s Congress and Senate will now be voted on again. If a majority in both houses vote against President Bolsonaro’s vetoes, the law will be approved in its entirety.

Covid-19 – Due Diligence And Asset Management

Private Equity’s Backdoor Path to PPP Cash Revealed in Data Dump

Brief: The private equity world’s massive push into U.S. health care is giving deep-pocketed investors a boost from taxpayer funds meant to prop up small businesses. Buyout firms were largely excluded from tapping the federal bailout money as the coronavirus pandemic prompted shutdowns. Yet a trove of data from the Paycheck Protection Program made public this week lists millions of dollars in loans to medical and dental practices that work in tandem with ventures controlled by private equity -- setting up those investments to benefit too. Abry Partners, Prospect Hill Growth Partners and Gauge Capital are among private equity firms with portfolio companies that partner with medical practices that the government says took loans. Representatives for the investment firms didn’t respond to messages and phone calls seeking comment on whether they gained from the injections. It’s particularly striking that the cash-rich world of private equity could get backdoor taxpayer support for investments in health care that have concerned lawmakers and government officials. Buyout firms have pumped more than $10 billion into bets on medical practices over the past five years, transforming the financial workings of clinics focused on specialties such as women’s health, dermatology, urology and gastroenterology.

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Wells Fargo Preparing to Cut Thousands of Jobs

Brief: Wells Fargo & Co <WFC.N> is preparing to cut thousands of jobs starting later this year, Bloomberg Law reported  on Thursday, citing people familiar with the matter. The company's plans will eventually result in eliminating tens of thousands of positions due to pressure to "dramatically reduce costs", the report said. Wells Fargo, the fourth-largest U.S. lender by assets, is leaning on cost cuts to stabilize its bottom line as it recovers from a raft of fines and costs relating to sales abuses first uncovered in 2016 and mounting loan loss provisions due to the coronavirus-driven economic downturn. The bank's executives have not yet adopted a specific target for shrinking its workforce of about 263,000, the report added, citing one person familiar with the matter. They are not likely to share details on the plan when they announce the bank's second-quarter results on July 14, the report added. A spokesman for Wells Fargo declined to comment on the report.

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Private Equity Weathering COVID-19 Economic Slowdown

Brief: Private equity investments appear to be weathering the impact of the pandemic across multiple sectors and geographies, according to the results of a Private Equity and COVID-19 study by Willis Towers Watson (NASDAQ: WLTW), indicating that despite a subdued environment for exit deals in the first six months of the year, there has been little evidence of forced exits. The survey, which took place in April across 36 private equity funds representing 300-plus portfolio companies, was designed to better understand how businesses were coping due to the pandemic as well as setting out expectations for the coming months. The results revealed the significant turmoil in capital markets has had little effect on the capital structures of portfolio companies, with 87% of respondents saying their holdings were unlikely to breach covenants as a result. Only 13% said holdings were either close to breaching or likely to breach covenants in the next two to three months… Regarding customer demand for products or services, however, responses were far more varied with 46% of respondents reporting their holdings were feeling a medium-to-high impact from the slowdown in global economies, mostly within the consumer discretionary, industrials, energy and materials sectors. In contrast, sentiment among commercial services firms remained robust, while 20% of consumer staples firms even reported a positive impact on demand.

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Hedge Funds Fell a Record 7.9% in Pandemic-Plagued First Half

Brief: Hedge funds lost a record 7.9% in the first half of the year on an asset-weighted basis, according to Hedge Fund Research Inc. None of the four major strategies made money as the industry struggled to trade with the Covid-19 pandemic convulsing global markets. Event-driven funds were the worst performers, losing 9.6%. Relative-value funds posted the smallest decline, at 5.1%. The losses for the period were the steepest ever in data going back to 2008, according to HFR data released Wednesday. In March, the industry grappled with the end of the longest bull market as the coronavirus spread worldwide. But equities bounced back by the end of June, with the S&P 500 Index surging 39% from its March 23 low. Funds broadly fell 0.4% in June, even as the S&P benchmark gained 1.8% to cap its best quarter since 1998. It was the fourth month in the red for hedge funds this year.

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Britain Signals End to Daily Redemptions for Property Funds

Brief: Funds that offer daily redemptions to investors may have to restructure to better reflect the time it takes to sell illiquid assets like property, Britain’s Financial Conduct Authority said on Wednesday.Retail property funds have been suspended because of their inability to value the commercial real estate they hold after markets were disrupted by the COVID-19 pandemic.The FCA and the Bank of England have already proposed principles on how to deal with “liquidity mismatches”, or where investments in a fund cannot be sold fast enough to meet daily redemptions without incurring losses in a market crisis.Retail property funds also had to be suspended in the immediate aftermath of Britain’s vote in June 2016 in favour of leaving the European Union. FCA interim Chief Executive Chris Woolard said there has been considerable discussion about how to ensure redemption arrangements offer a fair deal to those remaining in the fund as well as those who wish to exit.

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Coronavirus a ‘Once-in-a-Lifetime Opportunity’ for Debt Investors: Billionaire Marc Lasry

Brief: Household names Hertz (HTZ), J.C. Penney, and Neiman Marcus make up a fraction of the thousands ofcompaniesthat havedeclared bankruptcysince the outbreak of thenovel coronavirus. The downturn may spell misery for employees and business owners, but it offers a “once-in-a-lifetime opportunity” for debt investors, who can do “extremely well” making loans to companies that falter, says Marc Lasry, the billionaire co-founder and chief executive of hedge fund Avenue Capital, which specializes in investments in distressed businesses. “I know you're not supposed to say this, but it's a once-in-a-lifetime opportunity,” says Lasry, also the co-owner of the NBA’s Milwaukee Bucks. “You're not going to see this again: Where you've actually got an economy that's fine, and you've got a Fed pumping trillions of dollars in.” Avenue Capital, whichsays it manages about $10 billionin total assets, has invested in struggling brands like Macy’s (M) and J.C. Penney, Lasry said. The firm can issue senior debt that takes priority when a company begins to pay off its loans or cede ownership, Lasry added in the newly released interview, taped on June 29. “For us, you've got an opportunity to invest at a senior level and do extremely well,” Lasry says. “So you'll either get paid out, or you're going to end up owning the equity of this company.”

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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 8, 2020:

  • The United States have surpassed three million coronavirus cases, and it’s the way they got there that is most concerning. According to a CNN report, it took 99 days for America to reach one million, 43 days to reach two million and only 28 days to arrive where they are now at just over three million. Dr. Deborah Birx, a member of the White House’s coronavirus task force is suggesting people living in states with surges should return to phase one recommendations on gatherings. This would mean wearing face masks, avoid bars or indoor events and keep social gatherings to 10 people or less.

  • In Canada, the federal government released their economic snapshot of what the coronavirus pandemic did to the country’s finances. The government’s deficit is expected to hit $343 billion for the year, mostly attributed to the pandemic and spending has hit a level not seen since the Second World War. The government’s debt load will hit a whopping $1.2 trillion in 2020-21, up from $765 billion from a year ago. While the snapshot showed what the government did to help prop up the economy, it didn’t display much of a long-term plan on how to return the economy to its pre-pandemic ways, and what would happen if the feared second wave returns in the fall.

  • The United Kingdom government has announced a job retention bonus of £1,000 per worker to be paid out to companies that bring back staff out of their furlough plan. Chancellor Rishi Sunak told the House of Commons that the government’s plan could cost them as much as £9 billion if all of the 9 million people currently furloughed where re-employed by January 2021. The chancellor also announced a £2 billion job creation scheme to help UK’s young people as the government tries to boost the confidence of the public as they continue to emerge from the coronavirus crisis.

  • Israel’s top health official quit on Tuesday warning that the country’s government is leading them to a dangerous place. In a Facebook post, Israel’s top health bureaucrat Siegal Sadetzki wrote, “For a number of weeks now, the handling of the outbreak has lost direction. Despite systematic and regular warnings in the various systems… we watch with frustration as the hourglass of opportunities runs low.” Israel confirmed 1,000+ new coronavirus cases on Tuesday; the second time in under a week they have crossed the 1,000 per day threshold.

  • Mumbai, India’s financial capital, will allow walk-in coronavirus testing without a doctor’s prescription. Since the pandemic began, the country has had strict guidelines on testing making it even tough for ill patients to obtain tests with doctor’s prescriptions. This is especially troubling in a country of 1.3B people that has the third most coronavirus cases in the world with 742,000+, but one of the lowest rates of testing. India has carried out just 7,398 tests per million for its population compared to Brazil’s 20,500 per million and the United States’ 117,200 per million. The United States and Brazil sit first and second in worldwide coronavirus cases.

  • As the Philippines announced their largest single day increase of coronavirus cases on Wednesday, the government is seeking to borrow a record amount to help revive the economy. The government is seeking a record $86.83 billion budget for 2021 that will look to kickstart an economy that is expected to shrink for the first time in two decades. The health ministry on Wednesday reported 2,539 new coronavirus cases, bringing the overall total to over 50,000.

  • Japan is facing a coronavirus spike over the last few weeks but have no plans of issuing another cycle of shutdowns. A Washington Post article notes at the end of June, Japan’s government dismantled their panel of experts that have been guiding them through the virus in favour of a group that includes voices from the business world. Tokyo’s municipal government also ditched an alert system based on numerical targets that could have triggered new shutdowns if the virus started spreading again. In the past six days, Japan’s new infections have rose by an average of 219 per day. More than half of those cases are from Tokyo, and many among people in their 20’s and 30’s who have hit the city’s nightspots again since restrictions were lifted in May.

Covid-19 – Due Diligence And Asset Management

KKR to Buy Global Atlantic, Adding Almost $90 Billion in Assets

Brief: KKR & Co. agreed to buy Global Atlantic Financial Group in a deal that gives it a major presence in the insurance industry and adds long-term capital. The alternative-investment manager will acquire closely held Global Atlantic’s outstanding shares, according to a statement Wednesday, in a transaction that could be valued at more than $4 billion. Global Atlantic, which was founded within Goldman Sachs Group Inc. in 2004 and became independent in 2013, had more than 2 million policyholders through its retirement and life insurance products and almost $70 billion in invested assets as of March 31. KKR shares jumped the most in four months, gaining 9.2% to $33.60 at 9:40 a.m. in New York. KKR’s rivals have been building out their own insurance arms in recent years and have brought on executives who can help them attract more business. Insurers are facing historically low yields in fixed-income markets. Apollo Global Management Inc. helped turn annuity seller Athene Holding Ltd. into a business with a market value of $5.8 billion, and funds affiliated with Blackstone Group Inc. teamed up with other investors in 2017 to buy Fidelity & Guaranty Life.

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Crispin Odey Hedge Fund’s Losses Deepen to 17.9% in First Half

Brief: Crispin Odey’s flagship hedge fund slumped to a 17.9% loss in the first half. The Odey European Inc. Fund fell in five out of six months, including a 7.3% drop in June, wiping out a surge during the market sell-off in March, according to a letter to investors seen by Bloomberg. Odey’s losses compare with a 3.5% slide across the industry that was led by led by event-driven and equity hedge funds, according to preliminary figures from the Bloomberg Hedge Fund Indices. “The future is as unknowable today as it was three months ago,” Odey wrote in the letter, without giving an explanation for the fund’s performance. The fund’s losses come despite Odey Asset Management reportedly making at least 25 million euros ($28 million) betting against shares in scandal-hit German payment company Wirecard AG, and a reported gain of at least 75 million pounds ($94 million) from the demise of U.K. shopping mall owner Intu Properties Plc. The performance follows years of losses as Odey maintained bearish bets during an historic bull run. When the market cratered in March, he was among the few bearish investors to profit from the downturn, posting a 21% gain for the month. His main fund has shrunk over the years, and now manages $624 million, according to the letter. That’s down from about $700 million in March.

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Why the Covid-19 Pandemic is Exposing Corporate Fraud

Brief: Many investors will recall that Warren Buffet wrote in 2002 that “you only find out who is swimming naked when the tide goes out”. Today, given the global economic shock caused by the Covid-19 pandemic, investors and their advisers should be prepared to ask difficult questions in order to spot red flags, and get back onto shore before the metaphorical tide turns. The UK faces an estimated 35% fall in GDP for the second quarter of 2020; the OECD notes that Britain will suffer the worst economic harm of any developed country. Whilst the pandemic is unprecedented in its severity and scale, history does show a correlation between the current economic crisis and the discovery of corporate fraud and misconduct. The 2008 financial crash saw a 2.1% fall in the UK’s GDP and a 7.3% increase in fraud cases. By contrast, the UK currently faces a 35% decrease in GDP for the first half of 2020. Recent months have already seen notable scandals, including Wirecard’s €1.9bn accounting hole, fabricated sales at Luckin Coffee, and NMC Health’s undisclosed debt of $2.7bn. Why does fraud come to light during financial crises? As economies decline, struggling firms will look to adapt, and perhaps restructure entirely, in order to preserve cash and, therefore, survive. In so doing, company operations and accounts will be examined, and historic issues may be spotted.

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‘Low Vol’ in Name, Big Losses in Practice

Brief: In recent years, investors have poured cash into low volatility stocks, hoping to soften the blow of the inevitable market correction on their portfolios. But these stocks have done little to protect investors from the wild markets that started earlier this year when the spread of Covid-19 shut down economies around the globe. In theory, stocks with less volatility than the broader market underperform when equities are rising, but should hold up better during downturns. Low volatility strategies didn’t do that this time around. The pandemic may have changed the characteristics of stocks considered to be defensive, according to new research from $30 billion investment firm PanAgora Asset Management, which manages money using quantitative and fundamental techniques. PanAgora’s examination of low vol comes as investors and academics have been questioning the data and behavior of other widely used factors — stock performance characteristics — like value. By some measures, value stocks have underperformed for two decades. In a paper only for clients, but obtained by Institutional Investor, PanAgora addressed the odd behavior of low vol stocks within the Standard & Poor’s 500 index in the early part of the Covid-19 meltdown. It also examined how the pandemic has differed from prior crises and how these anomalies affected the performance of low vol equity strategies.

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Financial Services Firms Accelerating Technology Transformation to Navigate the Pandemic, Finds Broadridge

Brief: More than half of financial services companies plan to accelerate implementation of their next generation technology strategies, according to a new global survey of 500 financial services C-Suite executives and their direct reports released today by Broadridge Financial Solutions, a global fintech leader.  “Financial services players have shown they can adapt and change during the pandemic. Going forward, they will continue to drive digitisation and mutualisation to improve client experience, resiliency, and cost,” says Tim Gokey, CEO of Broadridge. “Prior investments in digital, cloud, and mutualised technologies have enabled companies to be more resilient during the crisis, and executives are taking careful note as they plan for the future.”  Virtually all financial services companies expect the pandemic to affect their operating model and strategy toward next-generation technology… The pandemic has also changed the role of fintech service providers, with 70 per cent of respondents stating that fintech providers’ ability to offer innovative uses of next-generation technology is now more important as a result of the outbreak. Almost half of respondents agree that the pandemic increased the need to mutualise – in other words, share or outsource – processing functions to reduce costs and increase resiliency. 

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Stock Markets Are Flat. Infections Have Spiked. Which Do Investors Care More About?

Brief: A lot has changed in a month.Just four weeks ago the II Fear Index recorded themost optimistic views yetfrom institutional investors, who were feeling ever more upbeat about the economy’s trajectory as they grew less concerned about the spread of Covid-19.Since then, sentiment has reversed sharply, with asset managers and allocators polled this week fearing a major resurgence of coronavirus infections and sharing mounting pessimism about their countries’ economic prospects. This week’s survey, which had 139 respondents, found that nearly 70 percent were more concerned about a new spike in Covid-19 cases than they werethree weeks ago, including 33 percent who reported that they were “much more concerned.” Three weeks ago, the Centers for Disease Control and Prevention had reported a daily increase of about 28,000 coronavirus cases in the U.S. On Monday — the last day responses were accepted for this week’s Fear Index — the number of new confirmed cases passed 44,000. Investor concerns over the increasing rate of infection in the U.S. have been reflected over the last few surveys, with respondent priorities seen shifting back to public health over economic stability. This week, 57 percent said governments should be focusing on health, compared to 43 percent who thought political leaders should prioritize economic issues.

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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 7, 2020:

  • Jair Bolsonaro, the President of Brazil has tested positive for the coronavirus. With Brazil only trailing the United States for most coronavirus cases, President Bolsonaro has downplayed the seriousness of the pandemic since it started, referring to it as nothing more than just a little flu. Speaking at a news conference on Tuesday, President Bolsonaro was his usual defiant self: “The number of deaths has increased not because of the virus but because of the fear of the virus. The virus is like the rain, it will hit you.” President Bolsonaro concluded his speech by taking off his mask and giving a thumbs up. The Brazilian President started feeling weak on Sunday after celebrating the 4th of July American holiday with the US ambassador and other top ministers before developing more symptoms on Monday such as tiredness, muscle pain and a fever of 38 degrees.

  • In the United States, the White House will turn their focus to reopening the country’s schools. While the reopening decision will be left to state and local governments, United States President Donald Trump’s administration will provide financial resources and share best practices and is strongly urging for students to return to class in the fall. President Trump, along with the first lady were to appear at an event centered around the reopening of schools on Tuesday.

  • In Canada, as of Tuesday, it is now mandatory to wear face masks while inside enclosed public spaces in the country’s most populous city. People in Toronto will now be required to wear a mask on public transportation, inside shops, grocery stores and malls. The mask policy will not apply to most workplaces where physical distancing is possible.

  • The United Kingdom’s senior scientists are urging Britons to embrace wearing face coverings while out in public. A Financial Times article notes that UK residents are well behind the United States and other countries when it comes to wearing facial coverings. Only 25% of Britons are wearing masks in public compared to 66% in the United States and 83% in Italy. The Royal Society, Britain’s national academy of sciences issued two separate reports that emphasized the benefits of wearing facial coverings for reducing the risk of infection for both the wearer and people around them.

  • Sweden’s daily COVID-19 total has fallen to its lowest levels since late May. The country drew worldwide attention for their lax social distancing rules early on and with expanded testing last month, saw their cases skyrocket. The country’s health agency director attributes the decline in numbers to residents voluntarily adhering to social distancing guidelines.

  • The World Health Organization (WHO) will be sending its experts to China this weekend. The aim of the trip is to work with their Chinese counterparts to identify the animal origin of COVID-19 and how exactly the disease jumped from animals to humans.

  • Australia has reimposed lockdown measures for the entire city of Melbourne. The decision to lockdown the city of 4.9 million people was made just hours before the border between New South Wales and Victoria was to shutdown for the first time in a century. Starting at midnight on Wednesday, everyone in Melbourne will be required to stay home unless travelling to work, studying, shopping for food, or attending medical appointments. Restaurants, cafes and bars will provide takeout service only. The lockdown measure is expected to be in place for the next six weeks.

Covid-19 – Due Diligence And Asset Management

Lansdowne to Shut Main Hedge Fund in Retreat From Shorting

Brief: Lansdowne Partners is shutting its main hedge fund in a shift away from short-selling after being hit by some of its worst-ever losses. The London-based investment firm is closing the $2.8 billion Lansdowne Developed Markets Fund, according to a letter to investors seen by Bloomberg. Clients can withdraw their money or move it into the Lansdowne Developed Markets Long Only Fund or a new LDM Opportunities Fund, which will invest in early-stage companies. The firm will continue to bet against companies in some of its other funds. A spokesman for Lansdowne Partners declined to comment. The move marks a dramatic retreat by one of the world’s most famous equity long/short hedge funds, and comes after poor performance in both rising and falling markets. The firm’s main hedge fund is run by Peter Davies and Jonathon Regis and tumbled 13% in March’s rout, the biggest monthly decline since it started trading almost two decades ago. It was down 23.3% in the first half of the year, according to another letter to investors. Years of poor returns have led to outflows from the firm, with its assets dropping to $9.8 billion in June from a peak of nearly $22 billion in 2015.

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Hedge Fund Sloane Robinson to Shut After More Than 25 Years

Brief: Sloane Robinson is closing as it struggles to raise enough capital, joining a string of high-profile hedge funds to shutter in recent years. The firm, which began investing in 1994, will shut at the end of 2020 and wind down its Global Opportunities and Global Compounder portfolios, according to a letter to investors seen by Bloomberg. David Gale, chief executive officer of the London-based investment firm, declined to comment beyond the letter. “Despite strong investment performance amidst difficult market conditions, we have not succeeded in acquiring the required assets to support this franchise and the partnership remains dependent on revenue from the legacy funds of the founding partners,” the firm told investors in the letter dated Monday. Sloane Robinson, which was founded by Hugh Sloane and George Robinson and specializes in emerging and Asian markets equities trading, managed more than $10 billion at its peak prior to the 2008 financial crisis, but assets dropped sharply in recent years. In 2012, the firm restructured its business and investment-management team. It’s the latest victim of a tough money-raising environment by hedge funds. For much of the past decade, investors have revolted over high fees and lackluster returns. Clients have pulled more than $130 billion since the start of last year, according to data compiled by eVestment, and hedge fund liquidations in the first quarter jumped to the highest level in more than four years.

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Some Private Equity Firms See Early Signs of a Deal Thaw

Brief: Private equity investors and bankers say they have seen deal activity start to slowly pick up in recent weeks after the coronavirus pandemic virtually stalled activity for more than three months. “There is a tangible change in the market sentiment,” said Daniel Connolly, managing director and co-head of mergers and acquisitions at William Blair & Co. “Most think there is an opportunistic window between now and the elections to buy and sell quality assets.” Investors are pushing deals closer to the finish line partly by modifying due diligence processes, pitching deals to only a limited number of reliable prospective buyers and buying minority stakes rather than control positions, several investment bankers, general partners and investment advisers told PEN sister titleWSJ Pro Private Equity. Some investors predict that deal activity will be buoyed as more firms report second quarter results, which will more accurately reflect the impact of the economic downturn. “That will help price the deals,” Connolly said. Michael Butler, chairman and chief executive of Seattle-based mid-market investment bank Cascadia Capital, said that buyers and sellers are reviewing deals in health care, technology, food and agricultural products, business services and some industrial sectors.

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The Asset Managers Approved for PPP Money

Brief: A hedge fund said to be closing up shop, a former fund manager’s family office, and a venture capital fund launched in 2015 are among the thousands of businesses listed as recipients of loans through the federal government’s Paycheck Protection Program.   On Monday, the Small Business Administration made public a list of the more than 660,000 companies that received a loan larger than $150,000 through the program, which is intended to help businesses keep people employed during the coronavirus pandemic.  If a company meets certain eligibility standards, part, or all, of the loan will be forgiven. The loans also carry a one percent interest rate, according to theSBA’s website.  Some firms listed in the SBA’s data have called its accuracy into question, however. Electric scooter company Bird shared on Twitter that it was “erroneously” listed among loan recipients. According to Bird, the firm neither applied for nor received a PPP loan. One firm contacted byInstitutional Investor for this story experienced a similar issue: its CEO said via email Monday that the firm did not receive a PPP loan, despite being listed in the data. And three other firms listed in an earlier version of the story that did not respond to a request for comment or could not be reached for comment subsequently responded to say that they, too, had been listed in error.

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Brevan Howard Back-to-Back Monthly Losses Cut Into Record Gain

Brief: Brevan Howard Asset Management’s flagship macro hedge fund lost 0.6% in June, suffering back-to-back monthly losses and giving up some of its record gains from March. The decline follows a 0.9% loss in the $3.8 billion Brevan Howard Master Fund in May, according to letters to investors seen by Bloomberg. Preliminary estimates from Eurekahedge show that macro hedge fund peers made money, on average, in both months. A spokesman for the Jersey-based investment firm declined to comment on the performance. Macro hedge funds, which bet on economic trends, have generally bounced back this year amid coronavirus-induced market volatility. Traders have been able to exploit big swings in bond and currency markets to make money. Brevan’s decline still puts its flagship fund up 21.3% in the first half of the year, according to one of the letters. If that return is maintained for the full year, it would beat all bar one annual return since the fund was launched in 2003. The firm, co-founded by billionaire Alan Howard, is rebounding from years of mediocre performance in its macro hedge fund. The master fund surged by 18.3% during the market turmoil in March, its best monthly gain, driven by interest rate trading across directional, volatility and relative value strategies in a range of different markets.

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Troubled Firm Marto Capital Asked for PPP Money – and Got Approved, Records Show

Brief: Marto Capital — aformer wunderkindfounded by an ex-Bridgewater Associates star — got approved for emergency funds from the U.S. government, records showed Monday. Katina Stefanova’s New York City-based firm would have received between $150,000 and $350,000 in potentially forgivable loans under the Paycheck Protection Program, which aims to help save small businesses hurt by the coronavirus pandemic. Marto did not confirm or comment on the loan.Notably, Marto retained zero jobs with the funds, according to the released data. Signature Bank approved its application April 28, per the official records.But it’s not clear what Marto Capital’s business actually is, or if it plans to repay any money received. Martogave upits active status with the industry’s main U.S. regulatory bodies. On its website, the company calls itself a “new age investment company.”  Founded as a hedge fund firm in 2015, Marto attracted hundreds of millions in capital from brand-name seeding firms including PAAMCO Prisma. Stefanova became a sparkling face in the investment industry, running what many saw as a spin-out from one of the world’s most successful hedge funds, Bridgewater.

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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 6, 2020:

  • As the United States emerge from their 4th of July long weekend, New York state’s Governor is taking aim at the President of the United States saying Donald Trump is enabling the coronavirus. Governor Andrew Cuomo’s criticism comes after President Trump stated during a weekend address that 99% of the coronavirus cases are “totally harmless”. “What he’s saying to the American people is that there's no problem. And then they don’t wear a mask, and they don’t socially distance... “He is facilitating the virus. He is enabling the virus by [making] statements like that. And you're seeing the infection rate go up and you’re seeing the economy suffer,” said Cuomo.

  • In Canada, Prime Minister Justin Trudeau is skipping an upcoming meeting in Washington D.C. with United States President Donald Trump and Mexico’s President Andres Manuel Lopez Obrador. The meeting would have highlighted a new North American Trade agreement that went into effect recently, but Prime Minister Trudeau cited coronavirus concerns and recent proposed tariffs on aluminum and steel that America has floated around recently for not wanting to attend. According to Canada’s public health rules if Prime Minister Trudeau were to attend the meeting in Washington, he would have to quarantine for two weeks upon return.
  • The United Kingdom government have announced a £1.5bn funding package to the country’s performing arts and culture sectors, which have been crippled by the coronavirus pandemic. The plan will consist of £880 million in grants and supplemented by £270 million of loans. Many museums and galleries plan to reopen in the coming weeks, but like many industries will look much different upon return with physically distanced queues, time slots, one-way systems and mandatory mask-wearing.

  • Spain have released the results from the final stage of a nationwide antibody study. It shows that 5.2% of Spain’s population had been exposed to the coronavirus. The more troubling part of the study suggests that immunity to COVID-19 appears short-lived with 14% of participants who test positive for antibodies in the first stage, subsequently tested negative in the last stage. The loss of antibodies was most common among asymptomatic patients. Spain’s study tested nearly 70,000 citizens three times over the past three months.

  • According to local media reports, Israel Prime Minister Benjamin Netanyahu has told his cabinet they are one step away from a full lockdown. After a full reopening of its economy in May, Israel has now shutdown bars, gyms, swimming pools and cultural venues. The country has seen new daily infections cross the 1,000+ mark twice in the past week. The new shutdown measures also requires about a third of government employees to work from home.

  • After Australia recorded its highest ever daily increase of new infections on Monday, the country is preparing to close the border between the country’s two largest states. As of late Tuesday, the border between New South Wales – home to Sydney and Victoria – home to Melbourne will be shutdown. Victoria Premier Daniel Andrews said 127 new cases were reported on Monday, which surpasses the peak of 111 cases suffered over three months ago.

  • An open letter signed by 239 scientists has been sent to the World Health Organization (WHO) asking them to be more forthright in explaining how the coronavirus can transmit in the air. The group of international experts state the virus can float in air droplets and is likely transmitting that way. Health experts around the world have warned for months the virus can transmit in close contact in crowded spaces with poor ventilation. This likely explains the explosion of cases in the United States upon their reopening of bars and restaurants. The WHO’s current guideline says the coronavirus is transmitted primarily between people via respiratory droplets through the nose and mouth and close contact.

Covid-19 – Due Diligence And Asset Management

Junk-Bond ETF’s Shed $2.6 Billion With Treasuries Back in Vogue

Brief: The surge in coronavirus cases has bond ETF investors dumping their riskier holdings in favor of the safety of U.S. government debt. Over $2.6 billion exited from junk-bond exchange-traded funds last week, in addition to the $5.6 billion that fled from high-yield mutual funds. The $11 billion SPDR Bloomberg Barclays High Yield Bond ETF (JNK)’s $746 million outflow led the way, followed by a $609 million withdrawal from the $27 billion iShares iBoxx High Yield Corporate Bond ETF (HYG). On the other end of the risk spectrum, Treasury-focused funds were a clear beneficiary of the renewed haven demand. BlackRock Inc.’s $22 billion iShares 7-10 Year Treasury Bond ETF (IEF) posted a weekly inflow of over $2 billion -- the largest since January 2019 -- while the $4.2 billion SPDR Portfolio Intermediate Term Treasury ETF (SPTI) absorbed $1.8 billion. The rotation into higher-quality debt shows investors are taking a “pause for breath” as policy makers grapple with a balance between containing the spreading virus and resuming economic activity, according to Principal Global Investors. “In that environment, many investors would prefer to be out of riskier assets and find more solace in investment grade and sovereign debt, and will wait for a good opportunity to rebuild their risk positions at a better price,” said Seema Shah, Principal’s chief strategist.

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BlackRock Favors Asia Markets Closely Tied to China’s Recovery

Brief: The world’s biggest asset manager is betting that some of the Asian markets that are closely tied to China’s recovery and have policy headroom will outperform peers over the next year. BlackRock Inc., which oversees $6.47 trillion in global assets, expects stocks and bonds in China, and its trading partners such as South Korea, Japan and Taiwan, will do better than global emerging markets over the next six to 12 months, according to Ben Powell, chief investment strategist for Asia Pacific at the firm. These countries have policy capability to do more if necessary and have a more direct exposure to the Chinese economy, which looks to be recovering quite well, Powell said in an interview. “Economies that are geared into that combination of policy, China’s recovery” and strong tech will do relatively better, he added. A variety of economic data out of the mainland have shown momentum of an economic rebound from coronavirus shutdowns. Profits of Chinese industrial enterprises rose in May for the first time since November while vehicle sales grew for a third straight month in June. That bodes well for China’s top trading partners in the region including Japan and Korea.

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Credit Suisse Survey: Hedge Funds Now Top Choice Among Investors, as Appetite Soars in 2020

Brief: Hedge funds have emerged as the top pick among asset allocators heading into the second half of 2020, outflanking other products such as private equity and real estate as investors’ asset-class-of-choice, according to new data from Credit Suisse, which showed hedge funds have met or exceeded the expectations of some two-thirds of investors so far in 2020. The bank’s 2020 Mid-Year Hedge Fund Investor Survey – titled ‘Navigating Unchartered Waters’ – probed evolving allocator appetite, surveying some 160 institutional investors during May and June, collectively representing around USD450 billion in hedge fund investments globally. The wide-ranging study quizzed a broad mix of pension funds, endowments, family offices, insurers, funds of funds, advisors, consultants and more on their allocations, redemptions, and strategy appetite, among other things. The findings show that hedge funds are drawing the highest net demand among the various asset classes surveyed by Credit Suisse, with 32 per cent of investors set to increase their allocations to the product.

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Banks Are Ditching London Offices and Not Just Because of Covid-19

Brief: The giants of Wall Street and European banking are giving up their stronghold on London. In the coming months alone, Barclays Plc may ditch its investment bank’s headquarters in the capital; Credit Suisse Group AG is offloading nine floors of office space; and Morgan Stanley is reviewing its entire London footprint. And all of those moves were planned before the coronavirus hit. Now, with thousands of job cuts likely to follow what’s forecast to be the worst recession in three centuries, the tenants of the glass and steel towers that dominate the City of London and Canary Wharf may face an even bigger retreat. “Larger banks are clearly a higher risk for landlords,” said Rogier Quirijns, head of European real estate at Cohen & Steers Inc., who oversees more than $2 billion of property funds. “For London, there are the threats of recession and a possible no-deal Brexit to deal with, and I expect Covid-19 will most likely accelerate those risks.” The pandemic has given banks further impetus to downsize and preserve cash after already spending a decade quietly offloading space as jobs vanished in the wake of the financial crisis. In the past nine years, their London footprint has been slashed by about six million square feet -- or the equivalent of a dozen Gherkin skyscrapers, according to broker CBRE Group Inc.

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World Economy That Took Elevator Down Faces Steep Stairs Back Up

Brief: The world economy is entering the second half of 2020 still deeply weighed down by the coronavirus pandemic with a full recovery now ruled-out for this year and even a 2021 comeback dependent on a lot going right. It’s a scenario few if any predicted at the start of the year when most economists were banking on another year of expansion and a U.S. and China trade agreement was meant to give corporate and investor confidence a shot in the arm. Instead, the rare pandemic forced swathes of the global population into what the International Monetary Fund dubs ‘The Great Lockdown.’ Central banks and governments responded with trillions of dollars in unprecedented support to prevent markets from melting down and to keep furloughed workers and struggling companies afloat until the virus passed.​ Even with those rescue efforts, the world is still suffering its worst economic crisis since the Great Depression. While some gauges of manufacturing and retail sales in major economies are showing improvement, hopes for a V-shaped rebound have been shattered as the reopening of businesses looks shaky at best and job losses risk turning from temporary to permanent. It’s an economic trajectory Federal Reserve Bank of Richmond President Thomas Barkin has likened to riding the elevator down, but needing to take the stairs back up.

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Money Laundering Enforcement Thrives In COVID-19 Era

Brief: While COVID-19 has made remote working a necessity for many government employees, it does not appear that COVID-19 has done anything to slow down government enforcement regarding money laundering.TheU.S. Securities and Exchange Commissionstated in its Office of Compliance Inspections and Examinations 2020 examination priorities,[1] that Bank Secrecy Act and anti-money laundering compliance remains a priority. Despite the COVID-19 pandemic, there have been significant actions by U.S. regulators this year against individuals and companies for money laundering activities, demonstrating a continued focus on AML enforcement. We expect that U.S. authorities will continue to make AML compliance, and specifically risk-based compliance, a priority.Recent AML compliance and enforcement efforts have taken account of the ongoing COVID-19 pandemic in some recent actions. In the last few months, the government has issued guidance on risks based on the COVID-19 pandemic from multiple enforcement agencies.TheFinancial Crimes Enforcement Networkissued guidance that provides institutions with some relief related to the administrative aspects of AML regulatory compliance, but does not excuse failures to take the required steps, and, indeed, puts institutions on notice of certain heightened money laundering risks associated with the COVID-19 pandemic.

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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 3, 2020:

  • As the United States head into their Independence Day long weekend, at least 36 out of 50 states are seeing COVID-19 cases rising. Because of this, at least 19 states and Washington DC are mandating masks when out in public. Health officials are urging Americans to limit their 4th of July festivities to avoid more outbreaks, but are fearing the perfect storm due to travel, the already previously eased restrictions, and people just not following preventative guidelines such as social distancing and facial coverings in crowded areas.

  • In Canada, Atlantic province travellers were facing long lineups on the highway as Friday marked the first day of the Atlantic travel bubble. Residents of New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland & Labrador can freely travel across one another’s borders without having to self-isolate for 14 days. CBC is reporting there are currently six active cases of COVID-19 in Atlantic Canada, a region of 2.2M people.

  • As of Monday July 6th, United Kingdom residents will be able to visit more than 70 destinations without having to self-isolate for 14 days upon their return to the country. As of July 10th, the UK will return the favour to those 70 countries, which means as long as people haven’t visited or stopped in any other country or territory in the preceding 14 days, those arriving will not be required to self-isolate once on British soil. Left off the list are the United States, Canada, Sweden, Portugal and African nations.

  • Sweden has launched an inquiry into the country’s strategy in battling COVID-19. The country has just surpassed 70,000 cases with over 5,400 deaths, making it one of the highest per capita death rates due to the coronavirus in the world. Sweden’s strategy has been well publicized as unlike most other European countries; the country didn’t implement strict lockdown measures. Instead, many businesses, areas of the hospitality sector and schools remained open during the pandemic. Sweden had previously defended their coronavirus stance, believing they would better handle a potential second wave with a higher level of immunity. However, Sweden’s Prime Minister said at a recent press conference: “We have thousands dead. Now the question is how Sweden should change, not if.”

  • India has approved a second possible coronavirus vaccine for trial use in as many days. Zydus, part of pharmaceutical group Cadila Healthcare, can start its candidate trial this month after “eliciting a strong immune response” in tests performed on mice, guinea pigs and rabbits. India is desperate for some light at the end of the tunnel as coronavirus cases overwhelm hospitals in New Delhi and Mumbai. The country reported their highest daily total on Friday with over 20,000 new infections and trail only the United States, Brazil and Russia in confirmed COVID-19 cases.

  • Melbourne Australia’s new door-to-door coronavirus testing policy isn’t going as well as state health officials had hoped. The Victoria government said more than 10,000 people, including travel returnees have refused to be tested for COVID-19, despite a surge in the area. The state health minister is hearing all kinds of excuses from people claiming they have been tested elsewhere, that COVID-19 is a conspiracy, or that it won’t have an impact on them. In an interview on Thursday, Australia’s acting chief medical officer, Paul Kelly understood why testers coming and knocking on doors unannounced could make residents feel uncomfortable. Local media have reported the federal government was considering stiffer penalties such as fines for those who refuse to be tested.

Covid-19 – Due Diligence And Asset Management

Tiger Global, Coatue Score Double-Digit Hedge Fund Gains in 2020

Brief: Stock-picking hedge funds led by Chase Coleman, Philippe Laffont and Andreas Halversen notched double-digit gains in the first half, beating turbulent equity markets amid the coronavirus pandemic. Tiger Global Management, run by founder Coleman, has climbed roughly 17% this year in its flagship hedge fund, according to people with knowledge of the matter. It was up about 6.5% in June, said the people, asking not to be named because the information is private. Meanwhile, Halvorsen’s Viking Global Investors rose 2% in its hedge fund in June, bringing this year’s returns to 11%, according to another person. Laffont’s technology-focused Coatue Management surged 8.6% last month through June 26, extending gains for the year to 19%, a separate person said. That outpaced the gains of the Nasdaq 100 Index, which rose 16% in the first six months. After falling 20% in the first quarter, stocks soared 20% in the second quarter, the most since 1998, as the Federal Reserve offered unprecedented market support. But while U.S. consumer confidence rose in June by more than forecast, hopes of a quick economic recovery have been shaken by the increase in Covid-19 cases across the nation. The managers share a common background. They are all so-called Tiger Cubs, the term for alumni of legendary stock-picker Julian Robertson’s Tiger Management who went on to start their own hedge firms.

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Asset Owners Say Coronavirus Pandemic a Boon for ESG

Brief: Environmental, social and governance factors will become more important as the global economy recovers from the coronavirus pandemic, say asset owners. Speaking during a virtual discussion Thursday organized and hosted by Bloomberg, panelists considered the investment implications of the COVID-19 outbreak on regions, assets and investments. While ESG has been a theme in investment for some time, the accommodation and help provided by governments to companies around the world means there is an "expectation that these companies will … be good corporate citizens and repay society in some way," said Morten Nilsson, CEO at BT Pension Scheme Management, which manages the assets of the £52.2 billion ($64.4 billion) BT Pension Scheme, London. Moves toward enhanced corporate responsibility have already been made, but due to the "bold" and "extreme" responses from governments in helping businesses, "I think that pressure will only increase," Mr. Nilsson said.

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Wall Street Shifts Bets to Big Pharma as COVID-19 Vaccine Race Progresses

Brief: Wall Street is moving some bets on COVID-19 vaccines to large pharmaceutical companies with robust manufacturing capabilities, signaling that a love affair with small biotech firms might be ending after the sector’s best quarter in almost 20 years. Early signs of the shift came Wednesday, when positive data for one of Pfizer Inc’s (PFE.N) COVID-19 vaccine candidates sent shares of the large U.S. drugmaker up more than 3%. Shares of its partner on the vaccine, Germany’s BioNTech SE (22UAy.F), have been flat on the data. Although the news had little effect on shares of Pfizer’s large rivals in the vaccine race, smaller peers Moderna Inc (MRNA.O) and Inovio Pharmaceuticals Inc (INO.O), both of which have previously shown promising COVID-19 data of their own, ended down more than 4% and 25%, respectively. Inovio partially rebounded Thursday.For the week so far, shares of bigger players in the vaccine race, such as Johnson & Johnson (JNJ.N) and Merck (MRK.N), have also outperformed Inovio and Moderna.Some of the selling was likely driven by end-of-quarter profit-taking, locking in dizzying gains in an otherwise turbulent market. Moderna and Inovio shares have risen nearly 200 percent and 540 percent in the year-to-date, respectively, greatly eclipsing gains for large pharmaceutical companies.

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Global Markets: COVID Recovery vs COVID Reality

Brief: World shares stalled near a four-month high on Friday and the industrial bellwether metal copper scuffed its longest weekly winning streak in nearly three years, as nagging coronavirus nerves tempered the recent recovery run. The market rally, fuelled by Thursday’s record U.S. jobs numbers, largely blew itself out after a record daily total of new U.S. COVID-19 cases, though news of the fastest expansion in China’s services sector in over a decade kept Asia’s tail up early in the day.Chinese shares had charged to their highest level in five years [.SS], helping the pan-Asian indexes to four-month peaks, so the sight of European markets stalling left traders floundering, especially with no Wall Street to pick things up again because of a U.S. market holiday. [.EU]Currency and commodity markets were also subdued after an otherwise strong week for confidence-sensitive stalwarts such oil, copper, sterling and the Australian dollar, which all struggled on Friday.More than three dozen U.S. states are now seeing increases in COVID-19 cases, including Florida, where they have leapt above 10,000 a day. And while Europe is largely easing restrictions, some places are having to keep them or reimpose them again.

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Workers on Re-Openings: ‘I Would Like Never to go Back to the Office’

Brief: Reopening businesses has started in many states and cities across the country. For people who have been working from home, some are chomping at the bit to get out of the house. Others, however, are not psyched. So far, the forced work-from-home framework many companies have been forced to implement has been largely seen as a success by many businesses and workers, some of which have decided to allow more widespread remote work, like Facebook (FB), Twitter (TWTR), and Square (SQ). Most people have been able to get the job done from home. Whether it’s better or not is another story. Just over half of people (51%) who have been working from home think it’s better, according to arecent survey from Yahoo Finance-HarrisPoll, while 30% say it’s worse. Some surveys have shown even more optimism. According to Korn Ferry, almosttwo-thirdsof its survey respondents said they are more productive from home… Companies like JPMorgan Chase in New York have been considering their reopening plans for their massive offices in Midtown Manhattan. In a memo to employees, the bank said that it's time to go back in and plan to start on July 13, though some employees returned on June 22. The company is bringing back employees in waves and expects to be at around 20% occupancy until Labor Day. The idea is to go slow and figure things out for a larger fall return. Bank of America said Thursday it plans to bringemployees back to officesin phases after Labor Day.

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These Hedge Funds Thrived in 2019. Are They Surviving 2020?

Brief: So far in 2020, the multistrategy hedge fund firm is earning that title. Citadel’s flagship Wellington fund was up 11.4 percent for the year through May, according to a person familiar with the fund, extending its win streak after delivering a19 percent gainin 2019. Multistrategy funds as a whole fared much worse, according to HFR, which reported losses ranging from 1.73 percent to 2.45 percent across its multistrategy indices. Across all strategies, hedge funds tracked by HFR were down 6.56 percent through April as the coronavirus pandemic rattled markets. At the end of May — the most recently available returns from the data provider — hedge funds were still down about five percent for the year. It’s a very different result from 2019, when hedge funds as an industry delivered double-digit returns amid soaring stock markets. The winners ofInstitutional Investor’s2020 Hedge Fund Industry Awardswere nominated on the basis of their strong performances in 2019 — but 2020 has proven more challenging.

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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 2, 2020:

  • As the United States hit 50,000 new coronavirus cases a day, including a record 10,000+ in Florida, the government has purchased nearly the entire stock of a drug proven to be effective to severely ill patients with the virus. According to a news release, the Department of Health and Human Services (HHS) buyout of Gilead’s remedesivir represented 100% of projected production for July, followed by 90% in August and September. HHS Secretary Alex Azar called the move “an amazing deal” struck by United States President Donald Trump. The move wasn’t as well received in the rest of the world with the European Union reaching out to Gilead Sciences Inc. about “reserving a significant number of doses” for its block member states.

  • In Canada, the country’s most populous province looks to move into Stage 3 of its COVID-19 reopening plan. Ontario’s 24 of its 34 public health units have been in Stage 2 of its reopening plan for nearly three weeks. While new cases are in the 150-range for the province, more than half of Ontario’s 34 public health units currently have fewer than 10 active cases. Ontario’s Health Minister Christine Elliott noted while they would like to move into the next stage as soon as possible, the government still needs another week of data before they make their decision.

  • In the United Kingdom, the Office for National Statistics (ONS)most recent report shows the fall of coronavirus infections across England leveling off. The ONS says their data shows the current trend as being flat, which is significant as the country plans a significant easing of their restrictions this weekend with pubs and restaurants opening on Saturday.

  • German Chancellor Angela Merkel has called the fallout from the coronavirus as Europe’s “most difficult situation in its history.” Chancellor Merkel has called on the EU member states to quickly come to an agreement on the $750B euro recovery fund to counter the economic consequences of the coronavirus. The EU nations are still fighting over the volume, financing and type of aid and have a little over two weeks to get on the same page when the 27 member states meet for a summit on July 17th and 18th.

  • Trying to avoid a second full lockdown, Israel is instead imposing targeted lockdowns in neighbourhoods with COVID-19 flare-ups. Earlier this week, Israel experienced a single day record for coronavirus cases in back-to-back days. The country’s first lockdown left a third of the population looking for unemployment insurance.

  • The Philippines announced Thursday they will release 15,000 prisoners in hopes to ease congestion and contain the spread of the coronavirus. The majority of the prisoners being released had committed light or bailable offences. Since Rodrigo Duterte became President in 2016, his war on drugs have helped fill the country’s prisons. Manila and Cebu City remain the coronavirus hotspots in the country and earlier this week, President Duterte said Cebu City will remain in lockdown for two more weeks.

  • Tokyo, Japan’s 107 confirmed cases on Thursday were the highest noted in nearly two months. Despite this, government officials say they have no plans of reintroducing a state of emergency. Home to 14 million people, Tokyo has seen at least 50 new cases every day for the past week. Government officials had been hoping with the state of emergency lifted on May 25th that those numbers would be fewer than 20 per day. Because of this, Tokyo government officials have decided to move away from numerical targets and instead focus on expert advice on how to rein in the virus to avoid more economic damage.

Covid-19 – Due Diligence And Asset Management

Investor Who Made Billions with GFC ‘Big Short’ Bet Quits Hedge Funds

Brief: Just over a decade after John Paulson shot to fame and fortune, he's become the latest big-name money manager to quit the hedge-fund business, saying this week he's converting his firm into a family office. Paulson never managed to sustain the success and notoriety he found by betting against the housing market in the run up to the last financial crisis. Now, in the midst of an another period of economic turmoil, he's returning outside investors' money to focus on his own fortune, which the Bloomberg Billionaires Index puts at $US4.4 billion ($6.4 billion). He joins a list of industry legends who have recently called it quits amid a generational shift. Louis Bacon said in the past year that he was stepping back, as returns that were once routinely in the double digits dribbled away. David Tepper also said he was transitioning his firm, though he planned to keep a few outside clients. Stan Druckenmiller and George Soros, two legends of the 1990s, were among the first to switch to the family office model. The move also underscores the wider tumult in the investing world, where fund managers who for decades bestrode Wall Street as revered money makers find themselves struggling to compete with computer-driven, index-tracking funds that closely follow seemingly ever-rising markets at a fraction of the cost of traditional offerings.

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Top-Performing U.S. Equity Funds This Year Are Betting On a Transformed World

Brief: U.S. equity funds that were able to best weather the global economic upheaval from the coronavirus pandemic this year are turning to healthcare, e-commerce and electric vehicle stocks as they look ahead to 2021. Few expect a quick economic recovery or containment of the virus that would allow a widespread return to office buildings and schools. Instead, top-performing fund managers say they are positioning their portfolios to benefit from an increase in new forms of technology as businesses and consumers change their habits amid a lingering pandemic. “It’s depressing to see the data that among the developed world, we’re having the worst situation, but we’re looking for the big industry trends that will persist no matter how long (COVID-19) goes on and will continue afterwards,” said Michael Lippert, whose Baron Opportunity fund is up 30.7% for the year to date. As a result, Lippert has been buying shares of warehouse company Rexford Industrial Reality Inc as a play on the growth of ecommerce and data, and cybersecurity firm Splunk Inc in anticipation that remote work will persist well into next year. Shares of Rexford are down nearly 10% in the year to date, while shares of Splunk are up nearly 33%.

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Rescue Cash Too Hot for KKR Proves Irresistible to Many PE Peers

Brief: Even inside battle-scarred KKR & Co., entering the political fray was enough to stoke unease. As several of the private equity titan’s portfolio companies got loans from an emergency U.S. program aimed at helping small businesses survive the coronavirus pandemic, executives at the firm’s New York headquarters issued a blunt message: Return the money to taxpayers. Yet across the cash-rich private equity world, many firms pushed ahead, benefiting from the $669 billion Paycheck Protection Program run by the Small Business Administration and Treasury Department, according to lawyers and lenders with knowledge of the strategies. Now, some of those firms face the prospect of tough public scrutiny, as the Trump administration acquiesces to pressure from lawmakers to name borrowers who drew potentially forgivable loans from taxpayers. After the government broadly excluded private equity firms from the program, dozens found ways to steer around the restrictions, often adjusting governance or ownership arrangements with portfolio companies in sectors including entertainment, fitness, sports and dermatology, the people said, asking not to be named discussing confidential arrangements.

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Bridgewater’s Dalio Says Capital Markets No Longer ‘Free’

Brief: Recent central bank actions mean capital markets are no longer “free,” according to Bridgewater Associates’s Ray Dalio, founder of the world’s largest hedge fund. “Today the economy and the markets are driven by the central banks and the coordination with the central government,” said Dalio, speaking at the Bloomberg Global Asset Owners Forum on Thursday. As a result, “capital markets are not free markets allocating resources in traditional ways.” The Covid-19 pandemic brought economic activity to a standstill and sent markets spiraling downward in March. The Federal Reserve’s unprecedented multi-trillion dollar response eased concerns and helped fuel a shock recovery in financial markets even as the U.S. economy continues to struggle. Dalio said the U.S. now has the worst wealth gap since the 1930s, adding that central banks will need to continue to pump money into the economy. “You’re going to see central bank balance sheets explode, they have to because the choice is the sinking ship,” he said. Dalio also said that investors should favor stocks and gold over bonds and cash because the latter offer a negative rate of return and central banks will print more money.

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Gundlach Sounds off on V-Shaped Recovery Prospects: ‘Highly Optimistic’ at Best

Brief: Billionaire bond investor Jeffrey Gundlach believes a quick economic recovery is "highly optimistic" — and probably not even plausible given that a rebound to pre-coronavirus levels will take at least a year to materialize.  Themarket’s powerful surgefrom its March lows has been propelled in part by investor expectations of a rapid“V-shaped” rebound, especially as coronavirus lockdowns get eased. However, Gundlach told Yahoo Finance in an interview that scenario is unlikely for a number of reasons. "I think that whatever the consensus is on the so-called shape of the recovery, I'm taking the under," the CEO of $135 billion DoubleLine Capital, said on Wednesday.  According to Gundlach, a sharp recovery from asteep, depression-like plunge "basically implies is that you can take 20% of the entire workforce...[and] put them on unemployment benefits, have them produce nothing,” the investor said, referring to the staggering post-lockdown job losses. To date,nearly 50 million peoplehave filed jobless claims in the wake of the COVID-19 crisis.

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You’re Doing It Wrong: A Tail-Risk Hedger Calls Out His Industry

Brief: Portfolio hedges aren’t insurance, Ari Bergmann wants to point out. Bergmann created some of the first derivatives while at Bankers Trust in the 1990s, and he is passionate that tail hedge managers are shooting themselves in the foot by trying to get investors to see the strategies as insurance with a small annual cost. “If you make money on insurance, you are an arsonist,” he said. During an interview, Bergmann, who founded Penso Advisors in 2010 to provide risk mitigation strategies, got on a roll. “Why do you need insurance? The market came back. That tells you that you don’t need insurance. Insurance doesn’t help. Between the Federal Reserve and the government, you have the best insurance. That’s for free and the taxpayers are paying you.” Brevan Howard owns a minority stake in Penso. Tail-risk hedging funds are designed to profit from rare episodes like the global financial crisis or March’s Covid Crash. They took off in 2008 as they generated profits even as stock and bond markets fell around the world. Nassim Nicholas Taleb’s 2007 bestseller The Black Swan, which argued that unexpected events are more common than most people think, gave these hedge funds added tail wind.

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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.

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