Brief: Hedge funds and other short sellers are beginning to set their sights on a U.S. credit-derivatives index with outsized exposure to hotel debt as the pandemic sinks the hospitality industry into distress. The firms are starting to build up wagers against the synthetic index, known as CMBX 9, shifting attention from a high-profile bet against America’s challenged malls. The shift, which market participants say is beginning to show up in some trading flows, comes as delinquencies on hospitality property loans surge and even begin to exceed those in retail. “In the last month there has been more selling pressure on the CMBX 9 than any of the other CMBS indices,” said Dan McNamara, a principal at MP Securitized Credit Partners, a hedge fund focused on shorting commercial mortgage bonds. “That’s because some hedge funds are actively looking to play the short side on the Series 9 index due to its significant hotel exposure.” Retail debt has been a lucrative bearish bet this year as people stayed home amid lockdowns and shopped online, exacerbating an existing threat to brick-and-mortar stores. Traders have been taking positions on retail through a 2012 version of the commercial mortgage index called CMBX 6, which has a high concentration of debt tied to shopping malls.
Brief: At the height of the coronavirus pandemic last spring, the heads of U.S. banks including Morgan Stanley, Bank of America Corp and others pledged not to cut any jobs in 2020 because it was the wrong thing to do. However, as executives prepare for an extended recession and loan losses that come with it, layoffs are back on the table, said consultants, industry insiders and compensation analysts. Compared with April projections, bank economists and executives expect the U.S. economy to take longer to recover, with high unemployment into 2021 and interest rates staying near zero for the foreseeable future. On top of that, working from home has shown some managers that they need fewer employees to do the same amount of work. “No question, layoffs (will) come across the board for all the banks,” said Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management, which invests in JPMorgan Chase and other large Canadian banks. Banks have to cut costs because of expected credit issues, as well as low interest rates and regulatory pressure to trim dividends, he said.
Brief: Funds recommended equity holdings be trimmed to the lowest in over four years in August, despite record-breaking gains by world stocks, as the pandemic drags on and new data suggest the nascent economic rebound is stalling, Reuters polls found. The August 17-27 poll of 35 fund managers and chief investment officers in the U.S., Europe, Britain and Japan was largely taken before Federal Reserve Chairman Jerome Powell announced a new policy framework promoting higher inflation to spur economic recovery and job creation on Thursday. The Fed’s new strategy sent U.S. Treasury yields higher, which gave a lift to interest rate-sensitive financials and in turn boosted the S&P 500 index to a new record high and pushed the MSCI’s all-country world index to surge past its pre-COVID-19 high reached in February. While world stocks have risen as much as nearly 60% since March troughs, the poll showed average recommended exposure for equities in August in the model global portfolio was the lowest since July 2016, down to 43.1% from 43.9% the previous month. Overall equity exposure is down 6.6 percentage points from the beginning of the year, down from 49.7% in January.
Brief: Active managers have long claimed that they needed volatility to beat the market. Yet many of them still failed to outperform the average passive fund during the “once-in-a-decade” volatility at the beginning of the Covid-19 pandemic. According to research from Morningstar, only about half of active stock funds and one third of active fixed-income funds bested their average passive peer during the first six months of 2020. The twice-yearly Morningstar Active/Passive Barometer measures the performance of Europe-domiciled active funds against their passive peers. It covers almost 22,600 funds managing €3.7tn of assets. Morningstar’s research is unusual because it compares the performance of stock pickers with fee-charging passive funds, instead of against a cost-free index. It found that 35% of UK large-cap managers have beaten their passive counterparts over the last 10 years. However, Europe-based US large-cap, Japan large-cap, France large-cap, Germany large-cap and Switzerland large-cap have done less well. Between 5.6% and 28.3% of managers in those sectors have outperformed the average passive fund.
Brief: Hedge funds seeking to take advantage of turbulence in the global aviation industry have lost almost EUR800 million in August, according to data from Ortex Analytics. Analysis of short positions against the world's 10 largest airlines throughout 2020 shows hedge funds lost EUR791.6 million in August. The losses reduced total returns YTD from the group by over a third, however hedge funds remain EUR1.4 billion in profit. A large proportion of this (EUR1.2 billion) came from short positions in March as international travel restrictions came into effect as a result of the Covid-19 pandemic. Peter Hillerberg, co-founder of Ortex Analytics, says: “This year has no doubt been the most difficult on record for the aviation industry. Hedge funds were quick to capitalise on the impact of travel restrictions and made significant profit as a result. However, what we’ve seen in recent months is a reversal of fortunes as short sellers made substantial losses in June and August. Although there is still much uncertainty about the reopening of international travel, when it comes to short profits, hedge funds should remember something airline pilots know for certain, what goes up must come down.”
Brief: Private-equity giant The Blackstone Group is gearing up for US employees to return to the office after Labor Day, according to memos seen by Business Insider.
Blackstone is partnering with Vault Health to provide COVID home testing kits to US employees before they return to the office, according to the memo written by HR director Paige Ross. All investment professionals and asset managers will have a test sent to their home by Aug. 31. One person with direct knowledge of the return-to-office plans said calls within the firm were strongly encouraging investment teams to come to the office, unless they had a “valid reason” to remain remote. A Blackstone spokesman said in a statement that the health and safety of employees is the firm’s top priority.