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Coronavirus Diligence Briefing

Our briefing for Tuesday December 8, 2020:

Dec 8, 2020 3:38:17 PM

  • In the United Kingdom, a soon-to-be 91-year-old retired shop clerk and grandmother of four received the first shot of the approved Pfizer vaccine in what public health officials have called V-Day. Margaret Keenan was the first one in line at the University Hospital Coventry, one of several hospitals around the country that are handling the initial phase of the UK’s inoculation program. The UK is the first country in the western world to start mass inoculations and will likely provide lessons to other countries as they prepare for the unprecedented task of vaccinating billions of people.

  • Ahead of an advisory meeting Thursday to review the Pfizer COVID-19 vaccine, the United States Food and Drug Administration (FDA) has given its opinion. The FDA said Tuesday data from the drugmaker’s vaccine trials is consistent with recommendations put forth by the agency for an emergency use authorization. Data submitted appeared to show the vaccine was at least 52% effective before the second dose and 82% effective for the combined group of people who took one or two doses. In comparison, the annual flu vaccine generally reduces people’s risk of getting the flu by 40% to 60% compared with people who aren’t inoculated, according to the Centers for Disease Control and Prevention (CDC).

  • In Canada, Ontario’s Toronto and Peel regions have passed the midway point of their 28- day lockdown, but it has seemed to do little in flattening the curve. Since measures such as the closure of in-person restaurant service, gyms and a ban on indoor social gatherings - case counts, and hospitalizations have continued a steady climb. Health officials attribute the situation to trying to slow down a massive truck, whose momentum is difficult, but not impossible to counteract. However, an Angus Reid poll on Canadians plan for the Christmas holidays may throw a wrench into slowing down the coronavirus truck. The new survey taken in late November, said 30% of the nearly 5,000 respondents said they will be visiting loved ones locally and 10% says they planned to leave their community or province to do so.

  • Germany’s center for disease control confirmed on Tuesday the proportion of coronavirus cases per 100,000 people has reached a record high. The data from the Robert Koch Institute shows Germany has been averaging 147.2 infections per 100,000 people in the past seven days, which is far above the government’s stated goal of bringing new infections below 50 per 100,000. Chancellor Angela Merkel has said the country could only consider its anti-pandemic measures if that stated goal is met. Germany’s health minister was on public television Monday evening stating that stronger measures might be needed if the current trajectory is not broken.

  • In an attempt to kickstart Japan’s economy, Prime Minister Yoshihide Suga has launched the third fiscal stimulus of the year. The $294 billion USD package includes money to fight the coronavirus pandemic, but also trillions of yen aimed at investment in new digital and green technologies. “This economic package will protect the lives and livelihood of the people”, said Prime Minister Suga in a meeting with his ruling coalition. “It will maintain employment, support businesses, drive the economic recovery and open the way to breakthroughs in growth areas of green and digital technology.” This round of stimulus follows earlier rounds in April and May.

  • As the United Kingdom might be a window to what vaccine rollouts will look like for others, Australia has shown the rest of the world the effectiveness of lockdowns. When Australia started to witness a resurgence in cases in late July, the government put in place measures with the goal of just not flattening the curve but reaching zero new cases. The policy proposal was named “Go for zero” by a think tank that advises the government. While the strict lockdowns were hard to deal with for its residents – they are now reaping the benefits. Victoria state – home of the lockdown back in August can now allow up to 100 people to attend public gatherings and Melbourne welcomed its first international passenger flight in five months. Australia’s “Go for zero” approach has attracted media coverage from countries such as India and Canada.

Covid-19 – Due Diligence And Asset Management

US Election Results and Vaccine Optimism Drive Hedge Fund Surge

Brief: Hedge funds saw their second-strongest monthly gain on record in November, following a surge driven by US election results and developments made in the search for a Covid-19 vaccine. According to data from Hedge Fund Research, the HFRI Fund Weighted Composite Index soared 6.2% in November - the strongest monthly gain since December 1999 and the second-strongest month since index inception in 1990. The HFRI 500 Index also increased by 4.6% for the month, increasing the year-to-date return to 5.6%. These gains were largely led by equity hedge strategies, which soared on the back of “positive” developments. The HFRI Equity Hedge Index increased by nearly 9% for the month. Kenneth J. Heinz, president of HFR, said: “Through the powerful and volatile macroeconomic and geopolitical trends which have defined 2020, institutions have continued to increase allocations to hedge funds and other alternatives, building in strong performance momentum and positioning for acceleration of these gains into 2020.” Blockchain and cryptocurrency exposures were also said to drive industry gains, as hedge funds continue to increasingly incorporate related exposures into new and existing fund strategies. 

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Singapore, China Deepen Collaboration in Digital Finance, Among Other Areas: MAS

Brief : To support tourism, trade and e-commerce between Singapore and China, the Monetary Authority of Singapore (MAS) is working with the People's Bank of China in the area of digital finance, the central bank said on Tuesday (Dec 8). This is one in a slew of initiatives that will deepen financial cooperation between Singapore and China following an apex meeting between the two countries, the MAS said. It added that the measures will build on existing areas of collaboration, with the aim of supporting financing and investment activities to help Singapore and China recover from the Covid-19 pandemic. The initiatives were discussed at the 16th Joint Council for Bilateral Cooperation between Singapore and China, the highest-level bilateral platform between the two countries, on Tuesday (Dec 8), the MAS said. Another initiative is a 25 billion yuan ($5.11 billion) facility launched last month to help banks in Singapore meet their customers' growing business needs in Singapore and the region. Yuan funding of up to three months will be channelled to primary dealers - banks in Singapore approved by the MAS - through the authority's money market operations.

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GMO Has a Plan to Profit From a Growth Stock Bubble

Brief: GMO, the investment firm co-founded by Jeremy Grantham, has started running a long-short strategy that is designed to profit from the bursting of the growth bubble the firm sees in the stock market. The GMO Equity Dislocation Strategy was first put to work in late October across the firm’s liquid alternatives and multi-asset portfolios, Ben Inker, GMO’s head of asset allocation, told Institutional Investor in a phone interview. The firm raced to create the strategy after observing excessive speculation in stocks as the market came roaring back from its Covid-19-induced crash in March. “By the spring, we had started to see ‘the stupid,’” said Inker. “If you’re not prepared to short the stuff that’s gotten drastically overvalued, you can avoid a lot of the pain — but that’s not going to make you money.” GMO’s new strategy — which is long cheap stocks and short those that are expensive globally — has the potential to produce cumulative net returns of around 80 percent, according to Inker. That’s similar to the gains reaped from the GMO U.S. Aggressive Long/Short Strategy that the asset manager built to profit from the bursting of the 2000 bubble in technology, media, and telecom stocks. “We see a very similar spread to what we saw then,” Inker said of the valuation gap between growth and value stocks. “In 2000, buying value stocks was a perfectly decent idea,” he added, “but buying value stocks and shorting growth stocks did a lot better.” 

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Early Bet on Moderna Sees Top European Fund Gain 65% This Year

Brief: A Baillie Gifford & Co. health care fund run by an all-female team has surged past peers to a 65% gain this year, largely thanks to a far-sighted bet on medical stock Moderna Inc. The fund’s standout performer by far is Moderna, up about 700% this year, propelled by the recent success of its coronavirus vaccine trials. Other top holdings of the $80 million Worldwide Health Innovation fund also saw triple-digit rises, making it the best performing among European health care peers, according to Morningstar Inc. data. “The best way to think about Moderna is that they’re at the root of controlling biology -- anything that can be coded, Moderna can replicate,” said the fund’s manager Julia Angeles, who first invested in the company when it listed in December 2018. “I believed they could be one of those really unique companies that bridges the gap between biotech and technology.” The coronavirus sparked a rush by investors to bet on the winners in a race for a vaccine, with Pfizer Inc. and partner BioNTech SE soaring in the past month. Still, the nearest European peers to the Baillie Gifford fund trail it with gains of 13%-45% this year to November. The pandemic has had a mixed impact on the health care industry overall. Many patients with other conditions have shunned emergency rooms and doctors’ offices for fear of contagion.

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Over Half of LPs to Access Secondary Market Within Two Years, says Coller Capital

Brief: Over half of private equity investors (LPs) will access the secondary market within the next two years, either as a buyer or a seller – or both, according to Coller Capital’s latest Global Private Equity Barometer. Investors’ main motivations will be to re-focus their resources on their best private equity managers (GPs) and to re-balance their portfolios for a post-Covid world. One third of Limited Partners will face liquidity shortfalls, which they plan to remedy through asset disposals and new credit facilities. GP-led secondaries are likely to play an important role, too. Well-structured GP-led processes are overwhelmingly popular with LPs – 85 per cent of whom regard them as a useful tool. “The secondary market played a vital role in private equity during and after the GFC,” says Jeremy Coller, Chief Investment Officer of Coller Capital, “and secondary capabilities have certainly evolved since then. If General Partners structure liquidity processes that offer genuine alignment to all parties – whether they’re buyers or sellers – Limited Partners will welcome them, to the benefit of all participants in the asset class.” Despite the suddenness of the pandemic’s onset, nearly all LPs declare themselves fairly or highly satisfied with how their GPs have communicated – a stark contrast to the Global Financial Crisis, after which 60 per cent of investors told the Barometer that they were dissatisfied.

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Does Dan Loeb Secretly Love Short Selling?

Brief: Like a lot of hedge fund managers, Dan Loeb might be suspected of having a love-hate relationship with short selling. And who could blame him? But even though short bets have been painful for Third Point in recent months, Loeb is backing a new long-short equity firm, called Snowhook Capital Management, launched by the man who was formerly Third Point’s top short seller. When the Covid pandemic hit the markets in the early part of the year, Loeb’s Third Point portfolio was considerably shorter than it is now. But even so, Loeb has admitted he wasn’t prepared for what was to come.  “We did not ascribe adequate probability to a full-blown global pandemic in our scenario analysis around Covid-19 nor to its blunt but necessary cure: a total economic shutdown in much of the world,” he told investors in his first-quarter letter. Third Point’s short book provided much-needed ballast during the storm, even as the fund sank in to the red, losing 16 percent during the first quarter. But as markets recovered, Third Point’s short positions have become among the top five monthly losers in five of the past nine months, according to the firm’s reports to investors.  And in 2019, two of the year’s top five losers were short bets. By September, Third Point managing director Stoyan Hadjivaltchev, who oversaw the equity short book, had left the firm and launched a fund of his own.

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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.

Topics:Coronaviruscovid-19