Brief: BlackRock Inc. Chief Executive Officer Larry Fink said the full extent of the coronavirus pandemic on the U.S. economy’s smaller companies remains unclear, even as cities begin reopening. “We still have not witnessed the full impact on small and medium businesses,” Fink said in an interview Tuesday on Bloomberg Television. The virus’s spread forced a shutdown across the country, upending sectors from energy to consumer. Signs of acute pain for small businesses are already showing: about 14% of companies that received support from the Paycheck Protection Program, a key pillar of the U.S. government’s aid to small businesses, expect they’ll need to reduce their workforce after using the loans, according to a new survey from the National Federation of Independent Business. Last week, 13 U.S. companies sought bankruptcy protection, matching the peak of the global financial crisis, data compiled by Bloomberg show. While larger corporations have stabilized, the fate of other parts of the economy will be determined by how Covid-19 is handled in the coming months, he said. Fink’s remarks come as the world’s largest asset manager navigates a year of turmoil that includes the pandemic and a wave of protests over racial inequality that began in the U.S. He said he expects market uncertainty, which spiked in mid-March, to remain elevated for months to come.
Inflation in the U.S. is likely to come back slowly, keeping the Federal Reserve from raising interest rates for an extended period, according to the chief executive officer of Pacific Investment Management Co. Over the next couple of years, prices are likely to increase to the 2.3% to 2.4% level, Emmanuel “Manny” Roman said Tuesday at the Bloomberg Invest Global virtual event. The central bank has learned its lesson from past interest rate increases and will be determined to avoid another “temper tantrum,” he said. “The days of inflation we remember are gone,” Roman said. “We don’t think the Fed is going to raise rates for a very long time.” Led by the Fed, central banks have been cutting interest rates and buying securities to combat the effects of the coronavirus pandemic, an intervention that helped stabilize global markets. Even as U.S. unemployment soared to its highest level in decades, stock markets have recovered most of their post-pandemic losses and corporate debt investors have poured money into junk bonds. U.S. equities rose to a two-week high Tuesday amid a report that President Donald Trump supports sending another round of checks to Americans and data that showed manufacturing nearing expansion. Pimco, with about $1.8 trillion in mostly fixed-income assets under management, is raising at least $6 billion for distressed credit and other corporate debt opportunities to take advantage of dislocations driven by the coronavirus pandemic.
Brief: The Covid-19 pandemic’s impact on hedge fund redemptions continued in April as the industry experienced USD38.1 billion in outflows. While a sizeable sum, the net redemption total was less than half of March’s USD85.6 billion redemption total. April’s redemptions represented 1.3 per cent of industry assets, according to the Barclay Fund Flow Indicator published by BarclayHedge, a division of Backstop Solutions. A positive note was a USD101.2 billion monthly trading profit fuelled by an April stock market rally, bringing total hedge fund industry assets to more than USD2.99 trillion as April ended, up from USD2.86 trillion at the end of March. Data from 6,000 funds (excluding CTAs) in the BarclayHedge database showed the greatest volume of April redemptions coming from hedge funds in the US and its offshore islands where investors pulled out USD21.7 billion during the month. Investors redeemed nearly USD13.1 billion from funds in the UK and its offshore islands during the month, while funds in Continental Europe experienced nearly USD2.6 billion in outflows.
Brief: A lively debate is currently taking place amongst allocators as to whether onsite due diligence and face-to-face meetings are still necessary given the current environment. The simple answer must be a resounding: yes, absolutely. Due diligence, both investment and operational, has always been an integral part of a well-structured investment process. Those of us who have been around since pre-2008 can certainly attest to the fact that a lot has changed since, and the days are long gone when it was possible for managers to simply refer to their stellar track records and assume that investments would be forthcoming without any other questions being asked. Investors have learnt that having a detailed understanding of a strategy is just the beginning and that the operational framework in which a strategy is implemented is also of great importance. The question, of course, is how to best ascertain all of this during the current period, whether process adjustments can and should be made and, critically, whether there are additional risks that necessitate closer scrutiny at present.
Brief: Dyal Capital Partners is nearing a $1 billion loan against the fee revenue of private equity firms in which it has acquired stakes and will use the proceeds to return cash to its investors, a person familiar with the matter said on Monday. The loan pertains to investments made out of the firm’s $5.3 billion Dyal Capital Partners III fund, the source said. While private equity firms often borrow against companies they own to fund dividends to their investors, such borrowing at fund level is less common. The loan has an “A-“ credit rating, according to the source, underscoring the confidence of lenders that it will be paid back in the face of economic uncertainty brought about by the COVID-19 pandemic. Dyal, a subsidiary of asset manager Neuberger Berman Holdings, owns stakes in major private equity firms such as Silver Lake and Vista Equity Partners. It had initially looked to raise $500 million, but increased the size of the loan due to strong investor interest, primarily from large insurers, the source said. The loan carries a 4.4% fixed coupon and is expected to close on Tuesday. A spokesman for Neuberger Berman declined to comment.
Brief: Trend-following strategies have earned a reputation for outperforming during periods of crisis. That theory was borne out during the height of the Covid-19 crisis — up to a point. In a new paper entitled “The Coronavirus Crisis: What is the same? What’s different?,” Katy Kaminski, chief research strategist and portfolio manager at quantitative investment firm AlphaSimplex, analyzed nine substantial drawdowns in equity markets since 1998. The paper classified drawdowns into two categories: corrections, for losses of 15 percent over periods of two months or less, and crises, for more sustained, deeper losses. Kaminski and AlphaSimplex junior research scientist Ying Yang concluded that the Covid-19 market crisis was “one of the fastest crisis periods in history.” They found that short-term, pure trend-following strategies proved better than other strategies — including other styles of trend-following strategies — at navigating the turmoil.