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Our briefing for Wednesday January 13, 2021:
Jan 13, 2021 4:24:26 PM
- The United States will be joining several other countries and requiring a negative COVID-19 test from all air passengers entering the country. According to Centers for Disease Control and Prevention (CDC) Director Dr. Robert Redfield, the new order will go into effect as of January 26th. Air passengers will be required to get a viral test within three days before their departure and provide written documentation of their lab results, or documentation of having recovered from COVID-19. The move is being made to help slow the spread of the virus and curtail the new variant from entering the country. CNN is reporting as of Tuesday, the new COVID-19 variant, which appears more transmissible, has already been found in 10 states in samples dating back to mid-December.
- In Canada, the coronavirus continues to cripple the airline industry. Air Canada announced on Wednesday they will be cutting 1,700 jobs as it scales down operations in response to a new wave of lockdowns, including a stay-at-home order in Ontario, the country’s most populous province. The airline will be making a 25% reduction in service for the first quarter of 2021 and are operating at 20% capacity compared with the first quarter of 2019. Atlantic Canada seems to be taking the brunt of the cuts with suspension of flights until further notice in certain cities in New Brunswick, Newfoundland & Labrador and Nova Scotia announced over the last several weeks.
- The United Kingdom reported their deadliest day yet so far from the coronavirus on Wednesday. The UK reported 1,564 deaths as the country’s hospitals are filling up with patients suffering from COVID-19 and the number on ventilator use surpassing peak levels of the first wave in April 2020. Despite all this, Prime Minister Boris Johnson said there are early signs current measures are working but didn’t rule out tougher restrictions. Elsewhere in the UK, industry groups representing pharmaceutical companies in America and Europe are raising doubts about the country’s strategy for giving COVID-19 vaccines to as many people as possible in the shortest amount of time. The UK has said it would allow for second doses of some vaccines to be given as many as 12 weeks after the first, longer than the timing determined by Pfizer and Moderna.
- Italy was already dealing with a health emergency when it comes to the coronavirus and now appear to have a political emergency. The country’s former premier Matteo Renzi said he was pulling his party’s ministers from cabinet on Wednesday, which negates the ruling coalition of its parliamentary majority. Renzi, who heads the Italia Viva party has long threatened to quit government over Prime Minister Giuseppe Conte’s plans for spending billions of euros promised by the European Union to restart the economy. If a coalition can’t be agreed upon moving forward, a national vote could be triggered in a country that has had to deal with over 80,000 COVID-19 deaths.
- China posted its largest daily jump in COVID-19 cases in more than five months. The country has stepped up containment measures by putting four more cities under lockdown. Official data showed most of the new cases were reported near the capital of Beijing, but a province in far northeast China also saw a rise in cases. The wave of new infections comes ahead of next month’s Lunar New Year holiday. Normally this is a time when millions of Chinese travel back to their hometowns. However, clearly apparent, these are no longer normal times and people are being urged to stay put with many provinces asking migrant workers to remain during the break.
- Many were hoping 2021 couldn’t possibly be any worse than 2020, the World Health Organization (WHO) has something to say about that. Given how the COVID-19 pandemic is spreading and with more infectious variants circulating in the northern hemisphere, the second year of the pandemic could be worse than the first said the WHO on Wednesday. “Certainly, in the northern hemisphere, particularly in Europe and North America we have seen that sort of perfect storm of the season – coldness, people going inside, increased social mixing and a combination of factors that have driven increased transmission in many, many countries,” said Mike Ryan, the WHO’s top emergencies official.
Covid-19 – Due Diligence And Asset Management
New Industry Data Reveals “Significant” Gulf Between Gains and Losses Among Largest Hedge Funds
Brief: Hedge fund managers have experienced “significant” performance dispersion over the past 12 months, with the biggest funds seeing the largest gaps between gains and losses, new industry data shows, once again underlining the importance of investor due diligence in separating winners from losers. Hedge funds globally ended a tumultuous 2020 on a high, generating an average monthly gain in December of some 4 per cent, to bring full-year returns to more than 11 per cent, according to newly-published year-end performance data from eVestment. The 10 biggest hedge funds tracked by eVestment generated returns of just 3.72 per cent between January and December last year – almost three times below 2020’s hedge fund industry average. But, of that grouping of the 10 largest funds, just one was close to that average, said Peter Laurelli, global head of research at eVestment, with most scoring strong double-digit gains. “Despite the high average returns across the industry, 2020 was a year where the dispersion of returns between fund types and within those various segments was significant. This was very apparent among large funds,” Laurelli noted in a commentary on Wednesday. “There were more large funds with double-digit gains and double-digit losses than not in 2020, highlighting the importance of fund due diligence and monitoring when selecting any hedge fund.
Howard Marks Says Fed Moves Have Had Coercive Effect on Markets
Brief: Federal Reserve rate actions have had a coercive effect on the markets and forced investors to move into risk assets, according to Oaktree Capital Group co-founder Howard Marks. “This has required people to invest because they don’t want to sit around with their cash,” Marks said Tuesday in an interview on Bloomberg TV. “They don’t want Treasuries at less than 1% or high-grade bonds at 2%.” Global credit and equity markets have staged a dramatic rebound since March, when the Fed first took unprecedented steps to steady the economy amid the Covid-19 outbreak. This dramatically cut the amount of distressed debt outstanding and propped up companies that were ailing even before the pandemic hit, depriving value-oriented investors like Oaktree of new targets. “The greater question is, why is the market making new highs every day if we have these problems?” he said. “The political division in the country is a terrific one but the greatest one of course is the pandemic.” Discussing Tesla Inc.’s meteoric rise, Marks said the stock is so high some investors may want to sell. “If you describe an individual not of great needs, he should take some profits,” Marks said. “If he bought Tesla two years ago, he probably has a huge gain. It’s probably a very disproportionate amount of his financial net worth. He should absolutely cut back, unless he really wants to try to hit the long ball.” Oaktree is one of the largest distressed-debt investors in the world, with more than $19 billion committed to credit from troubled companies.
Hedge Fund Managers Losing Millions as Order Delays Mount Up
Brief: An unprecedented number of delays when sending out orders to market is costing hedge fund managers USD20 million per year, according to new research from TradingScreen. A combination of operational inefficiencies and trade errors cause the majority of delays, while high costs associated with IT systems maintenance is also a significant contributor. The findings show that the most unprotected trade errors cost hedge funds anywhere between 3 and 10% of trade notional, which in some cases is USD5 million a year. Time delays and execution slippage, which is the difference between the expected price and the price at which the trade is executed, impacts performance by 2 per cent of AUM, which results in costs as high as USD9.5 million annually. When it comes to IT support and administrative costs, a large hedge fund with USD5 billion AUM spends between USD3.5 and USD5 million. Varghese Thomas, President and COO at TradingScreen, says: “From computer meltdowns to human errors, erroneous trades and order delays are caused by a myriad of factors. With so much disruption facing markets right now, hedge fund managers can ill afford not to keep execution delays down, particularly now that European share trading is likely to fragment post-Brexit.
The World’s Biggest Short Selling Hedge Fund Is Scaling Back
Brief: Sophos Capital Management, the largest dedicated short selling firm in the world as recently as a year ago, is scaling back its hedge fund business, according to people familiar with the plans. The move by founder Jim Carruthers — widely considered a legend in the business — comes as short sellers faced one of their worst years on record. Short-biased funds lost 47.59 percent through November, according to the HFRX Equity Hedge: Short Bias Index. This year isn't looking any better. The Goldman Sachs “most shorted” index of stocks was already up 13 percent in 2020 and more than 200 percent over the past year. Carruthers did not respond to a request for comment, and his funds’ performance details weren’t publicly available. Menlo-Park-based Sophos reported $1.16 billion in regulatory assets under management, six separate hedge funds, and nine employees at the end of 2019. That made it larger than even Jim Chanos’ Kynikos Associates, which had slipped below the $1 billion mark by that time. An individual familiar with Carruthers’ plans said the short seller had been telling people he was winding down some positions since late last year, and some employees have been looking for jobs. It's unknown how long it could take to unwind some of the positions, but people close to the situation said that he is not shutting the firm down. Carruthers launched Sophos in 2014 with about $200 million, including a seed investment from Yale University’s endowment. The move by Yale led other university endowments to invest in short sellers, according to one short-biased hedge fund manager.
UK Cyber Sector Saw Funding Boost After First Lockdown – But Early – Stage Startup Backing Fell off a Cliff
Brief: Funding secured by cybersecurity start-ups since the start of lockdown in March increased by more than half compared to the same period in 2019, according to new research released today by Plexal and Beauhurst. This is in contrast to start-ups across all sectors, which saw investment volume fall by 10 per cent year-on-year. Only 23 of the 1,715 start-ups falling into administration, liquidation or dissolution since the start of lockdown were from the cybersecurity sector. The research also found that despite the overall boost in funding (52 per cent increase) and deal numbers (33 percent increase), highlighting the importance of cybersecurity companies during the pandemic, activity consisted mainly of a small number of very large deals, showing that investors continue to prioritise later stage businesses. The volume of funding secured by cybersecurity companies seeking funding for the first time fell to just GBP11.9m since lockdown, from GBP265 million in the same period in 2019 – as companies raising capital for the first time fell by 96 per cent. “While increased total funding demonstrates the relevance of cybersecurity and shows that the UK’s cyber industry has not been impacted to the same extent as others, the almost complete absence of backing for early-stage firms puts the sector’s future at risk, said Saj Huq, director of Innovation at innovation centre Plexal. “It is these companies that we will ultimately rely on to solve the inevitable new cyber challenges arising from a society that is increasingly digital-first,” he added.
PIMCO says 2021 ‘Not a Time for Excessive Optimism’
Brief: Bond giant PIMCO expects the U.S. economy to return to pre-pandemic levels later this year but warned of political and economic risks that could derail the recovery, including a sooner-than-expected withdrawal of fiscal stimulus. In its 2021 outlook published Tuesday, the California-based fixed-income investor, which manages over $2 trillion in assets, predicts that U.S. economic activity will hit pre-recession peaks in the second half of the year. Global gross domestic product, PIMCO says, will grow at the fastest rate in a decade, buoyed by the worldwide rollout of COVID-19 vaccines. But a pullback in U.S. fiscal stimulus, Chinese corporate deleveraging and continued caution in U.S. spending, investment and hiring could all disrupt the expected recovery, potentially hurting investors who have already priced in a rebound, PIMCO said in the report. “Investors may have become too complacent as reflected by the bullish consensus positioning. As these risk factors underline, we see this as a time for careful portfolio positioning and not for excessive optimism or risk-taking,” the report said. PIMCO’s comments come amid a broad market rally. The promise of the coronavirus vaccine and hopes the Democratic Congress will ramp up spending have driven U.S. stocks to all-time highs and corporate credit spreads to pre-pandemic levels.
