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Coronavirus Diligence Briefing

Our briefing for Wednesday July 22, 2020:

Jul 22, 2020 4:41:40 PM

  • 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.

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