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Covid-19 Diligence Briefing

Our briefing for Tuesday July 28, 2020:

  • Republicans in the United States have unveiled their proposed $1trillion dollar COVID-19 relief bill. The contents of the bill include lowering the weekly emergency unemployment benefit payments from $600 to $200. The bill would also authorize a second round of $1200 stimulus checks. Senate Democrats are battling against lowering the unemployment benefits and would see payments remain at $600, a vote is scheduled for the upcoming days. Furthermore, President Trump’s national security adviser, Robert C. O’Brien has tested positive for the virus marking the highest-ranking official to have contracted COVID-19 thus far.

  • For the first time, Canada has approved the use of a drug to treat patients infected with COVID-19. Remdesivir, an antiviral drug manufactured under the brand name Veklury, by Gilead Sciences Canada Inc. has been approved for treatment of patients with severe symptoms caused by the virus. Remdesivir is mainly used treat those suffering from pneumonia and require extra oxygen, or a ventilator to breath. According to a Health Canada news release, the drug has been in the trial stages for six weeks and determined the “benefits outweigh its risks.” The treatment can only be applied to patients aged 12 and older, while under strict supervision from health professionals.

  • Prime Minister Boris Johnson is once again on the defensive as the U.K. reported 119 new deaths from COVID-19 on Tuesday. He warns that although the number of new cases has dipped in Britain, the rest of Europe may be seeing signs of a resurgence. Speaking to reporters in Nottinghamshire the Prime Minister said, “amongst some of our European friends, I'm afraid you are starting to see in some places the signs of a second wave of the pandemic." The United Kingdom continues to require anyone returning from travel outside of the country to quarantine for 14 days, although he added, “we are always looking at ways in which we can mitigate the impact of the quarantine.”

  • In Japan, thousands of companies are still waiting for their coronavirus stimulus payments to come through, forcing many business owners and their employees to find part-time work. Prime Minister Shinzo Abe's ruling Liberal Democratic Party promised more than $20 billion in relief payments, however, some Japanese citizens are skeptical and believe that funds are being mishandled. Dentsu Group Inc., one of Japans most influential companies with ties to Abe’s government, won the tender to distribute the relief payments but have since outsourced most of the job to smaller companies causing a delay in distributions.

  • South Africans worried about contracting the virus are avoiding hospitals even as the number of fatalities in country appear to be quite low. Just under two per cent of people who have contracted COVID-19 have died, while that stat looks impressive, authorities are saying it may be skewed. Almost every province in the country is using a different metric to track new cases and deaths, so without a uniform system of reporting “it becomes meaningless," University of Witwatersrand vaccine expert Prof Shabir Madhin says. In Port Elizabeth a new field hospital has been erected by the private sector, however, only 30 of its 1200 beds are in use.

Covid-19 – Due Diligence And Asset Management

Even Trading Floor Diehards Are Now Embracing Work From Home

Brief: For a sense of how dramatically perceptions of remote work are changing in the coronavirus era, consider Koji Motokawa. Like many traders in office-obsessed Japan, the deputy head of fixed income at Mizuho Securities Co. had never even considered working from home until the pandemic hit. Now, for the first time since he stepped onto the trading floor 25 years ago, Motokawa spends at least one day a week outside the office and plans to keep it up. “My initial thinking was that it was going to be pretty difficult given the way markets operate,” he said. “The reality is it’s actually doable.” As Covid-19 forces financial professionals around the world to re-examine the way they operate, anecdotal evidence from Japan -- ranked last among developed markets by the OECD for work-life balance -- suggests the move toward more remote work could be widespread and enduring. Tokyo-based brokerage employees from Goldman Sachs Group Inc. to CLSA Ltd. report a similar shift in attitudes that they expect will outlast the pandemic. Motokawa says Mizuho has gradually beefed up its infrastructure for remote bond trading, including distributing extra screens and computers. In Tokyo, which has recorded more than 10,000 coronavirus cases, authorities have urged residents to avoid unnecessary trips outdoors but haven’t imposed blanket restrictions on working in offices.

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Invesco Earnings Falter in a Year Ravaged by the Pandemic

Brief: Invesco Ltd. is having a tough year, even by 2020 standards. Investors continued to yank money from the asset manager’s funds in the second quarter, bringing total first-half net outflows to about $31.6 billion, according to a statement Tuesday. The stock has tumbled more than 40% this year, versus a roughly 9% drop for an S&P industry index, putting it well below peers. Fee pressure and a move away from active management has hurt the Atlanta-based firm in recent years. While senior executives made a series of bets to keep pace in a changing industry, some have yet to pay off, creating concern among clients and investors. Invesco has aggressively pursued acquisitions ever since Chief Executive Officer Martin Flanagan, 60, joined from Franklin Resources Inc. in 2005. The moves helped boost assets under management to about $1.1 trillion, but two years of outflows put Invesco in a tougher position than peers, even before the crisis triggered by the Covid-19 pandemic. “They came into this downturn more vulnerable,” said Bloomberg Intelligence analyst Alison Williams. On Tuesday, the firm reported second-quarter adjusted earnings of 35 cents a share, short of the average estimate of 43 cents by analysts in a Bloomberg survey. The stock slid 2.9% at 11:34 a.m. in New York.

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Boaz Weinstein Piles Up 90% Gain in Hamptons, Bets on More Chaos

Brief: It’s a hedge-fund summer idyll: Chickens strut, tomatoes grow ripe and the Atlantic breeze floats over this Hamptons refuge like a sweet balm. Here, in socially distanced splendor, Boaz Weinstein is printing money. As the pandemic consumes the outside world, Weinstein has repaired to his gated estate in Sagaponack, replete with tennis court, pool and a Vegas-style card room. When New York shut down, he left his office in the Chrysler Building and decamped to Long Island, like others from high-caste Manhattan. Unlike much of that crowd, however, Weinstein has settled here to make money -- lots of it. He’s added to his profits every month this year, trading credit and derivatives of companies including Wirecard AG, retailers Staples Inc. and Macy’s Inc. and loading up on cheap closed-end mutual funds. That’s helped him outperform all of his hedge fund peers, generating an eye-popping 90% gain in his main fund after years of uneven returns. He’s attracting new money, pulling in $1 billion to his now $3 billion Saba Capital Management. And he sees room to profit, even as stocks and bonds rebound. “Markets are at an unstable place right now. I look out at the next five months, and there are lots of known unknowns,” he said in a phone interview, pointing to everything from the course of the pandemic to the U.S. election and relations with China.

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Hedge Funds in North America Attract Investors Seeking Haven

Brief: Hedge funds based in North America are providing a haven to investors grappling with rising U.S.-China tensions and a global economy stalled by the Covid-19 pandemic. About 32% of allocators plan to increase investments to North America-based managers, compared with 18% at the start of the year, a JPMorgan Chase & Co. survey found. Most other regions, including Asia-Pacific, saw decreased interest. “Covid has created a lot more investment opportunities,” said Michael Monforth, global head of capital advisory at JPMorgan. “In some respects, there is a safe haven element to investors wanting to invest in the U.S., but it’s also being driven by the investment opportunity.” Investors are betting on hedge funds headquartered in North America as the world deals with a pandemic that’s halted commerce and sparked turbulence across markets. Escalating Chinese-American tensions remain a concern as the two superpowers have clashed on issues ranging from trade to the early handling of the coronavirus.

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World’s largest hedge fund, based in Connecticut, cuts dozens from staff as coronavirus takes toll

Brief: Bridgewater Associates, the world’s largest hedge fund, has laid off dozens of employees as the pandemic has hit the company’s bottom line. In an emailed statement, Bridgewater, based in Westport, said employees will be working more from home “so we won’t need the same number of support people, new technologies are changing what type of people we need and how we serve our clients, and we also want to become more efficient.” As a result, the shifts “will produce more than normal attrition in terms of people leaving the firm this year,” but it won’t be “greatly more than normal,” it said. Those leaving Bridgewater will receive “generous severance and extended health coverage,” according to the statement. The statement did not detail how many employees are affected, but The Wall Street Journal, which first reported the layoffs Friday, said several dozen were involved. Those cut worked in the research, client-services and recruiting, according to the newspaper.

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Private Equity and COVID-19: Lessons From the Global Financial Crisis

Brief: As businesses seek to address both the immediate and long-term effects of COVID-19 on their operations, the reinsurance industry is at the forefront of conversations to create a forward-looking solution for pandemic risk in conjunction with policyholders, insurance markets and key policymakers. Countries across the developed and emerging world are trying to manage the severe economic short-term impacts of the COVID-19 crisis. Given the immense uncertainty, it will take much longer to even begin to assess the permanent implications for the world’s populations, companies and economies. The ultimate effects will, in large part, be dependent on the duration of the crisis, the length and depth of which is currently generating speculations and requires substantial analysis, according to William T. Charlton, Jr., PhD., CFA, Global Head of Private Markets Data Analytics and Research at Mercer. Mercer is an affiliate of Guy Carpenter. Due to the inherent lag in private market reporting, even the initial impact on private markets will take considerable time to fully evaluate. However, the behavior of private markets during the Global Financial Crisis (GFC) may provide some insight into the potential short-term and long-term expectations of private markets in the current crisis.

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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.

Our briefing for Monday July 27, 2020:

  • In the last week, eighteen states in America have shattered records for new daily cases of the novel-coronavirus, COVID-19. The United States has now reached over 150,000 deaths due to complications surrounding the virus. Starting Monday, the country has begun the first Phase 3 clinical trials for a vaccine. According to biotechnology company Moderna and the National Institute of Allergy and Infectious Diseases, part of the National Institutes of Health, the trial will be administered to 30,000 adults at nearly 100 different research sites. Each participant will be given two 100-microgram injections of the vaccine or a placebo roughly 28 days apart. Results indicated the Phase 1 and Phase 2 vaccinations proved to induce immune responses in all of the participants and are viewed as safe for further study.

  • It’s been just over 6 months since the first case of COVID-19 was diagnosed in Canada. Since then more than 110,000 cases have been confirmed in the country and over 9000 deaths have been recorded to due complications associated with the virus. Leading health officials in the country unanimously agree that on average, Canada has fared better than most of the world in terms of dealing with the pandemic. Dr. Sumon Chakrabarti, an infectious disease specialist based in Mississauga, Ontario said that the majority of Canadian hospitals were not wholly overwhelmed, “we never were at a point where we felt appreciably out of control.”

  • In the United Kingdom, prohibitions have been put in place for travelers looking for a summer escape. The U.K. will no longer allow its residents to travel to Spain for vacations as the number of new Spanish cases rose to 12,166 last week. Nearly 10,000 flights were scheduled to fly from Britain to Spain in the coming weeks. The Spanish government is now urging the U.K. to reconsider its quarantine of the Balearic and Canary islands, where cases are low but are now once again on the rise.

  • Despite having the third highest number of cases globally, Indian Prime Minister Narendra Modi claims that the country has “proved the world wrong,” but conceded “we need to remain vigilant. We have to remember that coronavirus is still as dangerous as it was in the beginning.” The number of new cases in India rose to 48,661 on Sunday and is particularly prevalent in Delhi, the country worst hit city. The state government has increased testing in the area and has begun to adapt thousands of train coaches to house make-shift hospital beds.

  • The government of Hong Kong has imposed a ban on gatherings larger than two people as a reaction to surging cases in the region. It is now mandatory to wear a mask in both indoor and outdoor spaces with fines for failing to do so will range up to 5000 Hong Kong dollars or $645 dollars U.S. The city is now facing what residents are calling a third wave, with a new makeshift hospital being set up near the airport. Since the beginning of the pandemic only 20 people have died in the city, but officials are taking precautions as cases are climbing by more than 100 a day. The relatively low case load has been attributed to strict rules preventing non-residents from entering the city.

Covid-19 – Due Diligence And Asset Management

Hazeltree and Northern Trust Collaborate to Analyze the Impact of COVID-19 on Alternative Asset Managers

Brief: Hazeltree, a leading provider of cloud-based treasury management and portfolio finance solutions, and Northern Trust Alternative Fund Services (NTAFS) today published a report, “Weathering the 2020 Storm: Market Volatility, Location Disruption and Record Volumes.” The analysis examines the market impact of COVID-19, highlighting new operational challenges facing investment managers that require immediate attention. The analysis observes trends across both NTAFS and Hazeltree clients and: compares liquidity metrics experienced in March/April 2020 versus prior periods as tracked by NTAFS and Hazeltree.  Highlights the emphasis placed upon cash and liquidity management practices during these uncertain times. Details a new range of concerns from investors, introducing questions managers can expect during investor operational due diligence reviews. Stresses the importance of robust processes and technology to effectively manage cash, liquidity and collateral during this new “work from home” operating model.“Asset managers faced pressure beginning in March, not only from market volatility, but also from needing to execute on critical operational functions in a work-from-home environment,” said Peter Sanchez, Head of Alternative Fund and Omnium Business Services, Northern Trust. “The challenges highlight the importance for alternative fund managers to have the scalability, security and systems to operationally manage such a crisis – whether in-house or through a partnership with a Fund Administrator or another provider.”

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Koch online toolkit helping businesses reopen after Covid-19

Brief: A major Koch Industries Inc. subsidiary has created an online toolkit for businesses wanted to reopen safely after pandemic-related closures. The platform is called Hygiene Ready and was developed by GP PRO, the commercial division of Georgia-Pacific. It pulls from resources made available by the Centers for Disease Control and Prevention (CDC), Occupational Safety and Health Administration (OSHA) and the World Health Organization. The GP PRO team began putting Hygiene Ready together in March and its Wichita-based parent company, Koch, highlighted those efforts in a recent article on its website. The company says that the toolkit is geared toward any business looking to safely reopen, including restaurants, retail stores, event venues and industrial facilities. It also includes training materials and updated links to Covid-19 news and guidance.

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Wells Fargo Scales Back Business

Brief: Wells Fargo & Co. is slashing costs, cutting staff and tightening up on lending to ride out the coronavirus recession. Its rivals might not be too far behind. The fourth-largest U.S. lender entered the pandemic in worse shape than its peers. The bank is still clawing its way back from a 2016 fake-account scandal that put it on the wrong side of customers and regulators. Revenue has fallen for two years in a row, and the bank recently reported its first quarterly loss since 2008. "We have not done what is necessary to run an efficient company," Chief Executive Charles Scharf said in a memo to employees this month. Wells's mix of challenges is forcing it to cut costs first, but it might not be the last. The bank's approach to belt- tightening could offer some clues about what is to come for the rest of the industry. Other big banks cut billions of dollars in costs and laid off thousands of employees after the last financial crisis, putting them in a better position to withstand this one. Some have pledged not to lay off employees in 2020. Whether they are forced to make cuts later on will depend on the length and severity of the recession.

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Covid-19 could be trigger for widespread mandate losses

Brief: Investment managers with poorer performance through the Covid-19 crisis are set to see a high number of mandate losses, research suggests. Investors in hedge funds and smart beta were among the most dissatisfied with recent performance. In a survey of 368 institutional investors and family offices, 48% said they were disappointed with hedge fund returns and 64% said the same for ‘alternative risk premia’, which is usually known as smart beta. Emerging market debt also disappointed 53% of investors, the Bfinance research showed. As much as 54% of the asset owners are terminating or likely to terminate managers based primarily on their 2020 performance, including more than 80% of family offices. Apart from hedge funds, smart beta and emerging market bonds, active strategies received positive feedback, Bfinance said, and the vast majority of investors – or 82% - said they were satisfied with how their portfolios had performed.

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Hedge Fund Fees in Free Fall Is the New Reality For a Humbled Industry

Brief: Hedge-fund fees had already been shrinking before the pandemic ripped through global markets. Now, they’re in terminal decline. One of London’s fastest-growing hedge funds is enticing new investors by agreeing to forgo performance fees until returns hit a key threshold. In Hong Kong, a fund boss is offering to cover all losses, a concession that’s almost unheard of in this rarefied world. And famed investor Kyle Bass has told clients he’ll charge his usual 20% cut of profits only if he earns triple-digit returns in a new fund he has started. Long notorious for charging high fees, the $3 trillion industry runs portfolios that are generally open only to institutions and affluent individuals. It’s going to extraordinary lengths to attract new money as the coronavirus pandemic triggers losses and accelerates an investor exodus that has plagued the industry for years. Many of the world’s most prominent managers have come to the stark realization that they need to upend the “two and-twenty” fee model that’s been a fixture for decades if they want to expand. For some smaller firms, the goal isn’t growth. It’s survival.

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Economic slowdown hits the alternative lending business

Brief: The coronavirus pandemic is hitting alternative lenders hard, with business down substantially, a handful of mortgage investment corporations stopping investors from redeeming their funds and others trying to offload their portfolios of home loans. In Ontario, mortgage registrations by private lenders fell 26 per cent in June over the same month last year, according to Teranet, which operates the province’s electronic land registry system. That followed a 45-per-cent decline in May and a 29-per-cent drop in April, when real estate sales plunged, and private lenders halted loans to assess the economic rout. Industry experts say the downturn will reveal where the weaknesses are in the sector. “The tide is going out right now. We’ll see very quickly who was naked this whole time in the private mortgage world,” said Dustin Van Der Hout, investment adviser with Richardson GMP Ltd.

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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.

Our briefing for Friday July 24, 2020:

  • The United States has recorded 1100 deaths for the third straight day as much of the country remains open to non-essential services like bars, shopping malls and salons. More 150 medical experts, scientists, teachers and nurses have signed a letter to political leaders asking them to shut down the country and start anew in an attempt to slow the surging COVID-19 virus. The letter states that the country is on track to lose 200,000 lives by November 1st. In Texas, one the hardest-hit states, the numbers are plateauing. A shelter-at-home order made by a judge in Starr County has gone into effect this morning and will last through August 11th.  

  • In Canada, the number of asylum seekers has gone up. There were 1500 reports of people seeking asylum in Canada in June up slightly from 1400 in May. This comes as the country tightens its land and marine borders with the United States. On Wednesday a Supreme Court decision stated that the Safe Third Country Agreement between Canada and the US violates the Canadian Charter of Rights and Freedoms. As part of precautionary measures due to COVID-19, all persons arriving at the Canadian border from the US will be turned away. However, persons already inside Canada are still able to apply for asylum.

  • Despite having the third highest death toll in the world, the United Kingdom eased major lockdown restrictions on Friday. Prime Minister Boris Johnson said that people will no longer be told to work from home or avoid public transit. Starting August 1st, Britons will be asked to return to work if possible and all bans on non-essential public transit will be lifted. The Prime Minister is putting the onus on individual businesses to take precautions in a “COVID-secure way” and says that his government is now “preparing for the worst” if a spike in cases is seen during the winter months.

  • India recorded its highest number of confirmed cases Friday with 49,000 and 740 new deaths. It is the biggest daily surge in infections the country has seen since the beginning of the pandemic. The total number of cases in the country is over 1.3 million with new test results showing that nearly one in four people in the capital of New Delhi have been infected with COVID-19. A survey tested blood samples of 21,387 people across Delhi. Among them, 23.48% were found to have COVID-19 antibodies, indicating past exposure to the coronavirus.

  • In a virtual gathering China’s Foreign Minister Wang Yi announced a $1 billion loan to Latin America and the Caribbean to allow the region access to a Covid-19 vaccine when it becomes available. A statement from the Mexican Foreign Affairs Ministry stated "China's Foreign Minister said that the vaccine developed in his country will be a public benefit of universal access, and that his country will designate a loan of $1 billion to support access [to the vaccine] for the nations of the region." Mexican President Andrés Manuel López Obrador said "we're very grateful to China, with the Chinese government, [and] the President.”

  • South Korean baseball fans will be allowed back in the stands starting Sunday despite an uptick of cases in Seoul. Initially baseball and soccer stadiums will be allowed to sell only 10 per cent of their normal tickets as social distancing must be continued in the normally condensed seating areas. Professional golf, however, will continue without spectators for the time being as health authorities begin to develop plans for crowded courses. New daily cases dropped below 50 in the country on Friday and have stayed between 20 and 60 since South Korea eased social distancing measures in May.

Covid-19 – Due Diligence And Asset Management

CFTC Postpones Prosecution of US Coin Bullion Due to Coronavirus

Brief: The US Commodity Futures Trading Commission seeks to postpone the trial of two brothers who defrauded some 150 customers of more than $8 million due to precautions over the novel coronavirus. Salvatore and Joseph Esposito, the owners of precious metals investment firm U.S. Coin Bullion pleaded guilty in October 2019 on charges of conspiracy to commit wire fraud and mail fraud. Salvatore Esposito, 48, was sentenced to seven years and three months in prison, and his younger brother Joseph, 44, to a little less than six years. In a parallel case, the CFTC filed its civil enforcement action charging US Coin Bullion and its operatives with misappropriating customer funds and engaging in fraudulent solicitations. From 2014 to mid-2019, the Espositos engaged in a phony gold business, convincing victims to invest their savings to purchase precious metals and promising big payoffs. The CFTC seeks to retrieve the money that the Orlando brothers misappropriated from clients, but it’s unclear if that will happen, as most was lost.

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Bill Ackman responds to critics of 'hell is coming' TV interview and $2.6B windfall

Brief: Hedge fund manager Bill Ackman said on Thursday that critics of his "hell is coming" declaration on CNBC and $2.6 billion windfall that appeared to follow don't understand the timing. Ackman was accused of playing up coronavirus fears after making a $27 million bet against the market that paid off big-time. "We made $2.6 billion prior six days prior to my coming on CNBC. I gave a message of optimism," Ackman told "Mornings with Maria." "We did hedge our portfolio ... to protect our investors, which is our fiduciary obligation. We didn't sell our stocks, actually. That enabled us to benefit from a recovery." Ackman said he has been "long-term bullish" on the U.S. economy. "My view was, as long as you start shutting down the country, the market will recover," he said. "The day after the appearance on CNBC, California shut down. ... New York shut down, then every state in the country, effectively almost every state, went through the shutdown process."

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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".

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Secretive hedge fund boss Chris Rokos calls staff back to work in the office

Brief: The majority of Chris Rokos’ staff have returned to the hedge fund manager’s Mayfair offices following the lifting of UK coronavirus restrictions, Financial News can reveal. An email memo, sent to Rokos Capital Management’s nearly-200 employees and seen by FN, stated: “All [employees] are invited back, however only if the individual feels comfortable.” Although supposedly optional, most employees have now returned to Rokos’ office in Savile Row, according to a person familiar with the matter. The date of the return to the office is listed as 6 July. “The email was very much taken as an instruction for us to get back into the office and to stop working remotely,” the source said. A spokesman for Rokos Capital Management declined to comment. The hedge fund giant has given staff a £150 daily taxi budget. However, it added that employees who exceed the budget may be asked “to work from home until public transport is open”. The memo, sent in a Q&A format, discouraged staff to take public transport.

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Blackstone-backed quant gains 20% amid wild Covid-19 markets

Brief: A machine-learning hedge fund backed by Blackstone Group is enjoying a growth spurt after notching a 20% gain in this year’s wild pandemic markets. Bayforest Capital, which employs just five people in London, is set to oversee $235m in managed accounts over the coming month, compared to $45m at the end of 2019. It also plans to launch a fund for institutional investors later this year. A record of positive gains every month in this year’s cross-asset roller-coaster is drawing fresh client attention to the firm run by Theodoros Tsagaris, a quant with previous stints at Tudor Investment, GSA Capital and BlueCrest Capital Management. He credits Bayforest’s success to algorithms surfing fast shifts in capital flows in real time. With system trading futures based on the behaviour of different investors, and an average holding period of just eight days, the portfolio has managed to make money even as markets swing from despair to exuberance.

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Wells Fargo Pledges up to $20 Million to Support New York Economic Recovery Efforts

Brief: Wells Fargo & Company (NYSE: WFC) announced today that it pledged up to $20 million to support the New York Forward Loan Fund (NYFLF), an economic revitalization program across New York State. Initiated by New York Governor Andrew Cuomo, NYFLF is aimed at helping small businesses, nonprofits, and small landlords as they reopen following the COVID-19 pandemic. The fund purchased its first loans in July after pre-applications opened on May 26. A total of $100 million is expected to be available through NYFLF, which Wells Fargo is supporting along with other financial institutions and partners. Wells Fargo's commitment to NYFLF is the largest announced to date. NYFLF emphasizes supporting minority- and women-owned businesses and landlords who own small, multifamily properties in low- and moderate-income communities. The loans are intended to help with upfront costs related to reopening, such as inventory, marketing, or refitting for social distancing. Five Community Development Financial Institutions (CDFIs) are processing applications. NYFLF has funded 19 loans across 11 counties totaling $602,103, according to data through July 20. The average loan amount was $31,690. Seventeen loans were distributed to women- or minority-owned businesses and one loan was distributed to a veteran-owned business.

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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.

Our briefing for Thursday July 23, 2020:

  • With the United States surpassing the four million mark for coronavirus cases today - a quarter of that amount has come in just the past two weeks. “We’ve rolled back essentially two months’ worth of progress with what we’re seeing in number of cases in the United States,” said one American doctor. On Wednesday the COVID-19 hospital count in the country was 59.600 – roughly 300 short of America’s peak seen in mid-April.

  • A study released in the Canadian Medical Association Journal showed for-profit long-term care homes in Ontario saw significantly worse outbreaks of COVID-19 compared to their non-profit/municipality run counterparts. While profit status had no impact on whether a facility had a coronavirus outbreak, it did play a significant role on what happened once one occurred. In Ontario 57% of nursing homes are set-up to be profit-making – the highest rate in Canada.

  • In the United Kingdom, mandatory facial coverings are set to be in place as of Friday, although where they are necessary seems confusing. Citizens visiting shops/shopping centers, supermarkets, banks and take out restaurants will have to wear facial coverings. However, the public will not have to wear facial coverings in pubs, restaurants, hairdressers, movie theatres, or gyms. Enforcement of the rules will also be lax – it will be essentially up to the individual to make sure they are conforming to the new rules as businesses won’t be required to enforce them and police will only issue fines of up to £100 as a last resort for those who don’t comply.

  • European Union states have agreed on common hygiene standards for air travel. Measures include mouth-and-nose protection for passengers six years of age and older, social distancing at airports during security checks and check-in, and a high fresh-air quota in airplanes must be guaranteed. However, the social distancing plan seems to stop once you are up in the air as the middle seat does not have to remain free.

  • India reported an all-time high of nearly 45,600 coronavirus infections over the last 24 hours. As the virus continues to increase at a record pace across the country, Prime Minister Narendra Modi has tried to focus India’s attention to their relatively low death rate. However, public health experts believe the death toll is much worse than reported. A Financial Times article noted in some states, hospitals and officials have been under intense pressure to attribute the deaths of coronavirus patients to other underlying health issues such as diabetes to help keep the official COVID-19 death toll down.

  • Tokyo, Japan recorded 300+ new cases in a single day for the first time on Thursday. This news prompted Tokyo Governor Yuriko Koike to say, “I think we can consider this to be a warning that strong public cooperation is needed.” There were 920 new daily infections on Thursday across Japan, which set a record for the second straight day. The rise in infections are likely to hurt the government’s state sponsored “Go To Travel” tourism initiative as the country heads into its first long weekend since the incentive program set to boost the economy was launched.

Covid-19 – Due Diligence And Asset Management

Hedge Funds Gain Favor in Latest Sign of Rebound

Brief: Big investors including pensions and family offices are taking another look at hedge funds, as they navigate the market turbulence sparked by the Covid-19 pandemic. While the industry was hit with yet another quarter of outflows -- its ninth in a row -- the results of a Bloomberg Mandates survey suggest better times are ahead. This comes weeks after a Credit Suisse Group AG poll found a similar trend: Net demand for hedge funds was the highest in at least five years, with interest in the industry outranking others. The findings are the latest signal of a turnaround for the beleaguered industry, which has faced a tough capital-raising environment for much of the last decade as investors revolted over high fees and mediocre returns. Prominent names including George Soros’s family office and the Texas pension fund are leading the charge, pumping cash into managers in the past few months to diversify assets. Bloomberg’s mandates group surveyed 50 institutional allocators from May 14 to June 10. About half of those polled managed more than $1 billion. Here’s a look at the findings: Almost half of institutional investors re-positioning their portfolios boosted allocations to hedge funds or plan to this year. The industry emerged as the top pick among six major alternative asset classes, followed by private debt.

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U.S. SEC Chief ‘Worries’ About Retail Investors Trying to Get Rich Quick

Brief: The head of the U.S. Securities and Exchange Commission (SEC) on Thursday said he is worried about the risks to retail investors who are increasingly making short-term bets via low-cost trading platforms rather than sticking to long-term investments. “We’re seeing significant inflows from retail investors who conduct more trading than investing,” Jay Clayton said in a Thursday interview on CNBC’s “Squawk Box.” The rise of new, low-cost, easy-to-use trading apps combined with ultra-low interest rates has unleashed a flood of retail money into stocks from investors looking to cash in on the market rally. That money has often flowed into highly risky trades, including stocks that have filed for bankruptcy. Robinhood Markets Inc came under here criticism in June when a 20-year-old customer took his own life after believing he incurred a large loss using the free trading app. The firm has since expanded its educational content for options trading.“I encourage people to educate themselves, but short-term trading is more risky than long-term investing and I do worry about this risk investors take,” Clayton told CNBC.He also defended a recent agency proposal to significantly raise the reporting threshold for large institutional investment managers after critics said it would reduce market transparency.

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Commentary: Keep Emerging – and Diverse-Manager Programs on Track Amid COVID-19 Disruption

Brief: At a congressional hearing on diverse asset managers before the Committee on Financial Services in June 2019, Rep. Maxine Waters drew a line in the sand. She noted that in the past, when diversity efforts in financial services failed to gain traction, "we let it go," but she insisted that in the future, "It won't be that way anymore." She was speaking of the need to not merely discuss investing in diverse managers, but to begin taking concrete actions that will see asset owners and institutional investors actually deploy capital.Fast forward one year and attention in Washington has since turned to other pressing matters — from the upcoming election to, more recently, the response to the COVID-19 pandemic and ongoing social unrest.The attention deficit seems to underscore that while awareness can certainly help, progress will ultimately be found through a market that doesn't just recognize the challenges confronting diverse managers, but takes the necessary steps to eliminate the barriers. The data suggest investors will be rewarded for doing so, in the form of alpha and fund manager outperformance. The question facing the industry, however, is whether the market will revert to old habits and old standbys against a suddenly uncertain backdrop in which asset owners now have to contend with volatility that upsets target allocations, creates possible liquidity issues (particularly among endowments), and imposes significant due diligence challenges in a shelter-in-place world.

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Asset Managers Got Opportunistic – With Each Other

Brief: Investments in asset and wealth managers exploded, even though activity slowed substantially during March and April — the height of the economic shutdown. The PwC report looked at U.S. managers acquired by other American firms and foreign companies. Gregory McGahan, PwC financial services deals leader and a report author, expects that M&A will continue to flourish in the second half of the year. With the economic slowdown and uncertainty over the future, investors have kept up pressure on managers over fees. Managers are also racing to buy firms with some of the asset classes that have done well recently, including private credit. PwC argued that investors had the temerity to circumvent travel restrictions and other logistical problems because market volatility, economic uncertainty, and investor redemptions posed a bigger problem long term. “Some buyers swooped in on opportunities that emerged as Covid-19 intensified new or persistent problems in the market, including fee compression,” wrote McGahan and Arjun Saxena, deals strategy leader for financial services. The quest for scale and products such as ESG (environmental, social and governance) oriented strategies will drive transaction, the authors predicted. 

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Real Estate: ‘The Office is not Dead Yet’

Brief: As the prospect of a second wave of coronavirus still looms, many parts of the world are slowly reopening and people are returning to their workplaces, ever-changing social distancing measures in place. For many office-based businesses, this poses a challenge – it’s not always easy to maintain your personal space in a lift heading up to the tenth floor. But in the midst of an accelerated trend towards more flexible working, offices are not dying out just yet. It’s the way companies will use them that is likely to change, according to Paul Kennedy, head of strategy and portfolio manager for real estate in Europe at JP Morgan Asset Management (JPMAM). The future of city office lets is a major topic, he tells Funds Europe. This is not a new trend, he says.  “There’s been a trend towards flexible working, towards more technology-based solutions for many years now. If we look back, if this crisis had happened five or ten years ago, the technology wouldn’t have stood up as much. I think the conclusion we’ve reached as a business is that we can all work from home – but we don’t want to.” Office rents can be pricey, though. Regardless of how governments lift lockdowns, companies will rethink how they manage their office space in terms of functionality and safety – and in terms of saving on capital costs.

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Distress Mounts in U.S. Real Estate Market Frozen by Pandemic

Brief:The U.S. commercial real estate market is showing ever greater signs of stress, but there are still few deals to be had. Transactions fell 68 per cent in the second quarter across all property types compared with 2019 as potential buyers and sellers remained far apart on the prices of buildings, according to data released Wednesday by Real Capital Analytics. The paralysis set in despite near-record amounts of capital ready to be deployed by some of the world’s biggest real estate investors. “The buyer and seller expectations are not aligned,” said Simon Mallinson, an executive managing director at RCA. “Sellers aren’t being forced to the market because there’s no realized distress and buyers are sitting on the sidelines thinking there’s going to be distress.” Second-quarter sales plunged 70 per cent for apartments, 71 per cent for offices, 73 per cent for retail and 91 per cent for hotels, according to RCA. Industrial property transactions were a brighter spot. Sales dropped only 50 per cent in the second quarter, as online shopping thrived and manufacturers leased space to avoid supply chain disruptions. For markets to function, there needs to be some agreement on what assets are worth. But the surging coronavirus outbreak is fueling uncertainty, making the outlook for commercial property just as cloudy as it was in March when lockdowns put the economy into deep freeze.

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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.

Our briefing for Wednesday July 22, 2020:

  • 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.

Our briefing for Tuesday July 21, 2020:

  • After more than four days of negotiation and deliberation, the European Union struck a landmark deal on a coronavirus aid package for its member states. The €750 billion aid package is centered on a €390 billion programme of grants to economically weakened member states – this is down from the original €500 billion that was proposed back in May. EU leaders also signed off on the bloc’s next seven-year budget, worth a whopping €1.074 trillion. French President Emmanuel Macron, a key figure in the building of the package, called the result a “historic day for Europe.”

  • In the United States, the Republican controlled Senate and Democratic-led House of Representatives have less than two weeks to come together on a new coronavirus relief package of their own. The timing is due to the prior relief package and its aid running out for the enhanced unemployment benefits that were put in place when tens of millions of American lost their jobs during the pandemic. Congress so far has committed $3 trillion in relief, but much more is needed now as in the 12 weeks since United States President Donald Trump signed the bill into law, the number of American COVID-19 cases have tripled and are closing in on four million overall.

  • Canada’s good news story of flattening the curve is starting to show cracks as health experts believe lockdown fatigue, most notably in younger Canadians is leading to more COVID-19 cases. For instance, in British Columbia, a province that looked to be under control, experienced a surge in cases over the weekend noting 102 new cases. This has caused the province’s chief health official to sound the alarm and declare B.C. at a tipping point. Ontario also reported its most cases in three weeks as they try to slowly move the province into the last stage of reopening with close to 60% of those new cases in people 39 years old or younger.

  • In the United Kingdom, the public finances were exposed on Tuesday leading to what most already know: the government has been spending a lot of money during the coronavirus pandemic. Between April and June, the deficit of tax receipts over public spending was £174 billion. At the same time last year, that number was £20.3 billion and at the height of the 2009 global financial crisis it was £76.8 billion. In response to the numbers, Chancellor Rishi Sunak said the public finances would have been “far worse” if the government had not taken unprecedented action to protect incomes during the lockdown.

  • A new study is showing one of India’s hardest hit cities was exposed to more of the virus than originally thought.  Testing of close to 22,000 New Delhi residents was conducted between June 27th and July 10th. Of those sampled, 23.5% showed antibodies, which indicates past exposure to the virus. The results have now pitted public experts vs. health experts. The public experts believe the high amount showing antibodies is actually good news for possible herd immunity, which would make it harder for the virus to spread at a rapid rate. Health officials are pleading for continued isolation measures as a significant portion of the population are still vulnerable and there is not yet definitive proof that herd immunity actually exists.

  • The Philippines said they would ramp up testing for COVID-19 and President Rodrigo Duterte is talking tough for those who aren’t following government protocol. President Duterte threatened to arrest anyone who spread the virus, refused to wear masks or keep a safe distance from others. In an address on Tuesday, the president said it was a serious crime to spread COVID-19 and “we do not have any qualms in arresting people”. As bad as this might sound, it’s actually a step down in tone for President Duterte who warned back in April violators of lockdown rules could be shot for causing trouble.

Covid-19 – Due Diligence And Asset Management

Bernanke and Yellen Refocus Blame on Hedge Funds

Brief: Just a reminder from your friendly neighborhood former Federal Reserve Chairs: Hedge funds probably blew up the world’s biggest bond market in March and helped usher in unprecedented central bank action. Ben S. Bernanke and Janet Yellen, who combined led the Fed for more than a decade, delivered testimony last Friday to the House Select Subcommittee on the Coronavirus Crisis. Much of their remarks focused on the urgent need for Congress to take further fiscal action to offset the economic shock caused by the pandemic. However, in their writing on the Brookings Institution website, they also took some time to lay out their thoughts on steps taken by their successor, Jerome Powell, and his fellow central bankers. Here is how they described the market chaos in March: “Uncertainty about the pandemic led hedge funds and others to scramble to raise cash by selling longer-term securities. The upsurge in the supply of longer-term securities, including Treasuries, was more than dealers and other market-makers could handle. Key financial markets, including for Treasury securities, experienced substantial volatility. To stabilize these markets, which like the repo market play a critical role in our financial system, the Fed purchased large quantities of Treasuries and mortgage-backed securities, again serving as market maker of last resort…

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Game Changer? How the Recovery Fund Will Shake Up EU Bond Markets

Brief: The European Union is about to vault into the ranks of the world’s biggest supranational issuers after it gave the green light to a recovery fund financed via joint debt, a move that carries the potential to shake up euro debt markets. EU leaders have agreed a deal on a 750 billion euro ($858 billion) fund to address COVID-19 damage; together with its seven-year budget, that unlocks a total 1.8 trillion euro spending boost. Until now, the EU as an institution has contributed a fraction of the bloc’s roughly 8.5 trillion euro market of government and agency bonds. But the money it’s about to start raising could push its debt levels above that of member states such as Netherlands. “For the first time, the European Union will be a major force on sovereign debt markets,” said Berenberg chief economist Holger Schmieding. The EU currently has around 54 billion euros in outstanding debt, having borrowed nothing last year and just 5 billion euros in 2018. But if the entire 750 billion euros is raised on bond markets, issuance could amount to 262.5 billion euros next year and in 2022, with the remaining 225 billion euros coming in 2023, ING senior rates strategist Antoine Bouvet estimates.

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Secretive Hedge Fund Boss Chris Rokos Calls Staff Back to Work in the Office

Brief: The majority of Chris Rokos’ staff have returned to the hedge fund manager’s Mayfair offices following the lifting of UK coronavirus restrictions, Financial News can reveal. An email memo, sent to Rokos Capital Management’s nearly-200 employees and seen by FN, stated: “All [employees] are invited back, however only if the individual feels comfortable.” Although supposedly optional, most employees have now returned to Rokos’ office in Savile Row, according to a person familiar with the matter. The date of the return to the office is listed as 6 July. “The email was very much taken as an instruction for us to get back into the office and to stop working remotely,” the source said. A spokesman for Rokos Capital Management declined to comment. The hedge fund giant has given staff a £150 daily taxi budget. However, it added that employees who exceed the budget may be asked “to work from home until public transport is open”. The memo, sent in a Q&A format, discouraged staff to take public transport. Earlier this month, the UK government lifted lockdown restrictions and encouraged staff back to work by 1 August. The majority of employees at hedge funds are still continuing to work from home amid childcare and safety concerns over public transport.

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Brookfield Bets on Single-Family Rentals with US$300M Fund

Brief: Brookfield Asset Management Inc. is the latest Wall Street giant to plant its flag on Main Street lawns. Brookfield recently acquired a controlling stake in single-family landlord Conrex, which operates more than 10,000 rental homes across the Midwest and Southeastern U.S., according to people familiar with the matter who asked not to be named because the transaction isn’t public. In addition, Brookfield has raised US$300 million, including some of its own capital, for a vehicle called Brookfield Single Family Rental that will acquire and renovate homes. The firm intends to leverage the Conrex platform for that effort, one of the people added. A representative for Brookfield declined for comment. Conrex didn’t immediately respond to a request for comment. Wall Street discovered single-family rentals, once the domain of mom-and-pop landlords, in the aftermath of the U.S. foreclosure crisis, when firms like Blackstone Group Inc. and Starwood Property Trust Inc. spent billions buying up distressed assets. Rent collections on single-family homes have held up during the pandemic, and large investors have continued to ink deals for the properties. JPMorgan Chase & Co.’s asset-management more than doubled its investment in a joint venture to develop roughly 2,500 rental houses with landlord American Homes 4 Rent, according to a statement in May. That same month, Koch Industries Inc.’s real estate arm invested US$200 million in Amherst Holdings LLC’s single-family rental business.

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Hedge Fund Assets Surging as Investor Redemptions Ease Amid Performance Recovery

Brief: Hedge fund assets have risen sharply in the past three months, as strategy performance recovers and investors scramble to capitalise on opportunities emerging amid the post-Covid sell-off environment. The total amount of capital invested in hedge funds globally swelled by USD220 billion between April and June - a quarterly record – to reach some USD3.177 trillion overall, according to new data published by Hedge Fund Research. The surge was driven both by improving strategy performance – HFRI’s Fund Weighted Composite Index gained more than 9 per cent in Q2, its best quarterly performance since the global financial crisis – and falling investor redemptions, as outflows dropped 65 per cent between Q1 and Q2 this year. Following the pandemic-driven Q1 redemption bloodbath, when investors yanked more than USD33 billion from hedge funds, redemptions eased to USD12.2 billion (0.3 per cent of total industry capital) in Q2 this year, as markets rallied and hedge fund performance improved. HFR said investors rotated and rebalanced capital as a result of the pandemic, and are now positioning around opportunities in the second half of this year. “Extreme volatility in H120, including both the Q1 spike and Q2 reversal, represents a sharp and dramatic contrast to the beta-driven, risk-on sentiment which dominated 2019, creating an opportunity-rich environment for long/short hedge fund performance generation,” HFR president Kenneth Heinz said on Monday.

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Markets Are High on Stimulus, Not Health, Researchers Find

Brief: A new study shows that investors have every right to fear that the remarkable rebound in equity markets since March is from extraordinary government actions, not a return to economic health. StyleAnalytics, a quantitative research firm, evaluated the behavior of factors and subfactors in the second quarter, including value, yield, and growth. The firm found that factors, or stock characteristics, were not behaving like they have historically during enduring market recoveries. StyleAnalytics’ findings give pessimistic investors evidence that they’re correct to worry and that the rally may not have long-term legs.  The study “suggests the post-Covid [outbreak] market rally is not as much an expression of ‘getting back to normal’ as it is an expression of ‘the government stimulus is helping us get through this mess’.” Less a recovery and more a lifeline,” according to the two authors of the research, Damian Handzy, chief commercial officer, and Tom Idzal, managing director for North America. In the U.S., the Russell 3000 gained 22 percent in the second quarter, with most of the increase coming in April. Looking more closely, high volatility as well as growth stocks were the biggest winners. The biggest losers were value and dividend yielding stocks. That’s bad news for investors looking for signs of a real recovery. 

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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.

Our briefing for Monday July 20, 2020:

  • In the United States, many places in the country are still struggling with containing the coronavirus. In Florida, the state has reported at least 10,000 COVID-19 cases in 10 of the past 11 days. According to data from a state agency, 49 hospitals in Florida had no ICU beds available over the weekend. The city of Los Angeles, California reported their highest number of hospitalizations in a day with 2,216, and on Sunday, half of the reported 2,848 new cases were people under 41 years old. Because of situations such as these, the White House administration, including President Donald Trump, will resume its daily coronavirus news briefings as of Tuesday.

  • In Canada, the House of Commons is in session with the hopes of pushing through the legislation of extending the wage subsidy until end of the year, while providing one-time payments to Canadians with disabilities struggling during the pandemic. The Bloc Quebecois is expected to support the bill, which gives the federal government enough votes to move forward. The Opposition Conservatives plan to push back, citing the scheme needs to be simplified.

  • In the United Kingdom, the  government’s health secretary made clear their goal is for global access to a coronavirus vaccine if/when one becomes available. UK Health Secretary Matt Hancock made the declaration during a House of Commons session on Monday as preliminary results from an Oxford University vaccine trial induced strong immunity response in patients. “The UK is not just developing world leading vaccines, we’re also putting more money into the global work for a vaccine than any other country. With likeminded partners, we’re working to ensure that whoever’s vaccine is approved first, the whole world can have access,” Hancock said.  

  • France’s new facial covering guidelines have been put in place as of today. As mentioned last week, the country moved up its initial plan of phasing in facial coverings from August 1st to Monday after seeing an uptick in cases. Masks are now required in France’s supermarkets, shopping malls, banks, stores and indoor markets. Facial coverings were already in place for public transport, museums and places of worship. A fine of €135 is in place for those who don’t comply.

  • Some possible good news coming out of the European Union (EU) national leaders summit. German officials have said a sketched framework with the new basis of a deal are being drawn up after four days of painful negotiations. Media reports had French President Emmanuel Macron losing patience and angrily banging his fist against the table due to the “sterile blockages” by the Netherlands, Sweden, Denmark and Austria. The recovery fund is set to be €750 billion with €390 billion in grants, down from the initial €500 billion. The four days mark the bloc’s longest ever summit.

  • The rescheduled 2020 Olympics to be held in Tokyo, Japan are still close to a year away, but a recent survey shows citizens want no part of it. A Kyodo news survey showed only 23.9 % are in favour of holding the Olympic and Paralympic Games as scheduled next summer. Thirty-six percent think the Olympics should be postponed again, while 33.7% think they should be outright canceled. The Olympics is just another knock against the Shinzo Abe government as they deal with frustrated citizens on their initial handling of the coronavirus pandemic, and its plan to boost the economy with a travel domestic plan.

  • Australia’s acting chief medical officer has said it could take weeks to subside a surge in COVID-19 cases in Melbourne. The state of Victoria, whose capital Melbourne is in a partial lockdown, reported 275 cases on Monday, down from the record 438 three days earlier. The lockdown of Melbourne shows how easily this virus can throw a country’s plan into chaos. Just one month ago, Australia was discussing a possible travel bubble with neighbouring New Zealand and how the country essentially eradicated the coronavirus. Victorian Premier Daniel Andrews has said it’s too soon to declare measures such as the lockdown and telling residents to cover their faces when they leave their home has flattened the outbreak.

Covid-19 – Due Diligence And Asset Management

KKR Raises $950 Million for Fund Dedicated to Riskiest CMBS

Brief: KKR & Co. has raised $950 million for a fund dedicated to buying the riskiest slices of new commercial mortgage-backed securities as it expands in a part of the market that has been battered by the Covid-19 pandemic. The firm closed KKR Real Estate Credit Opportunity Partners II, a successor fund to a $1.1 billion vehicle it raised in 2017 to buy so-called “B-pieces” of CMBS. Such slices are the first to take losses when mortgages underpinning the securities sour. KKR is among the most active buyers of B-pieces, which banks and other financial institutions often seek to offload at steep discounts. Risk-retention regulations mandated by the 2010 Dodd-Frank Act require market participants to keep slices of CMBS as a form of “skin in the game,” though they’re allowed to sell the portions to third parties like KKR that hold the securities on their behalf. In the first half of 2020, B-piece buyers purchased about 60% of deals’ required risk-retention portions. KKR has invested more than $1.25 billion in the securities since 2017. Junior portions of CMBS have dropped this year as investors fret about the future of commercial real estate amid a pandemic-induced economic slowdown.

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Hedge Funds Stick to the Sidelines on Oil: John Kemp

Brief: Hedge fund position-taking in crude and products remains desultory as uncertainty about the future direction of prices and the course of the coronavirus pandemic compounds the normal summer-time trading slowdown. Hedge funds and other money managers purchased the equivalent of 24 million barrels of futures and options in the six most important oil futures and options contracts in the week ending on July 14. Purchases reversed sales of 21 million barrels the previous week, extending a slight rise in petroleum positions evident over the last month, after a much stronger upward trend over the previous two months. Last week’s purchases were concentrated in Brent (+11 million barrels) and European gasoil (+7 million) with smaller buying in NYMEX and ICE WTI (+1 million), U.S. gasoline (+5 million) and U.S. diesel (+1 million). The European focus may reflect concerns about the resurgence of coronavirus and its potential impact on oil consumption in the United States.

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Fund Managers Navigate ‘Night of the Living Dead’ in Small Caps

Brief: Investors are searching for bargains in the world of U.S. small-caps, as the beaten-down asset class prepares for what may be the worst earnings season in its history amid a resurgent coronavirus pandemic. Small-cap companies are expected to post a year-over-year earnings declines of approximately 90% as companies report their second-quarter results over the next several weeks, compared to a 67% hit for mid-caps and 44% for large-caps, according to Jefferies. That would be the largest drop since the fourth quarter of 2008, data from S&P Dow Jones Indices showed. While some investors had counted on a third-quarter rebound, many are now concerned that potential coronavirus-fueled economic shutdowns in California, Florida and Texas will deal a disproportionate hit to smaller firms, which are more directly tied to domestic spending and have been among the biggest beneficiaries of stimulus measures delivered by the Federal Reserve and Congress. People fear a “‘Night of the Living Dead’ of small-cap companies that would otherwise go bankrupt without the benefit of the stimulus and record-low interest rates,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management.

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Global Real Estate Investment Plunges 33% Amid Covid Pandemic

Brief: Global real estate investment fell by 33% in the first half as the coronavirus pandemic battered economies and disrupted deals. The Asia-Pacific region took the biggest hit, with volumes down 45% from the year-earlier period, because it was the first struck by the outbreak, according to a report from broker Savills Plc. Investment dropped by 36% in the Americas and 19% in Europe, the Middle East and Africa. With the tourism industry shut down for months by government lockdowns, hotels saw investment decline by 59% in the first half of the year, followed by a 41% drop for retail properties, according to the Savills report. Industrial and residential properties fared better. Investment is “expected to remain well below pre-pandemic levels for the rest of 2020 as investors wait for market clarity,” Simon Hope, Savills head of global capital markets, said in a statement on Monday. “However, certain sectors are expected to outperform as investors focus on secure assets, namely logistics, residential and life sciences.” The International Monetary Fund has forecast that global gross domestic product will shrink 4.9% this year as the pandemic wears on. IMF chief economist Gita Gopinath has said the cumulative loss for the world economy this year and next as a result of the recession is expected to reach $12.5 trillion.

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Jamie Dimon’s Warning for the U.S. Economy – Nobody Knows What Comes Next

Brief: Attempting to forecast the path of the American economy right now is like peering into a dark well — nobody knows how deep the hole goes. Even Jamie Dimon, CEO of JPMorgan Chase and veteran prognosticator of all things financial, is flummoxed. As head of the financial system’s bellwether, a bank with $3.2 trillion in assets that serves almost half of U.S. households and a wide swath of its businesses, Dimon has a unique vantage on the world’s largest economy.“The word unprecedented is rarely used properly,” Dimon said this week after JPMorgan reported second-quarter earnings.  “This time, it’s being used properly. It’s unprecedented what’s going on around the world, and obviously Covid itself is a main attribute.” More than four months into the coronavirus pandemic, the financial damage wrought by the outbreak has yet to fully register. Take JPMorgan, for instance: The bank added $15.7 billion to reserves for expected loan losses in the first half of this year. But second-quarter loan charge-offs in its sprawling retail bank actually declined 3% to $1.28 billion, or roughly the same level seen before the virus.That’s because the $2.2 trillion CARES Act injected billions of dollars into households and businesses, masking the impact of widespread closures. As key components of that law begin to phase out, the true pain may begin.

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Private Equity-Owner Companies Fuel Surge in Defaults

Brief: Private equity-backed companies are driving defaults in the Covid-19 recession, with companies owned by Blackstone Group, KKR & Co., and Apollo Global Management among those that have run into trouble, according to Moody’s Investors Service. More than half of companies that defaulted in the second quarter are owned by private equity firms, Moody’s said in a report this week. For example, Blackstone-backed Gavilan Resources and Apollo’s CEC Entertainment filed for bankruptcy, while KKR’s Envision Healthcare Corp. defaulted through a distressed debt exchange. U.S. defaults have more than tripled since the end of the first quarter, as companies with buyout debt proved vulnerable in the downturn, according to Moody’s. The credit rater expects the default rate to keep rising to about 12 percent next year as it continues to be fueled by private equity-owned borrowers, according to Moody’s analyst Julia Chursin, who spoke toII by phone Friday. Chursin said that private equity firms, being skillful financial engineers, will try to avoid bankruptcy through distressed debt exchanges. While still constituting a default, debt swaps can help buyout firms salvage their equity stakes as the company’s lenders take a haircut.

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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.

Our briefing for Friday July 17, 2020:

  • Starting with some good news from the United Kingdom as Captain Tom Moore will now be forever known as Captain Sir Tom Moore after being knighted on Friday. The 100-year-old became a national celebrity during the coronavirus pandemic raising close to £33M walking laps in his backyard. The knighting ceremony also marked the Queen’s return to public duties after the pandemic forced her to cancel almost all of her engagements.

  • In the United States, CNN is reporting an unpublished document prepared for the White House coronavirus task force recommended that 18 states in the “red zone” should roll back reopening measures amid surging cases. The “red zone” as outlined in the 350+ page document are states that report new cases above 100 per 100,000 population and a diagnostic positive test above 10%. California, Florida, Arizona and Texas are some of the states that fall into this category. Roll back measures suggested includes closing bars and gyms and wearing a mask at all times outside of the home while maintaining social distancing.

  • In Canada, its most populous province is starting to move into its final stage of reopening. Twenty-four of Ontario’s thirty-four public health units as of Friday will allow restaurants to resume indoor service while businesses such as bars, gyms and theatres can also welcome back customers. However, the heavily populated areas of Toronto, Hamilton, Niagara and Windsor-Essex will have to remain in stage 2 as they are still trying to reduce their COVID-19 numbers. Ontario reported 111 new cases on Friday.

  • Spain are urging the Catalonia region, home to four million people, including residents of Barcelona to stay home as they have seen an increase in COVID-19 cases. The stay-at-home order is one stop short of a mandatory confinement but marks the strongest measure the Spanish government has made since emerging from its lockdown last month. The country reported 628 new cases on Friday, the most since the beginning of May.

  • Israel is reimposing restrictions as the country sees a continued rise in new cases. As of Friday, gyms and exercise studios will closed to the public, as well as indoor dining in restaurants. Tighter restrictions will also happen over the weekend with the closure of stores (pharmacies + grocery stores exempted), beauty salons, museums and tourist attractions. The government also announced later in the month beaches will be closed to the public on weekends. Israel reported 1,800 new cases on Thursday and the government is facing heightened pushback from the public, including demonstrations outside the Prime Minister’s residence.

  • India and Brazil have both crossed COVID-19 milestones that neither wished they would have had to reach. India now has more than one million coronavirus cases, joining Brazil and the United States as the only countries to do so. Several Indian states are imposing focused lockdowns as government officials try to protect their areas and economies. Meanwhile, in Brazil, their health ministry announced the country has reached two million cases. The country has also reported 76,688 deaths and have recorded more than 1,000 daily COVID-19 deaths on average.

Covid-19 – Due Diligence And Asset Management

CEO of World’s Biggest Money Manager Says Wearing Masks Will Help Economy Avoid Another Shutdown

Brief: BlackRock CEO Larry Fink told CNBC on Friday that wearing masks is critical to helping the U.S. economy recover from the damage caused by forced business closures because of the coronavirus. “We are witnessing many, many states reopening, but reopening without wearing masks. We need a world of compassion and that compassion is meaning wearing a mask,” Fink said on “Squawk Box.” “If we all wore masks, if we all cared about our fellow citizens a little more, we will be resolving this crisis much sooner.” However, a failure to wear masks and take other precautions may allow the virus to continue to spread and potentially necessitate more strict mitigation measures, he said. “If the disease continues to grow, if mortality rates grow from where they are today, then we’re going to have to see another shutdown of parts of our economy, and then the small and medium business … are going to have a harder time,” Fink said. In states such as Texas and California, parts of their reopening plans have already been pulled back or paused due to record-breaking Covid-19 case increases and spiking hospitalizations. Daily coronavirus cases in the U.S. hit another record, topping 77,000 on Thursday, according to data from Johns Hopkins University.

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BlackRock Profit Beats Street Estimates as Markets Rebound

Brief: BlackRock Inc’s (BLK.N) results topped Wall Street estimates on Friday, helped by investors flocking to the world’s largest asset manager’s bond funds in the second quarter as global financial markets rebounded strongly from a COVID-sparked brutal selloff in March. BlackRock ended the quarter with $7.32 trillion in assets under management, up from $6.84 trillion a year earlier. The S&P 500.SPX rose 20% in the second quarter after falling by that amount in the first three months of 2020 as the coronavirus pandemic slammed the economy.“We had more conversations with our clients in the last six months than we have probably had in aggregate in years,” Chief Executive Larry Fink said in an interview. “Clients are looking to BlackRock more than ever before.”BlackRock reported a 21% jump in quarterly profit as investors poured money into its fixed-income funds and cash management services.The New York-based company's net income rose to $1.21 billion, or $7.85 per share. Analysts had expected a profit of $6.99 per share, according to IBES data from Refinitiv. (bit.ly/2ZEPkNv)

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U.S. Bank CEOs Warn of Tougher Economic Road After Recent Gains

Brief: The road to recovery for the U.S. economy will be uneven, unclear and uncertain as the coronavirus retains its hold on business and Americans’ everyday activities, according to the heads of the nation’s biggest banks. In the wake of brighter data on employment, retail sales and housing over the last two months, most financial-institution executives curbed their enthusiasm about the economy during the kickoff to the latest earnings season -- even as some of their own profits rose. “There is no question as reopening has occurred, we’ve seen a pickup in that activity,” David Solomon, chief executive officer at Goldman Sachs Group Inc., said on the firm’s July 15 earnings call. But with a recent uptick in Covid-19 cases in several states “and this uncertainty persisting, I think you’ll see a flattening in that economic pickup and that will slow the progress we make.” JPMorgan Chase & Co. CEO Jamie Dimon was just, if not more, skeptical that the recent pace of improvement in the economy will endure. “You’re going to have a much murkier economic environment going forward than you had in May and June,” Dimon said on JPMorgan’s July 14 call. “You are going to have a lot of ins and out. You are going to have people scared about Covid. They’re going to be scared about the economy, small businesses, big companies, bankruptcies, emerging markets. So it just could be murky.”

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Global Hedge Fund Industry Buffeted by Headwinds, says New Report

Brief: The global hedge fund industry is currently facing a number of headwinds, from fee pressure, increased redemptions and liquidations, to the decreasing new fund launches  as investors around the world look towards defensive strategies, according to a new report from ResearchAndMarkets.com. But despite the tough times, the industry saw a double-digit annualised return in 2019 for the first time in the past six years. The Global Hedge Fund Industry: Growth, Trends and Forecasts 2020-2025 report highlights that the United States currently accounts for three-quarters of assets under management globally in the sector. Despite hedge fund activity in other regions globally expanding alongside that of the United States, the country also accounts for 3,405 of the 5,523 institutional investors active in hedge funds and 3,319 of the 5,383 active hedge fund managers. The report also takes a look at fees and how due to investor pressure, fund managers in some places have given up the traditional 2-20 fee structure for 0 per cent management fee and 30 per cent performance fee. 

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Credit Managers Pessimistic on Global Economy

Brief:Credit portfolio managers remain cynical on the global economy despite the recovery of equity markets since March, according to the second-quarter survey from the International Association of Credit Portfolio Managers. The vast majority of surveyed credit managers, 87%, forecast rising loan defaults over the next 12 months globally. By region, 95% see defaults rising in North America, 91% in Europe, and 82% in Australia. The least negative region appears to be Asia, with 67% of surveyed managers believing corporate defaults will rise in that region over the next 12 months. "I think that's a reflection that Asian countries have managed the (COVID-19) pandemic in a way that they look significantly better, but of course things change day to day," said Som-lok Leung, IACPM's executive director, in a telephone interview.Mr. Leung said credit managers feel there is a disconnect between equity markets and what they are dealing with on a day-to-day basis. "Most of the IACPM members are banks," he said. "These people are managing bank portfolios which are primarily corporate credit loans." Those companies are in distress, he said, "dealing with their lines of credits, asking for amendments, extensions, all these kinds of things to weather the current storm."

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Private Equity Hitting the Breaks on Outside Legal Spending

Brief: Private equity firms in the U.S. and the U.K. are cutting back on outside legal spending amid an M&A slowdown that began even before the coronavirus pandemic, according to a May 2020 survey conducted by Apperio, a U.K.-based legal spend analysis company. Nearly all U.S. respondents - 98% - anticipated a decline in spending, the report found, with 83% expecting outside legal spending to contract by 6% or more.

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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.

Our briefing for Thursday July 16, 2020:

  • In the United States, it was announced earlier in the week that the government was rerouting coronavirus information such as hospital data directly to them instead of first going to the Centers for Disease Control and Prevention (CDC). Some of the information no longer available on the CDC website includes the current inpatient and intensive care unit bed occupancy, health care worker staffing and personal protective equipment supply status and availability. The government’s Department of Health and Human Services (HHS) says the CDC’s way of gathering hospital information is out of date and inadequate in today’s day and age. Critics of the Trump administration point out having the data go directly through a government filter first threatens to undermine medical data as being presented free of political bias.

  • In Canada, rumours of Atlantic Canada extending their travel bubble to the rest of the country are indeed just that: rumours. The Atlantic travel bubble of Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador has been operating since July 3rd and fairly successful with no major outbreaks. Newfoundland’s Premier had floated the idea of opening the borders to rest of the country as of this Friday, but now admits that was just a rough estimate. The farthest any of the four provincial leaders are willing to go is New Brunswick Premier Blaine Higgs who is considering loosening the restrictions to Quebec residents who live close to their border.

  • In the United Kingdom, the first clinical trials from Oxford’s University COVID-19 vaccine are set to be published in a medical journal on Monday. According to a report from the Financial Times, a senior Oxford scientist said the vaccine gave a double boost to the immune system of 1,000 trial volunteers, without significant side-effects. The full research backed by pharmaceutical company AstraZeneca is set to appear in The Lancet.

  • After seeing signs of an increase in coronavirus infections in Paris and some other regions, France will be moving up their mask-wearing order to begin next week. During France’s Bastille Day holiday, President Emmanuel Macron announced face masks in public indoor spaces were set to be enforced starting August 1st. Up until now, France had only required people to wear face coverings on public transport, or in public spaces where social distancing wasn’t possible.

  • A Russia-backed hacker group has been accused of trying to steal COVID-19 related vaccine research from Canada, the United Kingdom and the United States. All three country’s intelligence agencies said the group, APT29 – also known as Cozy Bear and the Dukes are behind the activity. The same group was accused of hacking the Democratic National Committee before the 2016 U.S. election. A Russian Kremlin spokesperson said Russia “has nothing to do” with the hacking attacks.

  • India reported a new daily record of 32,695 coronavirus cases as the national count inches closer to one million. The Indian Medical Association said 99 doctors have died, while another 1,302 are infected with COVID-19. The association is calling for shorter work hours for health care workers following safety concerns as the fatality rate for doctors (7.6%) is three times higher than the national average of 2.5%.

  • In Japan, Tokyo has raised its coronavirus level to the highest “red” level as the Governor describes the situation in the country’s capital as “rather severe”. Health experts have noted infections among young people and asymptomatic cases are rising in Tokyo. Fearing a second wave in the country, rural municipalities are asking the central government to suspend a major “Go To” travel aid campaign, aimed to boost domestic tourism. The government though plans to move forward, citing caution and fear that the world’s number three economy is set to shrink at its fastest pace in decades.

Covid-19 – Due Diligence And Asset Management

Private Equity Titans Turn to Europe for Mega-Deals

Brief: The U.S. is no longer the center of the private equity universe. Firms announced $143 billion of deals outside the U.S. in the first half, or almost 60% of the world total, according to data compiled by Bloomberg. That’s on track for the highest full-year proportion in almost two decades. And for the first time since 2003, no U.S. targets were among the five largest deals. As the U.S. grapples with a pandemic that’s still infecting thousands by the day, private equity firms are taking longer to do business, with dealmakers unable to meet in person and companies in hibernation. Meanwhile, a relative winner is emerging from the crisis: About half of this year’s non-U.S. activity came from Europe. “This points to the long-term trend for larger deals outside the U.S. as international markets mature,” said Scott Moeller, director of the M&A Research Centre at City, University of London. “It also appears Covid-19 is hitting the U.S. more strongly, which is impacting the ability to do deals despite the large amounts of unspent money available to PE funds.” Private equity started 2020 with more cash on hand than ever, according to data provider Preqin, and dry powder rose to nearly $1.5 trillion as of June 30 as dealmaking slowed. Capital-raising also dropped in the second quarter as lockdowns kept investors at home.

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Morgan Stanley Posts Record Profit on Trading Boom

Brief: Morgan Stanley posted a record quarterly profit on Thursday that blew past analysts’ expectations as another of Wall Street’s big investment banks gained from huge swings in financial markets due to the coronavirus crisis. The bank wrapped up second-quarter results for the big U.S. lenders that shook out along expected lines. Trading powerhouses Morgan Stanley and Goldman Sachs performed better than Main Street rivals JPMorgan Chase, Bank of America and Citigroup, which had to build massive reserves for loans that may go bust. A hallmark of Gorman’s tenure as CEO has been the bank’s decade-long expansion into wealth and asset management, businesses that diversified the bank’s revenue streams and provide balance against the unpredictability of its trading business. Gorman said the decision to keep the bank’s consumer loan business small also helped this quarter. Credit cards and small business loans are expected to be badly hit by the COVID-19 pandemic, and rival bank Goldman Sachs had to set aside $1.6 billion for loans that could go bad.

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Ray Dalio’s Bridgewater Flagship Fund Tanks 21% as Quants Resume Slump

Brief: Machines are continuing to feel the pain. Morgan Stanley’s latest Quant Trends report lays bare that quantitative hedge funds — systematic macro and commodity trading advisers, which trade futures, securities and currencies — are still lagging after failing to capitalise on the volatility caused by the Covid-19 induced market turmoil. Quant Trends, a 69-page report seen by Financial News, found that Bridgewater Associates, the world’s biggest hedge fund, also continues to struggle in 2020. Bridgewater’s Pure Alpha strategy was down 20.6% this year to the end of May. But according to a source close to the situation, Bridgewater's All Weather fund – its risk parity strategy – is faring relatively better, down only 2.8% in the year to date. The report also found Quant hedge fund heavyweight Renaissance Technologies’ Renaissance Institutional Equities Fund is down 10.9% in 2020 until the end of May. AHL Dimension, the multi-strategy hedge fund run by listed hedge fund Man Group, fell 5.6% for the year ending May 2020. Man Group’s AHL Alpha quant fund is up 2.9% over the same period, a person familiar with the matter told FN. Quant firms were hit badly by the March market meltdown, particularly caught off guard by a spike in fixed-income volatility. Data from Morgan Stanley shows many leading quants have failed to improve their performance subsequently.

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Some Managers See Return to the Office; Others Aren’t so Sure

Brief: Abrupt shelter-in-place mandates in March aimed at slowing the spread of COVID-19 sent millions of office workers home to work remotely. Now, more than three months later, many plan to eventually be back in the office — but more than a few are still uncertain of when (or if) their offices will reopen .A Callan survey of investment managers, published in late June, found 57% of those polled planned to be back in the office in the months before October, with one-quarter expecting a return in September and 17% expecting a July return. But 41% were noncommittal and didn't have a set return date.Some saw a few positions permanently working remotely, with 79% seeing up to a quarter of their workforce staying home full time. At the time of the survey, 87% of managers surveyed said at least 90% of their employees were working remotely. Since the survey's publication, however, there has been a surge in COVID-19 cases as the summer weather coaxed more people outdoors. Should a second wave of cases arise in the fall, the number of firms opting to have their employees work remotely will likely increase.

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World’s Wealthiest Lower Their Private Equity Expectations

Brief: As the pandemic was unfolding earlier this year, the world’s wealthiest families began doubting that private equity investments could beat gains from stocks, according to a new report from UBS Group.The Swiss bank probed global family offices worth an average $1.6 billion during the three weeks from February 19 to March 13 as stocks were plummeting on Covid-19 fears— and again in May as they were rebounding in the pandemic. Fifty-one percent of wealthy families said in May that they expected private equity to outperform public investments, down from 73 percent in early March.“At the height of the crisis when liquidity was everything, family offices’ immediate reaction was to view private equity with greater caution,” UBS said in the report. “After economies locked down, family offices’ expectations for returns declined.”Private equity has been a favored alternative investment of family offices, with a majority viewing it as an important driver of returns, according to the survey. Institutional investors such as pensions also have been targeting the asset class, expecting a premium for the illiquidity risk they’re taking in locking up capital for years in private equity funds.

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Blackstone to Shutter Real Estate Fund That Held CMBS

Brief: Blackstone Group Inc. is closing a real estate fund that used leverage to load up on commercial mortgage backed securities, investments that have slumped during the Covid-19 pandemic. The Blackstone Real Estate Income Master Fund, with about $1.1 billion of total investments at year-end, including those purchased with leverage, will sell the assets and distribute the proceeds to shareholders, the company said in a regulatory filing this week. Its net assets have declined from almost $773 million at year-end to $553 million as of May 31. The fund suffered a 24% decline in March as markets swooned. It had generated an average annual return of 5.52% over five years through 2019.CMBS delinquencies in the U.S. surged to 3.59% in June from 1.46% in May, the largest month-over-month increase on record, according to Fitch Ratings. With consumers staying home and shopping online, hotels and mall-based retailers are missing mortgage and rent payments. “An orderly wind down” would provide shareholders with the “best path to maximize portfolio recovery” while also getting them some cash, Blackstone said in the filing late Monday. The funds recently built a strong cash position “and have begun to see a recovery in pricing since the recent trough related to the outbreak of Covid-19,” the firm said. As of May 31, almost 10% of the fund’s net assets were in cash, according to company documents. At year-end, the master fund held about $687 million of CMBS and an additional $227 million of residential mortgage backed securities, with both categories including debt bundled by government sponsored agencies as well as private issuers.

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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.

Our briefing for Tuesday July 14, 2020:

  • In the United States, California Governor Gavin Newsom reissued a new set of closures for his state. Bars and indoor restaurant dining will be banned throughout the state, while indoor religious services, gyms, hair and nail salons are once again off-limits in most of the state. Over the last two weeks, America’s most populous state has watched its counties coronavirus watch list rise from 19 to 30, which now accounts for 80% of California’s population. Elsewhere in the country, CDC Director Dr. Robert Redfield believes Americans are finally coming around to the idea of facial coverings. “If we all wore face coverings for the next four, six, eight, 12 weeks, across the nation, this virus transmission would stop, Redfield said on Tuesday.

  • In Canada, multiple news outlets are reporting the land border closure with the United States will be extended into August. As of right now, the agreement, which is reviewed each month, is set to expire on July 21st. According to the reports, Canadian senior government officials state the arrangement will be rolled over for another 30 days until August 21st. The news of the extension comes after Canadian Prime Minister Justin Trudeau and United States President Donald Trump had a phone conversation on Monday that covered a number of topics, including the border closure.

  • United Kingdom’s government will be adopting the measure of having the public wear face masks in shops and supermarkets. The new rules will come into effect as of July 24thand those failing to comply could face fines up to £100. A report from the Academy of Medical Sciences is also sounding the alarm that the UK must prepare for a potential new wave of the coronavirus that could lead to a “reasonable worst-case scenario” of 119,900 COVID-19 related deaths by June 2021. Medical experts are imploring the government and citizens to use the remaining summer months to reduce the risk of health services being overwhelmed to save lives in the winter.

  • As France celebrates Bastille Day, a national holiday in the country, President Emmanuel Macron also announced its government’s plan to have masks worn in public mandatory. On Tuesday, President Macron said the new measures will come into effect as of August 1st and will primarily target enclosed public spaces but could also apply to public events held outdoors. In the national television interview, Macron added that France will be among the first countries to have access to a potential coronavirus vaccine developed by French pharmaceutical company Sanofi with testing made available to all French citizens hopefully in the near future.

  • In the Philippines, police are set to conduct house-to-house operations to find COVID-19 patients under home quarantine and transfer them to isolation facilities. Government officials are also calling on the public to report those who they believe to be COVID-19 positive and are possibly hiding and report them to authorities. All of this news comes as a fresh lockdown has affected 250,000 in Navotas, one of 16 cities that make up Manila. Those living in one of the poorest areas in Manila will go into lockdown as of Wednesday or Thursday as a full set of guidelines are still being worked on.

  • Australian states are tightening restrictions on movement as the COVID-19 hotspot in the state of Victoria continues to show new cases. Active cases in the state rose to 2,000 with 270 detected in the last 24 hours. New South Wales, home to Sydney, are also seeing a spike in cases, so other states like South Australia have canceled their plans to reopen the border as of July 20th. Meanwhile, Queensland introduced a mandatory two-week quarantine for people who have visited two areas in Sydney’s western suburbs.

Covid-19 – Due Diligence And Asset Management

Wanted: Signs of V-Shaped Recovery In Earnings Reports

Brief: Equity investors are no longer losing sleep over the short-term hit to company earnings from coronavirus lockdowns, instead they are looking for early evidence to support the V-shaped recovery narrative that has lifted stocks out of their mid-March crash. As Europe Inc starts churning out trading updates expected to show a more than 50% dive on average in second-quarter profits, many investors are keen to see whether the market bounce back can be sustained. European stocks have on average risen a whopping 36% from March 16 lows sending their valuations soaring to over 17 times their projected annual profits, well above the historic average of 14 according to Refinitiv data, indicating investors are happy paying a premium to buy stocks despite the uncertainty. Many companies pulled their guidance during the peak of the coronavirus crisis, leaving investors in the dark for the rest of the year, prompting them to write off the first-half of 2020. “One of the things that we’re watching for most closely is those companies that did withdraw guidance, do they now feel that they have enough visibility to return (to) giving guidance”, said Sunil Krishnan, head of multi-asset funds at Aviva Investors.” Flying blind into the earnings season, investors are eager to get a concrete sense of how companies are coping on the ground.

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VC Fundraising Hasn’t Slowed Down – For the Big Funds

Brief: Venture capital funds closed in the first half of 2020 have boasted one of the largest fundraising totals in the past decade — raising more money in just six months than VCs in all of 2017, 2015, or the preceding years. This is according to the latest industry report from PitchBook and the National Venture Capital Association, which tracked venture capital activity through the end of June. The Silicon Valley Bank and compliance software firm Certent also contributed to the report. “While many of these funds likely began fundraising before the uncertainty of the pandemic affected the markets, closing these massive vehicles over the last two quarters remains an impressive feat,” the report stated.  Funds that closed during the first half of 2020 had raised a total of more than $42.7 billion — “which already surpasses the full-year total for every year of the decade apart from 2016, 2018, and 2019,” PitchBook and the NVCA said. This “lofty” total was largely driven by so-called mega funds, defined by the report as those with at least $500 million in assets. Of the 148 funds that closed in the six-month period, 24 were mega funds, according to PitchBook and the NVCA. “This explosion of outsized funds drove the 2020 median fund size back over $100 million for the first time since 2007,” the report stated. In 2019, by comparison, the median fund size was $50 million.

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Coronavirus: Virgin Atlantic Finalizes £1.2bn Rescue Deal

Brief: Troubled airline Virgin Atlantic has finalised a rescue deal worth £1.2bn. The package includes support from its main shareholder, Virgin Group, and loans from outside investors. It also includes deferring hundreds of millions of pounds owed both to Virgin Group and to fellow shareholder Delta Air Lines. Virgin Atlantic had initially hoped to obtain emergency funding from the government, but ministers said any subsidies would be a last resort. The funding comes largely from existing shareholders and a new investor, hedge fund Davidson Kempner Capital Management. The company said the plan paved the way for the airline to rebuild its balance sheet and return to profitability in 2022. The Covid-19 outbreak plunged Virgin Atlantic into an acute crisis. Like other airlines, it was forced to ground most of its fleet for months and is not due to resume services until next week. The company had initially hoped the government would step in, but ministers made it clear taxpayers' money could only be considered once all other options had been exhausted. Under the package announced on Tuesday, the airline will receive loans worth £170m from Davidson Kempner, while Virgin Group, its biggest shareholder, will put in a further £200m.

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Wall Street Signals Economic Worry With Rush to Defensive Assets

Brief: The constant refrain on Wall Street is that markets have broken from pandemic reality, yet the evidence keeps suggesting otherwise. The S&P 500 staged a late-session reversal on Monday on fresh virus fears that underscore the jitters behind the global rebound in risk. The latter keeps taking place alongside a historic bid for safety and elevated equity volatility. Those signals of investor fear are appearing in the highest quality bonds, where the more than $13 trillion pile of sub-zero yields has threatened to surpass the March peak. In the safest exchange-traded funds, which hold more gold than ever before. Under the equity surface, where valuations point not to exuberance but to continued defensiveness in favor of growth stocks. As companies prepare to report how they fared at the pandemic peak, this bifurcated market is one way to make sense of risk appetite that seems to defy economic logic. “The V-shaped equity market is deceptive,” said Erik Knutzen, the chief investment officer of multi-asset strategies at Neuberger Berman. “Far from a vote of confidence, the rally has been led by a handful of defensive, U.S. large-cap growth stocks, and it has not been backed up by a similar rebound in more economically sensitive sectors and regions or in Treasury yields.” Much has been made of the apparent disconnect between Main Street and Wall Street after stocks staged the fastest rally in history as the world’s largest economy sunk into recession. With the economic fallout of the coronavirus still unfolding, the fact that global equities trade at about 20 times their forward earnings is often a cause for worry.

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Hedge Fund Manager Singh Calls Trump’s Handling of Coronavirus ‘An Incredible Gift’

Brief: President Donald Trump’s handling of the coronavirus outbreak early this year was “an incredible gift” for investors because it kept markets stable long enough for some to protect their portfolios, Axon Capital co-founder Dinakar Singh told investors this month. Trump has justified his public assurances that the virus will quickly go away by arguing he needs to be “a cheerleader” for the United States to avoid creating “havoc and shock.” The United States has the highest number of confirmed coronavirus infections and deaths in the world. “We simply never believed ‘what happens in China stays in China,’” Singh wrote in a letter to investors last week that was seen by Reuters. “Trump talking down COVID-19 risk gave investors an incredible gift — it kept markets resilient much longer than they should have, and enabled us to ensure our portfolio was sensibly positioned.” The White House did not immediately respond to a request for comment. Axon, a 15-year-old hedge fund which oversees roughly $1 billion, gained 24.3% in the first half of the year, thanks to bets on technology giants, managed-care stocks and Japanese companies, according to the letter. In the last days Axon extended gains and is now up 30%.

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Investment Association Warns of New Scams Targeting Retail Investors

Brief: The Investment Association (IA) has warned that retail investors are facing new and sophisticated attempts by fraudsters to get them to invest in bogus investment products and disclose their personal details in the process. In a report on Tuesday, the IA said investment managers have reported that organised criminal gangs are impersonating their products, particularly bonds, and promoting them through fraudulent price comparison sites and cloning brands with fake documents. The gangs are also targeting potential victims through sponsored links on Facebook and Google. As well as using the names and addresses of staff at real investment management firms. The estimated loss to savers is currently estimated at around £4mln, with around 300 incidences reported to date. IA said reports of the scam had spiked around three months after the coronavirus lockdown, with many investors contacting firms to enquire about unreceived payments before realising they had been conned. The IA said retail investors should be on the lookout for the details of any contacts offered to them, as well as any instances of cold calls. The body also said investors should be wary if they are placed under time pressure to part with their cash, a common fraud tactic.

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