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Covid-19 Diligence Briefing

Our briefing for Friday January 15, 2021:

  • The United States Centers for Disease Control and Prevention (CDC) is sounding the alarm on new, more contagious variants. The CDC announced on Friday Americans must double-down on their mitigation in efforts to protect their fellow citizens until larger numbers can be vaccinated. In every scenario explored by the CDC the United Kingdom strain will account for a majority of the cases in the United States by some point in March. British researchers estimate the strain is roughly 50% more transmissible than the common coronavirus strain.
  • Canada’s public health authority released new national modelling on Friday in tracking COVID-19 and it should come as no surprise to Canadians: the situation is getting worse. The latest data shows Canada is on track to see up to 796,630 total cases and 19,630 deaths by next Saturday, and up to 10,000 cases a day by the end of the month. “We’ve seen the kinds of impossible choices hospitals in other countries had to face when they become overwhelmed, said Prime Minister Justin Trudeau during a news conference. Deciding who gets an ICU bed and who doesn’t, well that’s not where we want to be. So please keep following public health guidelines and stay safe.” Canada also received some bad news on the vaccine front with Pfizer’s expansion plans at its European manufacturing facility, meaning a “temporary” delay on shipments of up to 50% over the next several weeks. 
  • United Kingdom Prime Minister Boris Johnson announced on Friday that the country will close all travel corridors as of Monday at 4 AM to protect against the risk of unidentified new strains. What this means is that all travelers as of Monday entering the UK will have to provide proof of a negative COVID-19 test within 72 hours of departure. They will also have to isolate for 10 days, unless they take another test, which will allow that period to be shortened to five days, if the result proves negative. The Prime Minister also announced significant ramping up of border controls, which will also require all inbound travellers to produce a negative COVID-19 test but didn’t mention about extending quarantine rules. 
  • Germany will be pushing up its next meeting with the country’s 16 regional leaders a week earlier due to the worsening situation in the country. “New infection cases are too high,” said Chancellor Angel Merkel spokesperson, Steffen Seibert. Chancellor Merkel and state leaders will meet on Tuesday after originally set to meet on January 25th. Germany on Friday surpassed two million cases and on Thursday, Robert Koch Institute chief Lothar Wieler admitted the current lockdown in place has not been effective as the one put in place last spring.
  • The United Arab Emirates (UAE) are now second in the world, trailing only Israel in coronavirus vaccine administration rates. The UAE is currently inoculating 180,000 people per day with the Ministry of Health and Prevention stating earlier in the week of a campaign to vaccinate over 50% of the population. On Thursday, UAE reported a record 3,407 new coronavirus cases. The country has China’s Sinopharm and Pfizer’s vaccinations currently available, while the Russian Sputnik vaccine is undergoing phase III trials in Abu Dhabi.
  • Brazil’s healthcare system in its largest state is on the verge of collapse as hospitals are running out of beds and oxygen tanks amid soaring coronavirus cases and a new variant. President Jair Bolsonaro said “all means” are being made to help the state of Amazonas as local news reports are quoting doctors and nurses as saying patients are dying of asphyxiation in the city’s hospitals due to a lack of oxygen. Brazil’s Vice President Hamilton Mourao is blaming the new coronavirus variant circulating in the city of Manaus, saying there was no way to foresee the collapse in the public health system.

Covid-19 – Due Diligence And Asset Management

Big Banks Unleash $5 Billion From Reserves on Loan Optimism

Brief : Wall Street’s worst fears about the fallout from Covid-19 are receding. Three of the biggest U.S. lenders -- JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. -- cut their combined reserves for losses on loans by more than $5 billion, helping fourth-quarter profit top estimates even as they faced headwinds from low interest rates. While posting results Friday, executives expressed guarded optimism about fiscal stimulus and rising vaccinations during a pandemic in which delinquencies have remained low. Still, the banks warned the economy isn’t out of the woods yet. Six of the largest U.S. banks urgently set aside more than $35 billion to cover loan losses in the first half of 2020 with the message that they simply had no idea what to expect. Now, banking chiefs are pointing to prospects for a rebound this year. Unprecedented action from the Federal Reserve and lawmakers have allayed the worst-case scenarios. “We’ve seen further improvement on both GDP and unemployment,” Citigroup Chief Financial Officer Mark Mason told reporters on a conference call, referring to gross domestic product. There are a lot of favorable indicators that “make for a more positive outlook in 2020 and hopefully a continued, stable recovery,” he said. Beyond vaccines, he pointed to more clarity on the next U.S. presidential administration and prospects for additional stimulus.

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KKR’s McVey Flags Dollar, Rates Among ‘Black Swan’ Tail Risks

Brief: KKR & Co.’s Henry McVey is advising investors to buy “tail risk” protection against the potential for low-probability events, like the dollar losing its status as the world’s reserve currency or a sudden spike in interest rates. The strategy is a form of financial insurance that typically pays off in the event of sudden selloffs, such as the pandemic-driven market chaos of last year. While McVey anticipates the current mix of economic trends and policy will drive a strong rebound in growth, he’s wary after the recent run-up in asset prices and the increase in Treasury yields. “There are two or three things that could go wrong against a generally constructive backdrop,” KKR’s head of global macro and asset allocation said in an interview on Bloomberg Television. Besides the potential loss of confidence in the dollar and a disorderly increase in rates, McVey also highlighted the “black swan” risk of a major disappointment in corporate earnings that could make investors re-evaluate equities. However, he thinks the probabilities remain low. Tail-risk hedging is a small industry that includes LongTail Alpha in Newport Beach, California, and Universa Investments, a Miami-based firm advised by Nassim Taleb, the former options trader who wrote the 2007 bestseller “The Black Swan.” The LongTail Alpha hedge fund gained 10-fold in March, rewarding investors who bought protection against a market collapse.

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Impact of Social Factors on Stock Performance Rises with Pandemic, Finds Federated Hermes

Brief: The ‘social premium’ for investing in companies with good or improving social practices is rising, according to new research from US-based asset manager Federated Hermes. In 2020, social factors were found to add up to 17 basis points each month to returns, which is two basis points higher than the result of a previous study in 2018. Lewis Grant, senior global equities portfolio manager at Federated Hermes, says that this increase reflects the fact that 2020 was a “huge turning point in society that brought some really difficult and ingrained issues to the fore”.  The impact of the coronavirus pandemic and the growth of the Black Lives Matter movement after the death of George Floyd at the hands of police in the US, both helped accelerated the trend toward social investing. “We were already seeing an increase in the importance of social factors. I think that's just what's happening in the world,” says Grant.  General sustainable funds have grown rapidly in recent years, with sustainable investment now accounting for a third of all assets under management in the US.  When Federated Hermes first started researching the topic of sustainability premia several years ago, Grant says they did not find any statistical relationship between returns and social factors at all, only for governance factors. Social factors include a company’s treatment of its staff, rates of employee turnover, health and safety in the workplace, and supply chain standards. 

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Timing is Everything During Pandemic: How Investors Can Ride the Second Wave and not Drown in it

Brief: Following the initial uplift from the announcement of a Covid-19 vaccine, markets have slowed, caught between optimism for the 2021 outlook and short-term concerns around the second wave impact. However, we expect a positive kick-off for risk assets in 2021, with conditions ripe for a co-ordinated acceleration of global growth. Over the next three to six months, as vaccine rollouts allow economic activity to resume, the return of growth and inflation will offer a temporary relief from the global economy's long-term state of 'Japanification'. This macro reflation scenario has been confirmed week after week by economic data and is supported by the promise of ongoing accommodative support from central banks.  Nevertheless, we do not expect the reflation to evolve in a straight line, with Brexit a potential bump along the road, and investors need to be mindful of ongoing volatility. Moreover, if we head into 2021 with a strong rally, this will be difficult to sustain - and investors will have to be quick to capitalise. The ongoing global recovery fuels a pick-up in global trade and especially Asian exports, similar to the previous 'reflation' episode in 2016-17. The global pandemic drove a wedge between equity sectors, starkly separating winners from losers. The technology and online retail sectors outperformed during the pandemic, as working from home and e-commerce accelerated demand for these firms.

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Standard Chartered Preparing Hundreds More Job Cuts

Brief: Standard Chartered Plc is preparing further job cuts as the emerging markets lender continues a restructuring that was postponed by the onset of the pandemic. The London-headquartered bank is expected to cut several hundred staff next month across its global businesses, with the reductions focused on more junior employees, according to people familiar with the matter. The bank has about 85,000 employees around the world. Job cuts restarted in the second half of last year as Standard Chartered, like other major lenders, faced pressure to curtail costs to cope with the impact of the pandemic. It’s one of a handful of large European banks who have resumed job reductions in the past months including HSBC Holdings Plc and Deutsche Bank AG. “A number of roles are being made redundant in line with our commitment to transforming the bank to ensure its future competitiveness, work that has been underway for the last few years,” Standard Chartered said in a statement. In July, the company said it was making a “small number of roles” redundant. Since then, several senior managers have left, including Didier von Daeniken, the head of its private banking arm. Standard Chartered Chief Financial Officer Andy Halford said in October that the firm needed to improve returns and its goal of achieving a 10% return on equity had been pushed back by Covid. The lender has said it will consider resuming dividend payments to investors after the Bank of England started to relax pandemic-related curbs in December.

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Silicon Valley’s Share of Venture Capital Expected to Drop Below 20% for the First Time

Brief: The pandemic has upended the U.S. economy and it has also had a far-reaching effect on Silicon Valley, the venture capital industry and the entrepreneurial ecosystem in America. According to PitchBook’s 2021 US Venture Capital Outlook report that was released late last month, the Bay area’s share of total VC count in the U.S. will fall below 20% for the first time in history, while other cities around the country grab larger amounts of equity capital for their home-grown innovators.  In 2020, $27.4 billion of venture capital was raised in the U.S., PitchBook reports. Of the total, 22.7% of the dealmaking occurred in the Bay Area, and 39.4% of deal value was invested in Bay area-headquartered companies. “The Covid-19 pandemic and subsequent exodus from San Francisco will only exacerbate this trend,” said PitchBook’s analyst Kyle Stanford. He notes that Silicon Valley’s share of venture capital deal count in the U.S. has fallen every year since 2006. The forces driving the continued shift: the rise of remote work during the pandemic, the high cost of living in the Valley, and the fact it’s become more expensive to finance start-ups in the Bay area. Another factor is the fact that many investors have left — either temporarily working from home or relocating all together. For example, 8VC has made 70% of its investments in California-headquartered companies, yet it moved its own headquarters from San Francisco to Austin in November.

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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 January 14, 2021:

  • In the United States, President Elect Joe Biden is expected to address the nation Thursday evening to outline his vaccination and economic rescue legislative package. Multiple media reports have the price tag somewhere between $1.3 and $2 trillion. The proposal is expected to include sizeable direct payments to American families and significant state and local funding – two sticking points in the previous round of coronavirus stimulus talks. CNN is reporting that the Biden team is taking a “shoot for the moon” approach even if they only hold the slimmest of majorities in the House and the Senate as of next week and his own Democratic party wanting something big.

  • In a news briefing on Thursday, the Canadian federal government outlined what phase two of the COVID-19 immunization process will look like. Major-General Dany Fortin, who is leading Canada’s logistical rollout of vaccine distributions, said as of April, the country is expecting to be receiving more than one million doses of approved vaccines every week. As of right now, it is expected that 20 million doses will be delivered in Canada between April and June. Canada’s immunization program has gotten off to a slow start with CBC reporting only 710,000 doses have been delivered to provinces and territories, with barely one percent of the population receiving their first dose of either the Pfizer or Moderna vaccines.

  • A United Kingdom survey of British healthcare workers has found people who have been infected with COVID-19 are highly likely to have immunity for at least five months. There is also evidence that those with the antibodies may still be able to carry and spread the virus. Preliminary findings by scientists at Public Health England (PHE) showed that reinfections in people who have COVID-19 antibodies from a past infection are rare with only 44 cases found among the 6,600 + previously infected people in the study. However, experts cautioned the findings mean that people who contacted COVID-19 in the early stages of the first wave in early 2020 may be vulnerable to catching it again since their immunity is likely gone.

  • Germany’s Robert Koch Institute (RKI) has called on its citizens to refrain from nonessential travel after the country detected new cases of the coronavirus variant. Germany has reported 16 cases of the coronavirus variant first detected in Britain and four other cases from variant found in South Africa. The country has approved tighter restrictions for people entering the country as of Thursday. Anyone coming to Germany from a high-risk area must provide proof of a negative COVID-19 test within 48 hours of arrival. As bad as things appear right now, the head of the RKI, Lothar Wieler said, “at the end of the year, we will have this pandemic under control”, and urged Germans to receive the COVID-19 vaccines as they become available.

  • As countries struggle to vaccinate just one percent of its population, Israel has quickly emerged as the frontrunner on the inoculation front. Bloomberg is reporting Israel has already vaccinated 21% of its residents, or 1.9 million people since the country’s health ministry began offering the Pfizer vaccine on December 20th. Prime Minister Benjamin Netanyahu says almost everyone in the country (although not Palestinians in the adjacent West Bank) will be vaccinated by early spring. Israel’s success is thanks in large part to its central government, limited territory and relatively small population (9.3 million). However, the country does have strong universal health insurance and a digitized medical system with extensive records that allow providers to target at-risk populations and track progress. The early spring deadline also coincides with an election in the country, one that Prime Minister Netanyahu is desperate to win and has made vaccinations his top priority to gain favour with Israeli voters.

  • The Financial Times is reporting health and technology groups are working together to create a digital vaccination passport in the expectation that governments, businesses and airlines will require proof of people having been vaccinated against COVID-19. The Vaccination Credential Initiative, a coalition of organizations including Microsoft, Oracle and United States healthcare non-profit Mayo Clinic are looking to build a system that establishes standards to verify whether a person has had their inoculation and prevent people falsely claiming that they did. However, there is already pushback against such a measure being put in place with Canadian Prime Minister Justin Trudeau making clear he is opposed to a vaccine passport claiming it could have divisive impacts on community and country.

Covid-19 – Due Diligence And Asset Management

BlackRock Results Beat Expectations as Assets Grow to $8.68 Trillion

Brief :BlackRock Inc’s, quarterly results topped analysts’ expectations on Thursday, buoyed by a rising stock market that boosted the firm’s assets under management to a record high $8.68 trillion, further widening its lead against peers. The firm drew $127 billion of total net inflows in the fourth quarter as investors poured money into its various business, including its exchange-traded funds, as well as active funds that aim to beat the market. “We begin 2021 well-positioned and intend to keep investing in our business to drive long-term growth and to lead the evolution of the asset management industry,” BlackRock’s chief executive, Larry Fink, said in a statement. Financial markets rallied in the fourth quarter, building on sharp gains of the prior two quarters, as accommodative global central bank policy and improving growth prospects helped lift investors’ risk appetite. While rallying stock markets provided a powerful boost to BlackRock’s results, the profit report showed outsized growth in inflows at a time when the rest of the industry is expected to struggle with redemptions.

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Healthcare Hedge Fund Rhenman Gauges “Crucial” Impact of Biden Administration’s Planned Reforms

Brief: The incoming US administration led by Joe Biden will be a “crucial” factor looming large over the healthcare industry this year, with planned reforms heralding potentially far-reaching implications for healthcare stocks and drug prices, Rhenman & Partners Asset Management said this week. Rhenman’s flagship Healthcare Equity Long/Short hedge fund gained 17.1 per cent in its main euro-denominated IC1 share class last year, bolstered by a 4.8 per cent monthly return in December. The strategy – which trades a range of small, medium and large pharmaceuticals, biotechnology, medical technology and service company stocks – made profits in each of those sectors last month, with medical technology and biotechnology companies bringing in the biggest gains. In an update this week, the Stockholm-based global healthcare-focused hedge fund said once the fall-out from the coronavirus pandemic is brought under control, the Biden administration’s proposed healthcare reforms will come under closer re-examination this year. While the Senate is now controlled by the Democrats, Rhenman believes major new healthcare reforms may prove tricky to push through with a weak majority.

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Wells Fargo CEO to Unveil Cost-Cutting Plan

Brief: Wells Fargo & Co Chief Executive Charlie Scharf will give investors more details on his long-awaited turnaround plan for the scandal-plagued bank this week. Although Wall Street expects Wells Fargo to report a 38% profit decline on Friday against the backdrop of the coronavirus pandemic, investors have become more bullish in anticipation of details about expansive cost-cutting plans. Wells Fargo shares have jumped 45% since Scharf teased a strategic update in October, outperforming JPMorgan Chase & Co and Bank of America Corp. Wells Fargo management has promised transformation since its 2016 fraudulent account scandal with little to show for the effort, but it feels different now, Raymond James analyst David Long said. Scharf’s “really changed the internal attitude to make improving the bank’s governance the number one priority,” Long said. Scharf started making changes shortly after taking the helm in October 2019, though he has not yet provided firm targets or timelines for progress. He installed a slew of external leaders, overhauled the reporting segments, and began to shed non-core businesses. He also implemented weekly and monthly reviews to increase oversight and address regulator concerns more efficiently.

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London Resilient at Top of European Tech Investment Table Despite COVID

Brief: London retained its position as the top European destination for tech venture capital in 2020, with levels near the record amount of the year before despite the impact of COVID-19, according to research by Dealroom.co and London & Partners. Start-ups and growth companies attracted $10.5 billion worth of funding, accounting for more than a quarter of all investment into Europe and three times the level in Paris, Berlin and Stockholm, the research found. Some of the largest deals involving London companies included a $500 million funding round for London fintech firm Revolut, a $400 million deal for electric vehicle maker Arrival and two funding rounds totalling $527 million for renewable energy firm Octopus Energy. The British capital is also home to more unicorns - start-ups with a valuation exceeding $1 billion - than anywhere else in Europe. At 43, it has more than Paris, Berlin and Amsterdam combined, according to the research. Dealroom said it had identified 81 potential future unicorns headquartered in the city. Eileen Burbidge, partner at London VC firm Passion Capital, said activity quickly rebounded after the shock of the pandemic in the first half.

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Startup Funding Touches New Records Amid Pandemic

Brief: What began as a desperate year for startups, characterized by mass layoffs as the pandemic took hold, has turned into a record venture capital funding haul.  Despite the economic tumult wrought by the coronavirus, startup investing in the U.S. reached a record high of $130 billion in 2020, according to a new Money Tree report from PricewaterhouseCoopers/CB Insights. Companies like Instacart Inc. and Stripe Inc. helped drive the surge by raising hundreds of millions apiece, even though the total number of funding rounds was lower than in 2019. The year also saw an uptick in funding for several cities outside the Bay Area, long the center of the startup universe.  Venture capital funding in 2020 rose 14% from 2019, according to the report, which includes private equity and debt investments as well. Last year also saw an increase in megarounds, meaning deals larger than $100 million, even as the number of funding rounds decreased, particularly for very young startups. The largest deals were a $1.9 billion infusion into Space Exploration Technologies Corp. and $1.5 billion in funding for Epic Games Inc., both giant funding rounds that were emblematic of the increasing muscle of private equity and mutual funds willing to write large checks to late-stage tech companies. In 2016, megarounds represented just 25% of the total money invested. That number increased to 49% in 2020—higher than ever—the report found. Large corporate players, including SoftBank Group Corp., Google Ventures and Uber Technologies Inc. also helped drive the rush to fund large startups.

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Renaissance’s Medallion Fund Surged 76% in 2020. But Funds Open to Outsiders Tanked.

Brief: Renaissance Technologies’ famed Medallion fund, available only to current and former partners, had one of its best years ever, surging 76 percent, according to one of its investors. But it was a different story for outsiders who are only able to invest in other RenTec funds — two of which had their worst years ever. The Renaissance Institutional Equities Fund, which launched in July of 2005, lost 22.62 percent through December 25, according to HSBC’s weekly scoreboard of hedge fund performance. A newer fund, Renaissance Institutional Diversified Alpha, fell even more: It fell 33.58 percent through the same time period, HSBC reported. Those two funds’ performance was so poor that they made HSBC’s top 20 losers list for 2020. Renaissance launched RIDA in February of 2012, and 2020 was its worst year since then, the report said. Renaissance declined to comment. Last year wasn’t RIEF’s first bout with turbulence. The fund was launched as a way for outsiders to partake of RenTec’s special sauce, as Medallion had only been available to insiders for several years by then. But RIEF fared poorly during the financial crisis: The fund fell 16 percent in 2008 and 6.17 percent in 2009. Its longest drawdown was between May of 2007 and April of 2009, a period when it fell 35.73 percent, according to HSBC. But until last year RIEF had produced double-digit returns for most of the past decade. Still, the earlier losses dragged down its annualized return, which is now only 8.05 percent. That’s below the Standard & Poor’s 500 stock index’s annualized return of 9.6 percent during the same time period.

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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 January 13, 2021:

  • The United States will be joining several other countries and requiring a negative COVID-19 test from all air passengers entering the country. According to Centers for Disease Control and Prevention (CDC) Director Dr. Robert Redfield, the new order will go into effect as of January 26th. Air passengers will be required to get a viral test within three days before their departure and provide written documentation of their lab results, or documentation of having recovered from COVID-19. The move is being made to help slow the spread of the virus and curtail the new variant from entering the country. CNN is reporting as of Tuesday, the new COVID-19 variant, which appears more transmissible, has already been found in 10 states in samples dating back to mid-December.

  • In Canada, the coronavirus continues to cripple the airline industry. Air Canada announced on Wednesday they will be cutting 1,700 jobs as it scales down operations in response to a new wave of lockdowns, including a stay-at-home order in Ontario, the country’s most populous province. The airline will be making a 25% reduction in service for the first quarter of 2021 and are operating at 20% capacity compared with the first quarter of 2019. Atlantic Canada seems to be taking the brunt of the cuts with suspension of flights until further notice in certain cities in New Brunswick, Newfoundland & Labrador and Nova Scotia announced over the last several weeks.

  • The United Kingdom reported their deadliest day yet so far from the coronavirus on Wednesday. The UK reported 1,564 deaths as the country’s hospitals are filling up with patients suffering from COVID-19 and the number on ventilator use surpassing peak levels of the first wave in April 2020. Despite all this, Prime Minister Boris Johnson said there are early signs current measures are working but didn’t rule out tougher restrictions. Elsewhere in the UK, industry groups representing pharmaceutical companies in America and Europe are raising doubts about the country’s strategy for giving COVID-19 vaccines to as many people as possible in the shortest amount of time. The UK has said it would allow for second doses of some vaccines to be given as many as 12 weeks after the first, longer than the timing determined by Pfizer and Moderna. 

  • Italy was already dealing with a health emergency when it comes to the coronavirus and now appear to have a political emergency. The country’s former premier Matteo Renzi said he was pulling his party’s ministers from cabinet on Wednesday, which negates the ruling coalition of its parliamentary majority. Renzi, who heads the Italia Viva party has long threatened to quit government over Prime Minister Giuseppe Conte’s plans for spending billions of euros promised by the European Union to restart the economy. If a coalition can’t be agreed upon moving forward, a national vote could be triggered in a country that has had to deal with over 80,000 COVID-19 deaths. 

  • China posted its largest daily jump in COVID-19 cases in more than five months. The country has stepped up containment measures by putting four more cities under lockdown. Official data showed most of the new cases were reported near the capital of Beijing, but a province in far northeast China also saw a rise in cases. The wave of new infections comes ahead of next month’s Lunar New Year holiday. Normally this is a time when millions of Chinese travel back to their hometowns. However, clearly apparent, these are no longer normal times and people are being urged to stay put with many provinces asking migrant workers to remain during the break. 

  • Many were hoping 2021 couldn’t possibly be any worse than 2020, the World Health Organization (WHO) has something to say about that. Given how the COVID-19 pandemic is spreading and with more infectious variants circulating in the northern hemisphere, the second year of the pandemic could be worse than the first said the WHO on Wednesday. “Certainly, in the northern hemisphere, particularly in Europe and North America we have seen that sort of perfect storm of the season – coldness, people going inside, increased social mixing and a combination of factors that have driven increased transmission in many, many countries,” said Mike Ryan, the WHO’s top emergencies official.

Covid-19 – Due Diligence And Asset Management

New Industry Data Reveals “Significant” Gulf Between Gains and Losses Among Largest Hedge Funds

Brief: Hedge fund managers have experienced “significant” performance dispersion over the past 12 months, with the biggest funds seeing the largest gaps between gains and losses, new industry data shows, once again underlining the importance of investor due diligence in separating winners from losers. Hedge funds globally ended a tumultuous 2020 on a high, generating an average monthly gain in December of some 4 per cent, to bring full-year returns to more than 11 per cent, according to newly-published year-end performance data from eVestment. The 10 biggest hedge funds tracked by eVestment generated returns of just 3.72 per cent between January and December last year – almost three times below 2020’s hedge fund industry average. But, of that grouping of the 10 largest funds, just one was close to that average, said Peter Laurelli, global head of research at eVestment, with most scoring strong double-digit gains. “Despite the high average returns across the industry, 2020 was a year where the dispersion of returns between fund types and within those various segments was significant. This was very apparent among large funds,” Laurelli noted in a commentary on Wednesday. “There were more large funds with double-digit gains and double-digit losses than not in 2020, highlighting the importance of fund due diligence and monitoring when selecting any hedge fund.

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Howard Marks Says Fed Moves Have Had Coercive Effect on Markets

Brief: Federal Reserve rate actions have had a coercive effect on the markets and forced investors to move into risk assets, according to Oaktree Capital Group co-founder Howard Marks. “This has required people to invest because they don’t want to sit around with their cash,” Marks said Tuesday in an interview on Bloomberg TV. “They don’t want Treasuries at less than 1% or high-grade bonds at 2%.” Global credit and equity markets have staged a dramatic rebound since March, when the Fed first took unprecedented steps to steady the economy amid the Covid-19 outbreak. This dramatically cut the amount of distressed debt outstanding and propped up companies that were ailing even before the pandemic hit, depriving value-oriented investors like Oaktree of new targets. “The greater question is, why is the market making new highs every day if we have these problems?” he said. “The political division in the country is a terrific one but the greatest one of course is the pandemic.” Discussing Tesla Inc.’s meteoric rise, Marks said the stock is so high some investors may want to sell. “If you describe an individual not of great needs, he should take some profits,” Marks said. “If he bought Tesla two years ago, he probably has a huge gain. It’s probably a very disproportionate amount of his financial net worth. He should absolutely cut back, unless he really wants to try to hit the long ball.” Oaktree is one of the largest distressed-debt investors in the world, with more than $19 billion committed to credit from troubled companies.

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Hedge Fund Managers Losing Millions as Order Delays Mount Up

Brief: An unprecedented number of delays when sending out orders to market is costing hedge fund managers USD20 million per year, according to new research from TradingScreen. A combination of operational inefficiencies and trade errors cause the majority of delays, while high costs associated with IT systems maintenance is also a significant contributor. The findings show that the most unprotected trade errors cost hedge funds anywhere between 3 and 10% of trade notional, which in some cases is USD5 million a year.  Time delays and execution slippage, which is the difference between the expected price and the price at which the trade is executed, impacts performance by 2 per cent of AUM, which results in costs as high as USD9.5 million annually. When it comes to IT support and administrative costs, a large hedge fund with USD5 billion AUM spends between USD3.5 and USD5 million.  Varghese Thomas, President and COO at TradingScreen, says: “From computer meltdowns to human errors, erroneous trades and order delays are caused by a myriad of factors. With so much disruption facing markets right now, hedge fund managers can ill afford not to keep execution delays down, particularly now that European share trading is likely to fragment post-Brexit.

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The World’s Biggest Short Selling Hedge Fund Is Scaling Back

Brief: Sophos Capital Management, the largest dedicated short selling firm in the world as recently as a year ago, is scaling back its hedge fund business, according to people familiar with the plans. The move by founder Jim Carruthers — widely considered a legend in the business — comes as short sellers faced one of their worst years on record. Short-biased funds lost 47.59 percent through November, according to the HFRX Equity Hedge: Short Bias Index. This year isn't looking any better. The Goldman Sachs “most shorted” index of stocks was already up 13 percent in 2020 and more than 200 percent over the past year. Carruthers did not respond to a request for comment, and his funds’ performance details weren’t publicly available. Menlo-Park-based Sophos reported $1.16 billion in regulatory assets under management, six separate hedge funds, and nine employees at the end of 2019. That made it larger than even Jim Chanos’ Kynikos Associates, which had slipped below the $1 billion mark by that time. An individual familiar with Carruthers’ plans said the short seller had been telling people he was winding down some positions since late last year, and some employees have been looking for jobs. It's unknown how long it could take to unwind some of the positions, but people close to the situation said that he is not shutting the firm down. Carruthers launched Sophos in 2014 with about $200 million, including a seed investment from Yale University’s endowment. The move by Yale led other university endowments to invest in short sellers, according to one short-biased hedge fund manager. 

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UK Cyber Sector Saw Funding Boost After First Lockdown – But Early – Stage Startup Backing Fell off a Cliff

Brief: Funding secured by cybersecurity start-ups since the start of lockdown in March increased by more than half compared to the same period in 2019, according to new research released today by Plexal and Beauhurst. This is in contrast to start-ups across all sectors, which saw investment volume fall by 10 per cent year-on-year. Only 23 of the 1,715 start-ups falling into administration, liquidation or dissolution since the start of lockdown were from the cybersecurity sector. The research also found that despite the overall boost in funding (52 per cent increase) and deal numbers (33 percent increase), highlighting the importance of cybersecurity companies during the pandemic, activity consisted mainly of a small number of very large deals, showing that investors continue to prioritise later stage businesses. The volume of funding secured by cybersecurity companies seeking funding for the first time fell to just GBP11.9m since lockdown, from GBP265 million in the same period in 2019 – as companies raising capital for the first time fell by 96 per cent.  “While increased total funding demonstrates the relevance of cybersecurity and shows that the UK’s cyber industry has not been impacted to the same extent as others, the almost complete absence of backing for early-stage firms puts the sector’s future at risk, said Saj Huq, director of Innovation at innovation centre Plexal. “It is these companies that we will ultimately rely on to solve the inevitable new cyber challenges arising from a society that is increasingly digital-first,” he added.

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PIMCO says 2021 ‘Not a Time for Excessive Optimism’

Brief: Bond giant PIMCO expects the U.S. economy to return to pre-pandemic levels later this year but warned of political and economic risks that could derail the recovery, including a sooner-than-expected withdrawal of fiscal stimulus. In its 2021 outlook published Tuesday, the California-based fixed-income investor, which manages over $2 trillion in assets, predicts that U.S. economic activity will hit pre-recession peaks in the second half of the year. Global gross domestic product, PIMCO says, will grow at the fastest rate in a decade, buoyed by the worldwide rollout of COVID-19 vaccines. But a pullback in U.S. fiscal stimulus, Chinese corporate deleveraging and continued caution in U.S. spending, investment and hiring could all disrupt the expected recovery, potentially hurting investors who have already priced in a rebound, PIMCO said in the report. “Investors may have become too complacent as reflected by the bullish consensus positioning. As these risk factors underline, we see this as a time for careful portfolio positioning and not for excessive optimism or risk-taking,” the report said. PIMCO’s comments come amid a broad market rally. The promise of the coronavirus vaccine and hopes the Democratic Congress will ramp up spending have driven U.S. stocks to all-time highs and corporate credit spreads to pre-pandemic levels.

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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 January 12, 2021:

  • In the United States, the federal government is changing their approach in the way they allocate coronavirus vaccine doses. According to Health and Human Services Secretary Alex Azar it will now be based on how quickly states can administer shots and the size of their elderly population. States will be given two weeks to prepare for the change and should have enough time to improve their data reporting to the government and ensure all vaccinations are being “properly” documented, according to Azar. The health secretary also pointed blame to the states saying they aren’t reporting vaccinations in a timely manner and adding vaccine doses are sitting in freezers in hospitals. The timing of this change in approach is also notable with the Biden administration set to take office in just over a week. 
  • Canada’s most populous province has issued a stay-at-home order in another attempt to get their latest COVID-19 outbreak under control. Citing a health care system on the verge of being overwhelmed, Ontario Premier Doug Ford made the move on Tuesday, which will come into effect as of Thursday at 12:01 AM. The stay-at-home order will require everyone in the province to remain at home with exceptions for essential purposes, such as going to the grocery store or pharmacy, accessing health care services, exercise, or essential work. “Our province is in crisis. The system is on the brink of collapse. It’s on the brink of being overwhelmed,” said Ford.

  • In the United Kingdom, Prime Minister Boris Johnson left some of his government ministers scrambling for answers over a bike ride on the weekend. The Evening Standard first reported Prime Minister Johnson riding his bike, along with his security officers at the Olympic Park in East London – 7 miles away from his official residence. Government guidelines said outdoor exercise should be limited and people should stay in their local area. With Prime Minister Johnson’s team unable to supply a statement explaining his trip, Health Minister Matt Hancock had to go into damage control saying a 7 mile outing for some exercise is allowed. “It is OK to go for a long walk or cycle ride, but stay local,” said Hancock. 
  • In Japan, the President of the Tokyo Olympic organizing committee says it is “absolutely impossible” to postpone the Games again after doing so last summer. Organizers and the International Olympic Committee previously stated event plans would be detailed in the spring. Polls in the last few days show Japanese citizens clearly don’t share the President of the organizing committee’s eagerness to see the Games through. Just over 80% of people surveyed believe the Olympics should be canceled, postponed, or believe they won’t take place as COVID-19 cases continue to surge. The President of the organizing committee’s “absolutely impossible” comment stems from the fact that many officials who have a played a key role in the preparations are loaned from other organizations.
  • Bloomberg is reporting China’s Sinovac Biotech vaccine is showing dueling data from trials performed in Brazil, Turkey and Indonesia. The main issue is that trials performed in Indonesia and Turkey were too small for any meaningful data. For instance, Indonesia’s data showed a 65% efficacy while Turkey showed 91.25% in its local trial for the same vaccine. Brazil, where Sinovac had it largest trial with more than 13,000 people, also showed dueling efficacy rates. The Butantan Institute, the company’s local partner said last week trials showed the vaccine was 78% effective in preventing mild cases of COVID-19 and 100% effective against moderate and severe infections. All of this news though isn’t stopping Indonesia who plan to be the most aggressive of the three countries mentioned with issuing the vaccine – having their President roll up his sleeve on Wednesday to receive his first dose.
  • New Zealand will be issuing new border crackdowns in the coming days to the limit the exposure of new COVID-19 cases, especially the variant strains that have surfaced in recent weeks. New Zealanders will need to show a negative COVID-19 test 72 hours before boarding a plane to the country. This is partnered with previously announced rules that as of Saturday arrivals from the United States and United Kingdom would also need a pre-departure negative test. Finally, as of Monday, once arriving in New Zealand people will need to take an extra COVID-19 test within 24 hours of landing. The existing Day 3 and Day 12 tests will continue as normal.

Covid-19 – Due Diligence And Asset Management

Private Equity in 2020: Not as Bad as You Thought

Brief: U.S. private equity firms raised “healthy” amounts of money from investors after the pandemic began last year, particularly for technology deals, even as most firms also poured cash into struggling portfolio companies, according to PitchBook’s 2020 review of the industry. Private equity firms quickly figured out how to negotiate the extremes of 2020, cannily shifting from the frozen leveraged buyout business to buying minority stakes and putting money to work in public companies, according to the report, expected to be released Tuesday. After an initial downturn early in the year, exits also rebounded as private equity firms turned to special purpose acquisition companies (SPACs), traditional listings, and other sponsors to take holdings off their hands, reported PitchBook. “What a rollercoaster 2020 was,” said Wylie Fernyhough, lead private equity analyst at PitchBook, in an interview with Institutional Investor. “Whether it was LPs having to pause allocations, or figuring out how to do due diligence online. Private equity really showed its resilience in 2020 with all these headwinds thrown at it.” 

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Chris Rokos’s Macro Hedge Fund Surges 44% in Best Year Ever

Brief: Chris Rokos’s hedge fund racked up its best year since the billionaire investor started his own macro trading firm more than five years ago, joining a string of peers who posted record gains in 2020. His $14.5 billion macro fund soared 44% as the pandemic upended markets, according to people with knowledge of the matter who asked not to be identified because the information is private. The London-based fund’s previous best year was in 2016, when it rose 20%. Macro hedge funds, which trade across asset classes to capitalize on broad economic trends, ended last year up 7% on average, according to data compiled by Bloomberg. Rokos’s returns coincide with a structural overhaul at his firm in late 2019, which allowed for bigger bets as portfolios previously run by individual traders were merged into a single pool of money. A spokesman for London-based Rokos Capital Management, which started in 2015, declined to comment. Rokos joins a slew of macro fund managers that posted double-digit gains last year as market turbulence created opportunities for the firms. Brevan Howard Asset Management, Rokos’s former employer, made 27% in its master fund, the best year since 2003, while its U.S. Rates Opportunities Fund soared nearly 99%. EDL Capital and Glen Point Capital gained 23% and 14%, respectively.

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Google Launches $3 Million Fund to Fight Vaccine Misinformation

Brief: The Google News Initiative on Tuesday launched a global open fund to fight misinformation about COVID-19 vaccines, worth up to $3 million. The “COVID-19 Vaccine Counter Misinformation Open Fund” aims to support journalistic efforts to effectively fact-check misinformation about the COVID-19 immunisation process, the initiative belonging to Alphabet’s Google said in a blog post. “While the COVID-19 infodemic has been global in nature, misinformation has also been used to target specific populations,” it added. “Some of the available research also suggests that the audiences coming across misinformation and those seeking fact checks don’t necessarily overlap.” The fund will accept projects looking to expand the audience of fact-checks, particularly to groups disproportionately hit by misinformation. Applications will be reviewed by team of 14 jurors from across the academic, media, medical and non-profit sectors, as well as representatives from the World Health Organisation. In December, the Google News Initiative pledged $1.5 million to fund a COVID-19 vaccine media hub to support fact-checking research.

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San Francisco Office Vacancy Rate Eclipses Financial-Crisis High

Brief: San Francisco’s office market is being hit so hard by the pandemic that, by some measures, it’s worse than the global financial crisis or dot-com collapse. The city’s office-vacancy rate reached 16.7% at the end of 2020, up 11 percentage points from a year prior, according to a report from commercial real estate brokerage Cushman & Wakefield. That’s a higher level than in the aftermath of the 2008 recession. The vacancy rate is being driven by a record amount of sublease space, which has surpassed the worst of the dot-com bust two decades ago, said Robert Sammons, senior director of research at Cushman in San Francisco. In addition, new leasing has effectively been on pause and hit the lowest annual level in 2020 since at least the early 1990s. Companies have been reevaluating their office needs after months of pandemic lockdowns showed them that it was possible to function with employees working from home. That’s caused a spike in vacancies, especially in cities like New York and San Francisco, where the cost of renting space is higher. The technology companies that dominate the Bay Area, in particular, have embraced remote work. Pinterest Inc. last year paid almost $90 million to cancel a large San Francisco office lease, saying it is rethinking where employees are based. 

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For Many, COVID-19 has Changed the World of Work for Good

Brief: The upheaval in global labour markets triggered by the coronavirus pandemic will transform the working lives of millions of employees for good, policymakers and business leaders told a Reuters virtual forum on Tuesday. Nearly a year after governments first imposed lockdowns to contain the virus, there is a growing consensus that more staff will in future be hired remotely, work from home and have an entirely different set of expectations of their managers. Yet such changes are also likely to be the preserve of white-collar workers, with new labour market entrants and the less well-educated set to face post-COVID-19 economies where most jobs growth is in low-wage sectors. “I think it would be a fallacy to think we will go back to where we were before,” Philippines central bank Governor Benjamin Diokno told the Reuters Next forum. “We were already geared towards the digital, contactless, industries ... That will define the new normal.” The pandemic, which according to a Reuters tally has so far infected at least 90.5 million people and killed around 1.9 million worldwide, has up-ended industries and workers across the globe.

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How European Fund Managers Avoided a Disastrous 2020

Brief: It could have been a disastrous year for the European fund management industry, but policymakers rode to its rescue. Huge fiscal and monetary stimulus packages supported markets and continued to push investors away from cash. In the end, the industry ended the year close to where it began, but this headline figure masked considerable variation underneath. The European fund industry had €10.03trn (£9trn), excluding money market funds, as at 30 November 2020 according to Morningstar data, an organic growth rate of 3.2%. In aggregate, fixed income saw the strongest inflows, at €110bn, in spite of continued low yields. Equity funds saw inflows of €91.7bn, while allocation funds saw inflows of €34.8bn. The notable weak spot was in alternatives, which saw €35.5bn exit the sector – a combination of the weakness of the property sector and a growing disillusionment with the poor performance and high fees from hedge fund strategies. Commodities had a good year, drawing in an extra net €1.6bn of assets. However, this overall picture masked huge shifts in the popularity of different asset classes through the year as economic news and investor sentiment ebbed and flowed. In November, for example, equity funds were firmly in the ascendancy as vaccine news emerged and some stability returned to US politics.

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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 January 11, 2021:

  • In the United States, the Centers for Disease Control and Prevention (CDC) said Monday that nearly nine million Americans have received their first doses of the COVID-19 vaccine and nearly 25.5 million doses of vaccines have been distributed among various states. The nearly nine million is still well short of the targeted 20 million which was expected by the end of 2020 as states say they don’t have enough staff or money to administer coronavirus vaccines at the needed rate. CNN is also reporting states are increasingly abandoning guidelines from the CDC on how to administer the vaccines and are taking their own approaches. New York state governor Andrew Cuomo has laid the blame at the feet of the Trump administration, calling the federal government’s response to the pandemic and its vaccine rollout, “an act of gross negligence.” 

  • The CBC is reporting Canada is rolling out the first study of its kind by mailing out thousands of test kits to gauge the prevalence of coronavirus in the country. The survey involves 48,000 Canadians receiving the kit in hopes they will poke their fingers and return a blood sample to the National Microbiology lab located in the province of Manitoba. The samples will be tested for the presence of coronavirus antibodies with Statistics Canada hoping of a minimum of a 45% response rate in order to obtain a good result. The kits have already been mailed out and received, catching some Canadians off-guard and questioning its validity as there has been little media coverage on the project.

  • The United Kingdom is struggling with the latest surge in the coronavirus pandemic and England’s Chief Medical Officer Chris Witty delivered some grim news while appearing on the BBC on Monday. “We’ve got to be very clear that we’re now at the worst point of this epidemic for the UK, in the future we will have the vaccine, but the numbers at the moment are higher than they were in the previous peak – by some distance.” In some of the hardest hit areas in London, Witty says the infection rate is around 1 in 20, compared to about 1 in 50 for the entire UK. During a news briefing on Monday, Health Minister Matt Hancock said it was still unclear the extent of which being vaccinated reduces one’s risk of transmitting the coronavirus.  

  • A recent survey seems to indicate French citizens are losing faith in their government to lead them through the coronavirus pandemic. The survey from the newspaper Journal du Dimanche said 62% of citizens are lacking confidence in President Emmanuel Macron and Prime Minister Jean Castex. The two have come under criticism for the slow start of vaccinations, which began on December 27th. France has reported an average of 18,000 new cases per day during the month, much higher than the government’s plan of having them around 5,000 cases per day. The country’s health minister was asked over the weekend of a possible third lockdown since the pandemic began and didn’t rule it out.

  • India will kick off one of the world’s largest inoculation campaigns on January 16th. The south Asian nation of close to 1.4 billion people will begin administering shots to nearly 30 million healthcare workers and other frontline staff most vulnerable to infection from COVID-19. According to the government’s health ministry, the vaccination program will cover another 270 million people, including senior citizens. Large urban areas such as New Delhi will lean on existing networks such as those used to vaccinate tens of millions of newborns each year against diseases such as polio. India only trails the United States in terms of COVID-19 infections.

  • China announced on Monday a World Health Organization (WHO) team of international experts investigating the origins of the coronavirus pandemic will arrive in the country on January 14th. The WHO’s team of 10 experts’ mission has been delayed in what China’s foreign ministry called a “misunderstanding” after a lack of authorization was given from Beijing. China’s National Health Commission also didn’t reveal the WHO’s itinerary, which would likely require a trip to Wuhan – something that hasn’t happened from outside sources since the pandemic began. Ahead of the governing health body’s arrival, China has been on a media blitz to shape the narrative of about when and where the pandemic began, stating more and more studies show the coronavirus emerged in multiple regions. According to Reuters, a health expert with the WHO said expectations should be “very low” that the team will reach a conclusion from their trip to China.

Covid-19 – Due Diligence And Asset Management

Hedge Fund Strategies Soar: Industry Enjoys Biggest Annual Return Since Global Financial Crisis, as Managers Weather 2020 Storm With Double-Digit Surge

Brief: Hedge funds weathered the political, social and economic shocks brought about by the global pandemic and frequent bursts of soaring volatility to score a near-12 per cent return last year – their best since 2009 – outperforming both the Dow Jones Industrial Average and FTSE 100, new data from Hedge Fund Research shows. HFRI’s main Fund Weighted Composite Index – a global, equal-weighted measure of some 1400 single-manager hedge fund strategies – finished 2020 up 11.6 per cent for the year following a 4.5 per cent rise in December. The full-year gains represent a strong rebound for the hedge fund sector as a whole, which had earlier plummeted 11.6 per cent in Q1 following three months of consecutive losses amid the initial coronavirus outbreak. The index’s annual 11.6 per cent rise builds on 2019’s 10.45 per cent annual return. The strong annual showing – the benchmark’s best since a near-20 per cent surge in 2009, at the height of the Global Financial Crisis – is likely to further draw in more yield-hungry allocators, according to HFR president Kenneth Heinz. “Hedge funds effectively navigated both December and calendar year 2020 volatility, and accelerated into 2021 with powerful, broad-based performance which continued yet broadened the high-beta equity- and crypto-driven gains to also include quantitative, trend-following macro, energy and special situations exposures,” Heinz observed.

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Singer’s Elliott Returns 12.7% on Investments in 2020

Brief: Activist investor Elliott Management Corp. returned 12.7% on its investments in 2020, turning in one of its strongest years in the past decade, according to an investor letter reviewed by Bloomberg. The New York-based hedge fund reported the same returns for both its international and onshore funds, marking their best year since 2012 and 2016, respectively, according to a person familiar with the matter who asked to not be identified because the matter isn’t public. A representative for Elliott declined to comment. The document shows Elliott was profitable every month in 2020, including in March when it eked out a 0.1% return amid a broader selloff in the markets in the wake of the coronavirus pandemic. The S&P 500 returned 16% over 2020. Elliott’s assets under management grew to $45.2 billion from roughly $41 billion at the end of June. Elliott, which is run by billionaire Paul Singer, took at least 16 new activist positions in 2020, including at Twitter Inc., Softbank Group Corp., and others, according to data compiled by Bloomberg.

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Eventus Systems Reports “Unprecedented Growth” in 2020

Brief: Eventus Systems, a global provider of multi-asset class trade surveillance and market risk solutions, has reported 'unprecedented growth' on multiple fronts in 2020, marking its strongest year to date in revenue and new client onboardings. The company has additional expansion plans for 2021, with deeper penetration in asset classes such as equities, foreign exchange (FX), fixed income and digital assets. Eventus CEO Travis Schwab says: “In a year full of so many challenges and hardships for us all, we are profoundly grateful that it was also the most monumental year since our launch. Our Series A funding round enabled us to make strategic investments that accelerated our growth in terms of staff, geographical presence, market coverage, client acquisition, product enhancements, scalability and efficiencies. I’m incredibly proud of our team and Board for the hard work, persistence, insights and first-class client service that made this growth possible. Our Validus platform is now a mission-critical piece of infrastructure for a wide range of leading financial market participants and exchanges. We ended 2020 on a particularly strong note, with one of the world’s largest non-bank cash FX trading firms and a major digital asset exchange both signing in the last week of the year.” Schwab says that following a year in which the firm established leadership as the trade surveillance platform used by many of the largest cryptocurrency exchanges, he expects further market penetration in this space, attracting not only more exchanges but also various other market participants active in digital assets.

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U.S. Bank Quarterly Profits Expected to Fall Again From Pre-COVID Levels

Brief: When the biggest U.S. banks begin reporting fourth-quarter results on Friday some of the headlines could show profits plunged by as much as 40% from a year earlier, before the pandemic struck. But investors will be focused on digging out clues to the earnings rebound expected in 2021. “You can look at Q4 as somewhat of a transition quarter as you put some of the challenges from 2020 in the rear-view mirror and look ahead to an improved 2021,” said Barclays analyst Jason Goldberg. The pandemic caused interest rates to plunge and produced a record decline in the margin between what lenders charge for loans and what they pay for money, said Goldberg. The pandemic also pushed big U.S. banks to set aside more than $65 billion for expected loan losses. From those low points, banks could see profits more than double in first and second quarters of 2021, according to Refinitiv’s IBES estimates. Bank stocks have risen 35% since early November. Since then, effective COVID-19 vaccines started being distributed, Democrats took power in Washington, promising more economic stimulus, and the Federal Reserve said it would allow banks to repurchase stock again, which will increase earnings per share.

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COVID-19, Political Unrest, Market Volatility Increase the Importance of Private Markets in 2021 and Beyond, says to Mercer Research

Brief: New strategic research from Mercer focuses on what the coming year holds for alternatives, outlining some of the issues investors may want to follow closely in an effort to optimise their portfolios. “We are seeing that though investors have been tested this year, the experiences of previous crises have made them more resilient. There were unorthodox challenges such as not being able to vet new managers in person, but clients continued to put capital to work, especially with existing investment manager relationships across all private market segments,” says Raelan Lambert, global head of alternatives at Mercer. “In 2021, investors should consider stretching their risk appetites and consider their allocation to real estate. Although the pandemic will continue to challenge the property market, 2021 is likely to be an opportune time for entering the asset class with a medium- to longer-term investment horizon. Initially, investors should prioritise allocations to the largest, most-liquid markets, where price discovery is furthest along.”

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KKR Raises $3.9 Billion in Biggest Asia Infrastructure Fund

Brief: KKR & Co. raised $3.9 billion for its first Asia-Pacific infrastructure fund, amassing the largest pool of cash in the region for investments in everything from waste management and renewable energy to communication towers. In the process of raising funds, the firm boosted its initial target from $3 billion and stopped fundraising after reaching its cap. It tapped three dozens investors in the U.S., Europe, the Middle East and Asia-Pacific, said Alisa Amarosa Wood, head of KKR’s Private Markets Products Group. KKR and its employees contributed about $300 million. Accelerating its expansion across a region that’s emerging from the pandemic and bolstered by a growing middle class, the firm is also in the midst of raising at least $12.5 billion in a fourth private equity fund and planning its first real estate and credit funds in Asia. KKR declined to comment on the other fund-raisings. Institutional investors are increasingly looking for a “one-stop shop” with deal-making, operational and capital market expertise, favoring assets with a lower-risk profile that aren’t tied to public market indexes, Wood said. “Investors are looking for a safe pair of hands,” she said in an interview.

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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 January 8, 2021:

  • United States President-Elect Joe Biden will aim to release every available dose of the coronavirus vaccine when he takes office in a little less than two weeks. The strategy differs from the current Trump administration whose plan is to hold back half of the vaccine output production to ensure second doses are available, which is the case with the Pfizer and Moderna vaccines. President-Elect Biden’s strategy doesn’t come without risks. On one hand, releasing all the vaccines will obviously boost the number of people who have their first vaccine, which will provide some immunity. However, both the Pfizer and Moderna vaccines are to be administered at specific intervals, according to their already performed trials, and vaccine manufacturing has not increased to the point many health experts had hoped. A study published in the Annals of Internal Medicine appear to be on the side of President-Elect Biden stating administering the first COVID-19 doses to more people instead of withholding supply may reduce the number of new cases.
  • In a news briefing on Friday, Canadian Prime Minister called the state of the pandemic in the country “frightening”. The prime minister is vowing the number of Pfizer and Moderna vaccines, the two inoculations authorized for use in Canada, will “scale up” in February. According to CTV News, 124,000 does of the Pfizer vaccine were delivered to 68 sites across the country this week, with 208,000 more doses per week expected for the rest of the month. Prime Minister Trudeau’s latest update comes as Ontario’s top public health officials are saying the pandemic curve is going the wrong way and its Premier Doug Ford says it’s the most serious situation they’ve been in since the start of the pandemic.
  • In the United Kingdom, the state of the coronavirus pandemic centered around travel on Friday. A study published in the journal Science said travelers coming from Spain and France contributed to the diversity of variants in the country’s latest COVID-19 outbreak. This news is coupled with the UK now requiring all passengers arriving in the country must prove they don’t have the coronavirus by showing a negative result within 72 hours of their departure. Under the new rules, anyone failing to produce evidence they don’t have COVID-19 will be fined 500 pounds and travellers arriving from countries not on the government’s open corridor travel list, will have to isolate for 10 days, regardless of their test results. 
  • In a televised address on Friday, Iran’s supreme leader said he was banning the purchase of coronavirus vaccines made by the United States and United Kingdom. “If their Pfizer manufacturer can produce a vaccine, then why do they want to give it to us? They should use it themselves, so they don’t experience so many fatalities. Same with the UK,” said Ayatollah Ali Khamenei. The decision made by Iran’s supreme leader will severely limit the country’s options for a vaccine as the country experiences the worst outbreak in the Middle East. Ayatollah Khamenei also claimed western drug companies tested vaccines on other countries “to see if they work or not.”
  • Brazil is showing signs of another coronavirus surge as their death toll has passed 200,000. The country reported more than 1,500 deaths on Thursday, the highest since July 29th. Year-end festivities, which included large gatherings and a more contagious variant being detected in Sao Paulo are all reasons for the rise in cases. To make matters worse, the largest country in Latin America has yet to approve the use of a vaccine. Neighbouring nations such as Chile and Argentina have already started inoculations. Brazil is close to giving the green light to China’s Sinovac vaccine, which proved 78% effective in its latest trial.
  • Similar to other countries throughout the world, Australia is changing their international travel rules in an attempt to keep the coronavirus and its new variants from entering the country. Prime Minister Scott Morrison told reporters on Friday after a meeting with his cabinet that passengers must wear masks on all international flights to Australia and on domestic routes. Any international traveler must return a negative COVID-19 test before they can board and the government will reduce the number of people allowed to arrive each week, which will prolong those Australians still waiting to return home.

Covid-19 – Due Diligence And Asset Management

Record Sum of Dry Power Ready for Pandemic-Hit Firms, ICG Says

Brief: Cash-rich private debt and equity providers are hunting for viable pandemic-hit businesses to fund, according to London-listed alternative asset manager Intermediate Capital Group PLC. “If a business has a shortfall purely due to Covid-19, there is plenty of capital to support them,” said Nicholas Brooks, ICG’s head of economic and investment research in a telephone interview. European private debt managers had almost $93 billion of capital available as of December 2020, with over $295 billion in the hands of private equity, according to data provider Preqin. That cash could help out a lot of companies bearing the brunt of the pandemic that have already tapped out government-backed emergency loans. It’s a relatively expensive option, but may be the only one open to some of the hardest hit sectors as parts of Europe enter their third lockdown. That means yet more pain for many of the firms identified by ICG in their analysis of financial data for around 500 private companies. Hardest hit were automotive and components, travel, hotels, restaurants and leisure, and retail, which endured months of almost zero revenues last year. “Private debt and private equity have record levels of dry powder,” Brooks added. “Funds aren’t the issue, it’s really whether a business is viewed as viable in the long-run.” It’s also a question of whether borrowers can afford the money on offer.

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Flesh-and-Blood Hedge Fund Traders Prevailed in 2020’s Tumult

Brief: The pandemic has made one thing abundantly clear for hedge funds: Trading a once-in-a-century crisis is best left to humans. Funds that survive largely on their ability to place high-conviction bets made some of their strongest returns in decades last year. Some of the industry’s best-known names such as Brevan Howard Asset Management, Millennium Management and Andurand Capital Management soared past peers as stormy markets provided rich pickings. That’s thrown a wrench into the rise of computer-driven quant funds, which gobbled up assets year after year but couldn’t protect investors or make money in 2020. Algorithms largely failed to decipher the impact of a rapidly moving virus and the response from central banks to contain economic damage. The “narrative was: stock selection is dead, the future is all about indexing and quants and the blackbox and all that,” said Craig Bergstrom, chief investment officer at the $7.5 billion Corbin Capital Partners that invests in hedge funds. “It’s another kind of arms race and there are winners, but there are definitely also losers, and it’s not the future of active management.” The market selloff in March and subsequent recovery humbled some of the most sophisticated of quants last year -- most notably behemoths such as Renaissance Technologies, Winton and Two Sigma.

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Investor Optimism Has Increased Since Start of Pandemic: Survey

Brief: Investor optimism has increased “significantly” since the start of the pandemic, according to a new survey. The Scotia Global Asset Management Investor Sentiment Index found that investor optimism spiked from a reading of 100 in May to 117 in November. The reading was even higher — 130 — among investors who use advisors. Eight-two per cent of investors who’d met with an advisor in the past six months said they felt more confident about their investments, compared to 56% of investors who hadn’t met with an advisor. The survey also found that 80% of investors who use advisors felt they were on track to meet their financial goals, and 90% were somewhat or very confident about funding their retirements. Scotia commissioned Environics to conduct an online poll of 1,024 investors with a minimum of $25,000 in household investable assets from Nov. 10 to Nov. 19, 2020. Online polls cannot be assigned a margin of error because they do not randomly sample the population.

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Venture Capital Hits Record High in U.S. in 2020 Despite Pandemic

Brief: Venture capital backed companies in the United States raised nearly $130 billion last year, setting a record despite the COVID-19 pandemic, figures from data firm CB Insight released on Friday show. While the investment total is up 14% from 2019, the number of deals is down 9% to 6,022. And so-called mega-rounds, deals that are $100 million or higher also hit a record amount and number with $63 billion raised in 318 deals. “What we’re seeing is a ‘rich get richer’ phenomenon where successful, high momentum technology companies are vacuuming up most of the financing,” CB Insights chief executive Anand Sanwal told Reuters by email. He said that data showed a big drop in a very early stage investment called seed stage, and expected some of those companies that stand out to see “insatiable investor demand” with fewer competitors for the money. The trend of big investments doesn’t look like it will slow in 2021 as there is a lot of capital chasing investments, say some venture capitalists.

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Commerzbank Takes Additional $2.6 Billion Hit From Pandemic

Brief: Commerzbank AG will take an additional 2.1 billion-euro ($2.6 billion) hit in the fourth quarter as the pandemic weighs on interest rates and drives up bad loans, pushing the lender deeper into the red as it readies a new turnaround plan. Commerzbank will write off 1.5 billion euros in goodwill on its books and set aside about 630 million euros for bad loans to reflect the impact of a second lockdown, according to a statement Friday. That’s on top of a 610 million-euro charge the Frankfurt-based bank announced last month to cover job cuts. Chief Executive Officer Manfred Knof, who took over this month, is preparing to unveil a radical restructuring after shareholders pushed out the previous leadership amid frustration with the slow pace of change. Knof and new Supervisory Board Chairman Hans-Joerg Vetter are now working on a more ambitious cost-cutting plan with about 10,000 jobs on the line, Bloomberg has reported. “After this balance sheet clean-up, we are well prepared for the road ahead of us,” Knof said in the statement. “Our goal is to make the bank more profitable in the long term.” Commerzbank shares fell as much as 4.1% after the announcement and were trading 3.1% lower at 12:56 p.m. in Frankfurt. They have fallen about 5% in the past 12 months.

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These Are The Trends Experts Are Seeing In Hedge Funds Right Now

Brief: The COVID-19 pandemic has changed the way hedge funds do business, from raising money to investing and more. Some trends are here to stay, while others will change as the pandemic continues and eventually comes to an end. Craig Bergstrom, chief investment officer at Corbin Capital Partners, said in an email that active management had returned in 2020, exceptionally fundamental stock selection. He said results across the industry are mixed, but dispersion has meant that careful portfolio construction has been precious. "Broad hedge fund performance has certainly been disappointing in recent years," Bergstrom said. "Very low interest rates are a big part of that problem, but clearly another key factor is fund fees, which have come down, but not fast enough, which means they are consuming too much of the gross returns." He adds that it's not fair to compare hedge fund returns to stock market returns because it is nearly three times as volatile. However, in recent months, investment managers have finally started to have an easier time generating alpha. "The right hedge fund portfolio, though, has been able to deliver solid alpha, and attractive risk adjusted returns, which we think remains very attractive in a world where prospective fixed income returns are very low," Bergstrom said. 

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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 January 7, 2021:

  • In the United States, the fallout from a deadly riot on Capitol Hill overshadowed what was America’s deadliest day yet from the coronavirus, according to Reuters. More than 4,000 citizens succumbed to the disease and COVID-19 hospitalizations were at 132,051 as of Wednesday – a new record for the fourth day in a row. The Centers for Disease Control and Prevention (CDC) are projecting anywhere between 405,000-438,000 deaths by the end of the month. According to data from Johns Hopkins University, the overall death toll from COVID-19 currently sits at approximately 361,000.

  • Canada’s most populous province set a record for daily COVID-19 cases and had its deadliest day so far. Ontario reported 3,519 cases on Thursday and 89 deaths. The concerning part is while the cases are still the highest in Toronto and Peel Regions, which have been in some form of a lockdown for over a month now, eight more regions experienced triple digits in new cases. Elsewhere in the country, Quebec became the first province in the country to institute a curfew as starting Saturday, anyone caught outside between 8 PM and 5 AM without a valid reason could face a fine of up to $6,000. The move aimed at slowing the spread of the virus has already been questioned both for its effectiveness and legality. The province’s health director admitted on Wednesday that there is no study that proves curfews stop transmission and a Quebec civil liberties group says the government should not be placing the weight of the pandemic on the backs of Quebecers. 

  • Speaking during a Thursday evening briefing, United Kingdom Prime Minister Boris Johnson said the country’s vaccination effort is going to require an “unprecedented national effort.” The prime minister insisted the most vulnerable Britons will be inoculated by the middle of February and vaccination sites will be made available within 10 miles of all Britons’ homes. Prime Minister Johnson’s pledge comes as its capital city London is on the verge of having its hospitals overcrowded. National Health Service (NHS) Chief Executive Sir Simon Stevens said London’s Nightingale hospital is set to open next week in response to the surging infections. 

  • A survey from pollster Pulse Asia has said almost half of Philippine citizens may not be willing to take the COVID-19 vaccine when it becomes available. Nearly 2,400 Filipino adults were polled and only around one-third said they are willing to be vaccinated while 21% are on the fence and can’t say yet if they want to be inoculated. Of those that outright said they didn’t want the vaccine, 84% of them said it was due to safety concerns. As noted in Castle Hall’s COVID-19 Diligence Briefing on Wednesday, the government was targeting to vaccinate more than half of its population in 2021, using 148 million doses from at least seven vaccine makers. This latest poll might make the task a little more complicated.

  • In China, the city of Shijiazhuang with a population of 11 million people is heading into lockdown. The city located about three hours south of the capital, Beijing has recorded 200 cases, the worst reported outbreak in at least two months in the country. Chinese state TV reported Thursday authorities in Shijiazhuang banned people and vehicles from leaving the city and five hospitals have been emptied out to treat COVID-19 patients.

  • Japanese Prime Minster Yoshihide Suga declared a state of emergency Thursday for Tokyo and adjacent areas. The Japanese capital city recorded 2,447 new COVID-19 cases, which was a new record. The state of emergency will go into effect as of Friday and last until February 7th. The government will press for a return to remote work – aiming to cut the number of commuters by 70% and residents will be requested to avoid going out after 8 PM and having bars and restaurants close at that time. Authorities can’t enforce compliance for now, but Prime Minister Suga is seeking to amend the law to add penalties for businesses that don’t comply and add incentives for those that do.

Covid-19 – Due Diligence And Asset Management

FCA Warns 4,000 Firms at Risk of Failing Amid Crisis

Brief: The financial regulator has warned 4,000 firms in the financial services sector are at "heightened risk" of failing as a result of the coronavirus crisis.  In its most detailed financial snapshot of the market published since the pandemic began the Financial Conduct Authority said almost a third of these firms could potentially cause harm to consumers should they collapse.  Within the retail investment market, which includes advisers, self-invested personal pension operators and platforms, 3,414 firms predicted the crisis would have a negative impact on income.  The advice sector had one of the highest proportion of firms expecting a drop in income, equating to 66 per cent of the 5,159 firms which responded to the FCA's data request. But the impact on income was largely predicted to be minimal, with 2,973 of the firms in the retail investment market which predicted a drop estimating the reduction would sit between 1 and 25 per cent and only 26 firms saying income might plummet by more than 76 per cent.  The FCA sent its financial resilience survey to 13,000 firms in the wider financial services in June and to a further 10,000 firms in August. 

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Brevan Howard’s Main Hedge Fund Gains 27% in Best-Ever Year

Brief: Brevan Howard Asset Management has recorded its best year since the hedge fund firm began investing nearly two decades ago. The main fund at billionaire Alan Howard’s firm was up 27.4% last year, the most since 2003, according to an investor letter seen by Bloomberg. That compares with a 3.4% average return for macro hedge funds through November, according to data compiled by Bloomberg. The Brevan Howard Master Fund managed $4.3 billion at the end of November. The biggest boost came in March thanks to gains from interest-rate bets, option trading in equity and credit indexes and from oil, according to an investor letter seen by Bloomberg. A spokesman for the Jersey-based investment firm declined to comment. Brevan Howard is making up lost ground after years of mediocre returns shrunk its assets by more than 80% from a 2013 peak to about $6.4 billion two years ago. Clients are now returning, lured by improved performance and as rising volatility creates money-making opportunities for macro hedge funds. Its assets rose to about $11.4 billion at the end of November. The firm’s rebound was also fueled by a more than 100% gain in a hedge fund earlier last year that Howard personally manages. Full-year returns for the AH Master Fund, which invests money for the main hedge fund, the billionaire’s own cash and for a few external investors, are not known.

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Marathon Asset Management Closes $2.5 Billion Distressed Fund

Brief: Marathon Asset Management ("Marathon"), a leading global credit investment manager, today announced the final close for its Marathon Distressed Credit Fund, which was oversubscribed with approximately $2.5 billion in commitments. The fund will invest in a wide range of situations by providing capital solutions that allow companies to grow or reposition their businesses, including stressed and distressed companies in transition. The opportunities it will pursue include restructurings, debtor in possession financings, and exit financings where Marathon can bring to bear its differentiated expertise, experience and resources. "While the broader market has recovered, the K-shaped recovery has resulted in a disparate impact that requires tailored capital solutions to help companies across industries recover from the 2020 cyclical decline," said Bruce Richards, Chairman & Chief Executive Officer of Marathon. "Companies that are well positioned for future growth may need a thoughtful and sophisticated capital partner to navigate the downturn, even in the event it may require a consensual restructuring." Louis Hanover, Chief Investment Officer of Marathon, said: "Following a prolonged economic expansion marked by mispriced risk and heavily levered capital structures with weak documentation we are presented with an optimal investment environment to prudently and opportunistically deploy capital."

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Manulife Sees Markets, Economy Diverging Through 2nd Virus Wave

Brief: Canada’s economy and financial markets are moving in opposite directions as investors drive up asset prices in response to cheap-money policies. That trend will continue in the months ahead, according to Manulife’s Frances Donald. The country is grappling with a fresh set of lockdowns as governments try to quell a wave of Covid-19 infections. Quebec, the second-largest provincial economy, is likely to unveil new restrictions Wednesday that will shut down the construction sector. Less than 1% of the population has been vaccinated so far, putting Canada behind the U.S. and U.K. Meanwhile, the S&P/TSX Composite Index is near a record after rising about 8% in three months. Economically-sensitive energy and industrial stocks have surged, while bank shares are up 14% since Oct 5.While vaccines have arrived, “the economic benefits are probably not solved before the second half of the year,” Donald, global chief economist and head of macro strategy at Manulife Investment Management, said by phone. “In 2021, my suspicion is the disconnect between the economy and markets continues.” Economists are still predicting a strong recovery in the second half of the year, as vaccines allow for a rebound in travel, entertainment and other sectors that have been crushed by the pandemic. Even so, Donald doesn’t see a full recovery until 2022. That’s because there will be structural scarring to the economy from business closures, job losses and new ways of working.

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Covid-19: Family Offices Warned Portfolio Response May be too Little

Brief: The majority of family offices will not significantly alter their asset allocation strategies in 2021 despite the likely market turbulence and challenging economic conditions that lie ahead. This is the chief finding from a survey of family offices conducted by BlackRock. Of the 185 offices that were canvassed, only 23% said that they plan to make material changes to their asset allocations. BlackRock ascribes this to the long-term investment outlook adopted by most family offices. However, the asset manager also warned against viewing the events of 2020 as simply short-term volatility and ignoring the likely long-term impacts. “While we recognise Family Offices have a long-term investment horizon, we believe that the nature of the crisis will have a long lasting impact on economic growth, interest rates and corporate fundamentals leading to structural shifts across asset classes,” said Sheryl Needham, managing director, head of Emea family offices at BlackRock. “It’s important that even long-term investors consider the resilience of their portfolios by reviewing their strategic asset allocation, to ensure they are positioned to navigate current markets, protect wealth and to harness opportunities through the recovery.”

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Prominent Activist Investors Post Record 2020 Returns Despite Pandemic-Muted Activity

Brief: Some investors including William Ackman and Glenn Welling, who push corporations to perform better, posted record-breaking returns in 2020 when activist investors generally backed off demands during a year marked by wild and unexpected business conditions. Ackman’s publicly traded Pershing Square Holdings fund rose 70.2%, marking the best-ever return at his 16-year-old firm Pershing Square Capital Management and one of the best in the hedge fund industry. In 2019, the fund rose 58%, also a record. Welling’s Engaged Capital, founded in 2012 and known for pushing companies like Medifast Inc and Hain Celestial Group Inc to make changes, returned 51%. That tops the firm’s previous record return set in 2019 with a 34% gain. And Andrew Left, who has targeted companies he thinks are over-valued through his work at Citron Research, told investors that his hedge fund returned 155% in 2020, after gaining 43% in 2019, the fund’s first year in business. The gains reflect a late-year rebound among activists - fueled partly by strong stock market gains - with the average fund up 6.7% in the first 11 months of 2020 after a 27% drop in the first quarter, Hedge Fund Research data shows. Activist campaigns were down 20% in 2020 from the previous year, Lazard data shows.

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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 January 6, 2021:

  • In the United States, two Senate seat run-offs in the state of Georgia appear to be going in favour of the Democrats. As long as both of these results stay the same, the Democrats would have control of both the House of Representatives and the Senate. Media are already reporting this could open up the possibility of passing the $2,000 checks for Americans in the latest coronavirus stimulus relief, which was suggested by President Donald Trump, but met with opposition by his fellow Republicans. Both Democratic Senators in Georgia ran on the premise of passing the $2,000 checks once President Elect Joe Biden is sworn in as America’s 46th leader on January 20th. 
  • In Canada, the CBC is reporting new air traveller restrictions set to come into effect on Thursday are tighter than expected. Speaking on the condition of anonymity because the regulations weren’t yet finalized, airline industry officials received briefings from government officials on Tuesday. One of the items to come out of the meeting was that airlines were not expected to be given the power to exercise their own discretion and allow travellers to board planes to Canada if they are unable to get a negative COVID-19 test abroad. The only exception is if the standard PCR test (the standard nose swab test) is not widely available to travellers in the area. CBC says Canada’s consular services around the world are still determining the availability of testing in different regions, which could leave some stranded if they can’t provide the negative PCR test.
  • The United Kingdom plans on vaccinating 13 million people against the coronavirus by the middle of next month in what a government health spokesperson said would be “Herculean” but can be achieved. “It’s a stretching target no doubt. Very stretching target,” said Nadhim Zahawi, the minister responsible for the program’s deployment. However, Zahawi went on to say with the plan put together by the National Health Service (NHS), they can deliver. Since December 8th, the NHS has administered more than 1.3 million COVID-19 vaccine doses with one-in-four adults over the age of 80 receiving at least their first shot. 
  • Germany has urged patience among its citizens as the government has received some heat from the rollout of the COVID-19 vaccine. Chancellor Angela Merkel had a contentious meeting with state leaders on Tuesday and agreed to lengthen controversial limits on movement, private gatherings and hard lockdown measures until at least January 31st. During the meeting, Chancellor Merkel defended the vaccination strategy, saying more supply is coming soon.
  • The European Union (EU) has approved Moderna’s COVID-19 vaccine, making it the second vaccination authorized for the European bloc of countries. Under a contract the EU has with the American biotech firm, they have secured up to 160 million doses of the vaccine, which due to the two-dose process, will vaccinate 80 million people. The European Commission says Moderna has promised to deliver all of their doses between now and September. The EU has 448 million citizens and have noted they secured up to two billion of potential COVID-19 vaccines.
  • The Philippines is negotiating with seven vaccine manufacturers to procure at least 148 million COVID-19 vaccinations, which would account for close to two-thirds of their population. The news came from Carlito Galvez, a former military general who now has the unenviable task of leading the country’s vaccination strategy against the coronavirus. Galvez says the government hopes to close deals with Novamax, Moderna, AstraZeneca, Pfizer, Johnson & Johnson, Sinovac Biotech and the Gamaleya Institute this month. Although, availability of these vaccines will be hard to come by as the competition throughout the world is fierce.

Covid-19 – Due Diligence And Asset Management

Billionaire Christopher Hohn Hedge Fund Recoups Pandemic Losses

Brief: Billionaire activist investor Christopher Hohn’s hedge fund has racked up a 12th straight year of gains, overcoming record losses at the onset of the pandemic. The Children’s Investment Fund made about 14% in 2020 as its concentrated stock portfolio rose amid surging markets, according to people with knowledge of the details. That took the fund’s assets to about $35 billion, a separate person said, asking not to be identified because the information is private. Hohn hasn’t lost money in a year since the last financial crisis. Last year, the fund recovered from losing 19% in March, the most in a month since it started trading in 2004, as the coronavirus roiled global markets. Bets on firms such as Microsoft Corp., Canadian Pacific Railway Ltd. and Charter Communications Inc. contributed to the fund’s 2020 gains. Still, while Hohn outperformed activist hedge funds that were up an average 6.2% through November, he fell short of the 18.4% gain in the S&P 500 Index. A spokesman for the London-based investment firm, which manages about $45 billion, declined to comment on the returns. Hohn is famous for building large stakes in companies and pushing for change to boost their share prices. He runs a long-biased portfolio spread over a small number of stocks, making it susceptible to sharp drops in values. The strategy has worked for his investors over the years, with the fund losing money only in 2008 when it dropped 43%.

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New Listings on TISE up 27 Per Cent in 2020, Despite COVID-19

Brief : The International Stock Exchange (TISE) listed 831 securities during 2020 against the backdrop of the coronavirus (Covid-19) global pandemic. This is the second highest annual total of new listings since the inception of the Exchange – eclipsed only by a bumper 2018 – and represents a 27 per cent increase on 2019. It means that there was a total of 3,162 securities listed on TISE at the end of December 2020, which is a rise of 6 per cent year on year. Cees Vermaas, CEO of The International Stock Exchange Group, says: “It is really pleasing that our business flows have held up so well this year, despite the impact of Covid-19 across the world. What we have seen is that while Covid-19 may have disrupted or slowed some market activity, it has also generated other new listings business as companies refinance, whether opportunistically or essentially, in the face of the changing economic conditions.” During 2020, TISE has maintained its position as a leader in the European high yield bond market. There were 124 high yield securities issued by companies such as telecommunications firms Altice and eircom, luxury car manufacturer Aston Martin, LEGOLAND owners Merlin Entertainments, transport operator Stena and US digital content platform and producer Netflix, which were listed on TISE during the year. This also included three of the largest 10 transactions in the third quarter of the year: the largest being the Liberty Global and Telefónica financing vehicle for the merger of Virgin Media and O2; the UK’s largest pub chain, Stonegate Pubs; and debut issuer First Quantum Minerals. Overall, the total number of high yield bonds listed on TISE reached 291 at the end of December 2020.

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BlackRock Bucks New York Departure Trend With Plans to Stay Put

Brief: As a growing number of Wall Street firms plan to move New York employees to cheaper U.S. hubs and even let rainmakers work from faraway homes, BlackRock Inc. is planting its feet firmly in Manhattan. Executives at the world’s largest asset manager have privately urged employees not to get too attached to doing their jobs remotely full-time, while it awaits a move to a new office tower in New York, where it’s based. With the pandemic surging across the U.S., the company extended the work-from-home period through this year’s first quarter. But that won’t be the new normal. “The office will remain our primary work location longer-term,” senior executives including Chief Operating Officer Rob Goldstein wrote in one memo sent to staff in November. “Employees will have increased flexibility to work remotely part-time, but full-time remote work will be done very selectively and with approval.” Returning to offices on a larger scale will take time, they wrote, and the company is working on making regular Covid-19 testing available to “as many people as practicable.” BlackRock still plans to move its New York staff into 50 Hudson Yards, a new skyscraper on Manhattan’s west side, in late 2022 or early 2023, a spokesman confirmed this week. The relocation, first announced in 2016, came with a lucrative incentive: BlackRock secured $25 million in state tax credits to create hundreds of new jobs and keep staff there.

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Hedge Funds Turning Doubtful on Staying Power of Recovery Trade

Brief: Once believers, professional investors are getting antsy about stock bets tied to a smooth reopening of the American economy. Hedge funds that make both bullish and bearish equity bets spent Monday -- the worst opening day in five years -- leaning back into what has come to be known as the stay-at-home trade, buying lots of online tech companies optimized for lockdown commerce. Their preferences showed a shift away from the travel-leisure-retail group they’d favored in the second half of 2020, data compiled by Goldman Sachs’s prime brokerage show. It happened as virus angst mounted, with infections surging and vaccine distribution short of hopes. “When we think of what could possibly derail these lofty expectations of a second-half economic boom, it has to do with the race between the vaccines and the virus,” said David Rosenberg, founder of Rosenberg Research & Associates Inc. “Nobody said it’s not a big bull market. It’s just one premised on cheap money rather than solid fundamentals. Hence the speculative fervor.” When the S&P 500 dropped 1.5% Monday, hedge-fund clients tracked by Goldman reduced short positions in companies that cater to at-home demand, such as internet and software shares, with a basket of such stocks seeing the biggest net buying in three weeks. Meanwhile, reopening companies, like airlines and cruise operators, experienced the largest net selling in two weeks.

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U.S. Private Payrolls Post First Decline in Eight Months as COVID-19 Cases Soar

Brief: U.S. private companies shed workers in December for the first time in eight months as out-of-control COVID-19 infections unleashed a fresh wave of business restrictions, setting the tone for what is likely to be a brutal winter for the economy. The ADP National Employment Report on Wednesday showed job losses across all industries last month as the coronavirus outbreak kept many consumers and workers at home. While the report underscored the magnitude of the crisis, the economy was unlikely to slide back into recession, thanks to additional fiscal stimulus approved in late December. The ADP report added to slumping consumer spending and persistently high layoffs in suggesting that the economy lost significant momentum at the end of 2020. “America’s great jobs machine ran into a wall of rising coronavirus cases and state lockdowns which puts the entire economic recovery from recession at risk,” said Chris Rupkey, chief economist at MUFG in New York. “The heart of every recession is job losses and right now the decline in jobs at year end is hinting that the dark days of the labor market last spring have returned.” Private payrolls decreased by 123,000 jobs last month, the first decline since April, after increasing 304,000 in November. Economists polled by Reuters had forecast private payrolls would rise by 88,000 in December.

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World’s Super-Rich Families Want More Hedge Funds, Survey Finds

Brief: Family offices are heading back to hedge funds. More than a third of 185 investment firms for wealthy clans plan to boost allocations amid the economic upheaval caused by the Covid-19 pandemic, according to survey released Wednesday by BlackRock Inc. and Juniper Place, a London-based firm that helps asset managers raise capital. Family offices and other investors soured on hedge funds in recent years, bemoaning high fees and lackluster returns. But the health crisis has given some of those managers a boost, particularly stock-pickers who benefited from aggressive bets on technology stocks and copious economic stimulus that drove equities to new heights. “Recent market turmoil and the expectation of sustained volatility in the medium term has re-invigorated hedge fund appeal,” New York-based BlackRock and Juniper Place said in their report. Family offices have proliferated in recent years along with a surge in personal wealth derived from tech, finance and real estate. Some of the largest include Bill Gates’s Cascade Investment and Sergey Brin’s Bayshore Global Management. There are now more than 10,000 single-family offices globally, according to accounting firm EY. Single family offices, which have just one client, had average assets of $802 million, according to research published in 2019 by Campden Wealth and UBS Group AG. More than three-quarters of family offices said they preferred long-short equity hedge funds, according to research BlackRock conducted in July and August. Such funds were the best performing broad strategy last year, gaining about 4% through November on an asset-weighted basis, according to data from Hedge Fund Research Inc.

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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 January 5, 2021:

  • In the United States, CNN is reporting on a study that says COVID-19 infections may have been four times higher than the cases reported. The study was published in the medical journal JAMA Network Open on Tuesday. Researchers tested randomly selected blood samples for the presence of COVID-19 antibodies in a series of surveys conducted in 10 states, as well as one nationwide. As of November 15th, about 10.8 million cases were reported to the US Centers for Disease Control and Prevention, but the study suggests the actual number of infections at that time was closer to 46.9 million. The study also suggests that approximately 35% of COVID-19 deaths may not be reported.

  • In Canada, the leaders of Air Canada, WestJet, Air Transat and Sunwing have sent a letter to Transport Minister Marc Garneau to delay a new COVID-19 testing strategy for travellers for at least two weeks. As of right now, starting this Thursday, travellers five years of age or older must receive a negative result from the standard nose swab test within 72 hours of boarding a flight to Canada. The major airlines, along with two major trade associations said the timeline for implementing the new testing protocol isn’t feasible and should be pushed back to January 18th. Elsewhere in the country, Alberta’s Premier Jason Kenny’s response to his MLAs travelling abroad during the holidays was not enough to ease the concerns of the public, so he has now either demoted or in the case of his Chief of Staff, accepted their resignation. Premier Kenney originally said there would be no punishment for those elected officials who travelled outside of the country during the last few weeks. 

  • With the United Kingdom into their third lockdown and heading into a double-dip recession, Chancellor Rishi Sunak announced 6.2 billion USD of emergency support to help UK businesses. The retail, hospitality and leisure businesses will be entitled to one-off grants as much as 9,000 pounds to help with the crunch until the spring. The extra funds are on top of the 3,000 pounds per month businesses have received for shutting their doors because of the coronavirus restrictions. Chancellor Sunak said the following via a video message on Twitter: “This will help businesses to get through the months ahead – and crucially it will help sustain jobs, so workers can be ready to return when they are able to reopen.” Chancellor Sunak went on to say the budget in early March will set out the next stage in their economic response. 

  • The United Arab Emirates (UAE) have administered more than 826,000 doses of the COVID-19 vaccines they have been provided with, which accounts for 8% of its population. UAE has approved the Pfizer/BioNTech vaccine, as well as one by Sinopharm unit China National Biotec Group. With Israel taking the lead in vaccinating about 15% of its population since December 20th, the UAE plans the lofty goal of vaccinating 70 to 80% of its population by April or May.

  • In Australia, the country’s most populous state – New South Wales – has called on residents in three of its cities to be tested for COVID-19 and isolate. The concerns are that a Sydney cluster may have spread to regional areas after a visitor from the city tested positive. The Australian cities told to get tested are Orange, Broken Hill and Nyngan. The state of New South Wales has been effectively isolated from the rest of the country after other states and territories closed borders or imposed 14-day mandatory quarantine rules.

  • The World Health Organization (WHO) is said to be “very disappointed” that China has not authorized entry of their inspectors to Wuhan to examine the origins of the coronavirus pandemic. The WHO were set to go in this month to examine the root cause but learned on Tuesday that Chinese officials have not yet finalized the necessary permissions for the team’s arrival in the country. The United States have been critical of the handling of the coronavirus outbreak since the beginning, accusing China of covering up the extent of how bad the outbreak was and criticizing the WHO for allowing Chinese scientists to do the first phase of preliminary research into the cause of the coronavirus pandemic in Wuhan.

Covid-19 – Due Diligence And Asset Management

GMO’s Jeremy Grantham Warns: The Stock Market is in a ‘Fully-Fledged Epic Bubble’

Brief: "The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble,” says GMO’s Jeremy Grantham. “Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history,” wrote the investor. He compares this period the South Sea bubble, the 1929 market crash, and the dot-com boom of 2000. “These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part,” he wrote. He warns the bubble will burst in due time, “no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios.” The markets had a wild ride in 2020, briefly going into a bear market after COVID-19 lockdowns were set in place. Soon after they recovered as the Federal Reserve made unprecedented moves to support the economy, and Congress passed a stimulus bill. “I am not at all surprised that since the summer the market has advanced at an accelerating rate and with increasing speculative excesses,” wrote Grantham.

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Solomon Sees Vaccine Bringing Goldman Staff Back by End of Year

Brief : Goldman Sachs Group Inc. Chief Executive Officer David Solomon said he expects to have all his employees back at their offices by the end of the year as the vaccine rollout ramps up. “The big focus right now is we’ve got to get people vaccinated -- we’ve got to get to the other side,” Solomon said in a Bloomberg Television interview Tuesday. “I certainly would expect a lot of Goldman Sachs employees back in full by the end of the year. We will get through this, and I’m really hopeful that over the course of the next six months we see a real improvement.” The Goldman CEO said he’s encouraged by the amount of vaccine production, but flexible, efficient ways need to be found to get shots distributed, which he believes will be the biggest challenge facing President-elect Joe Biden’s administration. In addition to government actions, the private sector can play a role in speeding up vaccinations, he said. “There’s still work to be done,” he said. “And once we deal with the vaccine and the virus, and people feel safe, we’re still going to have to deal with the economic consequence of the shutdowns and the impact on our economy that this pandemic’s had.”

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Pandemic-Spurred Policy “Revolution” Will Continue to Drive Asset Allocations in 2021, says BlackRock

Brief: The world’s largest asset manager, BlackRock, has predicted that the “revolution” in monetary and fiscal policy spurred by the Covid-19 pandemic will dampen government bond real yields in 2021. The asset manager favours inflation-linked bonds, as well as risk assets such as equities and high-yield credit. Central banks across the world responded to the coronavirus crisis last spring by lowering interest rates and buying bonds, totalling 190 rate cuts and USD1.3 billion spent every hour since March 2020 on asset purchases. Interest rates are expected to enter an era of “lower for longer”, despite the potential for rising inflation as vaccination programmes are rolled out and the global economy continues its recovery in 2021. BlackRock Investment Institute writes in a recent market note: “A key takeaway is how swiftly macro policies can evolve and the lasting impact this can have on market dynamics. The policy revolution that started in 2020 is still a key driver of our investment views for this year.” The Federal Reserve has already outlined plans to allow US inflation to exceed the 2 per cent target temporarily, without hiking rates, in a new monetary policy framework.

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Bill Ackman’s Billion-Dollar Year

Brief: No one in the investment world appears to have mastered the tumultuous pandemic year as well as Bill Ackman, who banked more than $1 billion in 2020. Ackman’s billion-dollar pay day is based on the gains of the shares he owns of Pershing Square Holdings — his publicly traded hedge fund — as well as estimates of performance fees and a few private investments. The 54-year-old hedge fund manager declined to comment on his spectacular year, saying he did not want to “gloat.” “Happy New Year,” he added, on the record. Pershing Square’s publicly-traded fund, now its largest, gained a net 70.2 percent in 2020, a record for the firm and multiples of the returns of the broader market and other hedge fund legends, many of whom nursed steep losses until markets began to recover from their March swoon.  Ackman owns 45 million shares, or 23 percent, of that fund, earning him $720 million on the gain in the stock alone. It gained 86 percent, including dividends, for the year. But he's been uncharacteristically shy about his winnings. “It’s hard to talk about success when a lot of people are suffering, and many more have died,” Ackman told investors in a recent call.

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Hedge Fund Raise Mining Shorts as Vaccines Seen Tamping Gold Gains

Brief: Hedge funds increased bets against major gold miners, filings reviewed by Reuters showed, as COVID-19 vaccines weakened expectations for the yellow metal after a year of record gains. Gold prices have dipped from last year’s record highs above US$2,000 per ounce as vaccines deployed against the coronavirus encouraged investment in assets that perform well during periods of economic growth. “While we are by no means out of the woods in our view, the light at the end of the tunnel means that gold markets should begin to see an unwind of the trends that became quite exaggerated over the course of 2020,” Royal Bank of Canada analysts said last month. The bank cut its 2021 forecast for gold to US$1,810 per ounce from US$1,893. Short trades as a percentage of total traded volume for Barrick Gold rose to 24.8 per cent for the second half of last month, from approximately 14.9 per cent for the first half of December, according to filings reviewed by Reuters. Newmont Corp. saw an increase to 11.4 per cent, from 8.8 per cent, over the same period, while trades in Kinross Gold rose to 20.6 per cent, from 18.2 per cent, according to the data.

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FE Survey: Covid to Accelerate Restructuring of Australia’s Pensions Industry

Brief: Testing financial conditions during 2020 have added to the pressure on Australia’s superannuation industry to deliver better investment outcomes and greater cost efficiency, according to Funds Global Asia’s 2020 Australia survey conducted in partnership with Calastone. Respondents predict that this will accelerate mergers between superannuation funds, while placing fresh demands on fund providers to offer wider product choice to scheme members. The Australian pension fund, or “superannuation”, sector, has been under scrutiny from financial regulators over the past four years as part of a far-reaching review of pensions and wealth management provision. The Australian Royal Commission on Misconduct in the Banking, Superannuation and Financial Services was established in 2017 to investigate misconduct and poor standards in the financial services industry. Publishing its findings in February 2019, the Commission identified “cultural failings” in the superannuation, banking and wealth management sectors and highlighted a need to reform governance, fee structures and remuneration policies which often worked to the “financial detriment” of scheme members.

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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 January 4, 2021:

  • In the United Kingdom, Prime Minister Boris Johnson announced another coronavirus lockdown via a televised address Monday evening. Everyone in England must stay at home, except for permitted reasons starting midnight Tuesday. The permitted reasons are similar to the first lockdown in March 2020, so essential medical needs, food shopping, exercise and work for those who can’t do so from home. On Monday, the UK recorded more than 50,000 new COVID-19 cases for the 7th day in a row.

  • In the United States, Operation Warp Speed is not living up to its moniker. According to data from the U.S. Centers for Disease Control and Prevention (CDC), the federal government has distributed more than 15 million doses to states and territories. However, less than a third (4.5 million) have actually been administered so far. There were repeated promises of 20 million Americans being vaccinated by the end of 2020. In a news conference on Monday, New York State Governor Andrew Cuomo said they will be fining hospitals that don’t administer the allotted COVID-19 vaccines within a week of receiving their supplies and will decline to provide them with further doses for failing to do so. “I don’t want the vaccine in a fridge or a freezer, I want it in somebody’s arm. If you’re not performing this function, it does raise questions about the operating efficiency of the hospital,” said Cuomo.
  • In Canada, as COVID-19 cases continue to climb and some provinces are in a form of lockdown, the public is raising eyebrows at the conduct of some of their elected politicians. Multiple media reports have uncovered several federal and political politicians travelling over the holiday season, either for leisure, or to visit an ailing relative. The federal government has advised Canadians throughout the pandemic to avoid all-non-essential travel and are introducing new testing requirements for those planning to travel by air this week. The majority of MPs and MPPs/MLAs called out via the media have stepped down from either a cabinet post or other higher profile duties. The exception seems to be the province of Alberta where their Premier Jason Kenney took responsibility for not being clear about travel rules and has now ordered MLAs should not leave the country, unless it’s for government business. Premier Kenney said he planned not to sanction members of his party for their actions. 
  • China has stepped up their efforts to suggest the COVID-19 pandemic started somewhere else. In an interview with a state broadcaster over the weekend, Foreign Minister Wang Yi stated: “more and more research suggests that the pandemic was likely to have been caused by separate outbreaks in multiple places in the world.” The comments come as the World Health Organization (WHO) is expected to be granted access to Wuhan for the first time this month. The WHO has been to China over the past year, but never granted access to Wuhan, considered to be ground zero for the coronavirus pandemic. 
  • Philippine President Rodrigo Duterte has warned legislators of a “crisis” if they push forward with an investigation of unauthorized use of COVID-19 vaccines. A media report has suggested around 100,000 Chinese nationals working in the Philippines have been inoculated as early as November, along with President Duterte’s security team. The president has told his security team to ignore summons from the Congress, adding “there will be a little crisis. I am prepared to defend my soldiers. I won’t allow them to be brutalized in hearings.” Health regulators have yet to approve any vaccinations for use in the Philippines.
  • Japanese media are reporting Prime Minister Yoshihide Suga is considering declaring a state of emergency in Tokyo and surrounding areas as early as January 7th. The measures would last a month and grant power to local governments to urge residents to stay home and order some businesses to close or limit operations. Japan’s state of emergency differs from what has been seen in some European nations such as France, Italy and the UK. Due to civil liberties enshrined in the country’s postwar constitution, Japan’s government can’t send police to clear people off the streets.

Covid-19 – Due Diligence And Asset Management

Hedge Funds Bet on Recovery in 2021

Brief: Hedge funds, which use leverage and employ more aggressive, often riskier strategies than other investors, believe many previously undesirable sectors, ranging from energy to retail, will rebound in 2021. Accounting for roughly $3 trillion in assets, hedge funds showed resilience in 2020, with many outperforming the market, according to investors. “We think 2021 is going to be a really positive year for the markets,” said Jason Donville, president and CEO at Toronto-based hedge fund Donville Kent Asset Management. He forecasts an explosion of pent-up demand for travel and leisure producing a period of “super growth.” “I think it will take a little while for the vaccines to roll out and then somewhere around March, April, May, you’re going to get a confluence of the vaccines getting to a certain critical mass... and infection rates dropping.” For 2020 as a whole, the S&P 500 unofficially rose 16.26%, a stunning rally from a bear market that kicked off when the pandemic spread rapidly earlier in the year. “What I would say about 2021 is it looks like it’s going to be a year of recovery,” said Robert Sears, chief investment officer at UK-based Capital Generation Partners, which invests in hedge funds globally. “That’s the consensus view.”

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Over 80 Per Cent of Major Investors Believe Global Financial Crisis is a Possibility

Brief : Eighty three per cent of institutional investors believe that a global financial crisis is a possibility, with 60 per cent expecting the next severe crisis to occur in the next one-to-three years, according to Block-Builders.net. A new infographic - https://block-builders.net/crash-alert-83-of-major-investors-believe-gl… - highlights that around 80 per cent of major investors believe that markets have not yet sufficiently priced in the long-term risks posed by the Corona crisis, while more than half see the advantage of a defensively oriented portfolio. Institutional investors remain largely unanimous in their view that, despite all the risks, securities from the Asian region have great growth potential. One of the reasons for this is the fact that countries such as China have got a better grip on the pandemic and their economies are now correspondingly growing much faster. Meanwhile, the scars left by the pandemic on business owners' coffers are becoming ever clearer. The situation is most critical in the case of the hospitality industry, where 19 per cent of businesses report having only 4 weeks of cash reserves. Across all sectors, 11 per cent of entrepreneurs say they only have reserves for just under 4 weeks. "Despite all the risks, many stocks are still trading at all-time highs," says Block-Builders analyst Raphael Lulay. "Whether we are already in the midst of a speculative bubble remains to be seen. Many market participants continue to see the stock market as almost without alternative".

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Airlines Slam ‘Confusion’ New COVID-19 Testing Rules Create for Carriers, Passengers

Brief: Airlines say a slew of questions remain about the federal government's decision to require passengers returning to Canada to show negative results on COVID-19 tests taken abroad. Transport Minister Marc Garneau announced Thursday that air travellers overseas will have to present proof of a negative molecular test — known as a PCR test, conducted with a nasal swab — that was taken within 72 hours of departure, unless the testing is unavailable in that country. National Airlines Council of Canada chief executive Mike McNaney says the Transport Department has yet to provide a list of foreign agencies whose tests are considered acceptable or to establish how airline employees should determine whether a test document is valid. He says the new rule, which mandates a 14-day quarantine in Canada regardless of the test result, will cause "confusion" and "frustration" for carriers and passengers alike. Air Transat vice-president Christophe Hennebelle says Ottawa announced the requirement, which takes effect this Thursday, "out of the blue" without any prior consultation or notice to industry. Transport Canada did not immediately respond to questions Monday. The rule comes as a devastated airline sector continues to bleed cash following a collapse in demand caused by the pandemic. It also arrives amid growing criticism of the federal sick-leave benefit that pays $500 per week for up to two weeks to Canadians quarantined after touching down from abroad, including after vacations.

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Blank-Check Deals, Distressed M&A to Headline 2021 Trends

Brief: The new year is expected to be a mergers and acquisitions bonanza as deal makers attempt to put the pandemic behind them, meaning attorneys must be on top of trends like the continued use of special purpose acquisition companies and an anticipated increase in distressed M&A. The coronavirus pandemic caused a short-term slowdown in the pace of deal-making last year, but players in the M&A space didn't spend too much time on the sidelines; after initial shockwaves from the virus-induced shutdowns decimated figures for the second quarter, the third and fourth quarters of 2020 were relatively strong. As of Dec. 10, the total value of U.S.-targeted M&A deals announced in the third and fourth quarters totaled $915 billion, far greater than the $378.4 billion overall value of deals across quarters one and two, according to data provided by Dealogic. "There was a slowdown in the first two months post-shutdown," said Susan Oakes, an M&A partner at Holland & Hart LLP. "But once things settled into place, the deals that were on hold restarted, and we've been really extraordinarily busy." In 2021, clients will look to build on the momentum from the end of 2020, but they'll have to do so in a landscape that has been significantly altered because of the once-in-a-century pandemic.

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The NYC Billionaires Who Got Richer During the COVID-19 Pandemic

Brief: Big Apple billionaires are booming — with a collective wealth that ballooned by $81 billion to more than $600 billion during the pandemic, according to an analysis. That 16 percent surge among Gotham fat cats since mid-March included big gains for former Mayor Mike Bloomberg, the city’s richest person, whose financial data and media empire shot up by $6.8 billion to some $55 billion, a 14 percent spike, says Americans for Tax Fairness and the Institute for Policy Studies, which crunched the Forbes data. President Trump also did quite well, as his net worth grew by $420 million, jumping from $2.1 billion to $2.5 billion, a 20 percent increase, the data shows. New Mets owner and hedge fund titan Steve Cohen is also among the metro-area billionaires — a class of 141 — who had a great 2020, adding $700 million to his pile, which now totals $14.6 billion, a 5 percent uptick. Buoyed by trillions in federal COVID-relief largesse, Wall Street powerbrokers notched some of the largest gains. Stephen Schwarzman of Blackstone Group fattened his wallet by some $5 billion to about $21 billion, a 34 percent gain. JPMorgan’s Jamie Dimon’s holdings went from $1.2 billion million to $1.5 billion, about a 29 percent increase. 

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Hedge Fund Launches Rise as Industry Positions for Growth in 2021

Brief: New hedge fund launches increased to the highest level in five quarters in Q3 2020 on optimism in the US economy, as managers and investors positioned for acceleration of performance gains and capital growth into 2021, according to the latest HFR Market Microstructure Report, released today by HFR. New hedge fund launches increased to an estimated 151 in Q3 2020, the highest quarterly launch total since 2Q19 and exceeded the estimated quarterly liquidations for the first time since 2Q18. Launches in the most recent quarter exceeded the 2Q estimate of 129 new funds, bringing the YTD 2020 launches to 364 through Q3, a period which included a record low number of fund launches in 1Q as the global pandemic began. Fund liquidations fell to an estimated 137 in Q3 2020, the lowest liquidation total since 2Q18 and marked a decline of over 50 percent from the 304 liquidations in Q1 2020. Through Q3 2020, an estimated 619 funds liquidated in 2020, with nearly half of those occurring in Q1 2020. The investable HFRI 500 Fund Weighted Composite Index® advanced +5.1 per cent in November, increasing its YTD return to +6.1 percent and topping the +3.9 per cent YTD gain of the DJIA. The HFRI 500 Equity Hedge Index led strategy performance in November with a +7.5 per cent return, bringing YTD performance to +10.9 per cent. Over the first eleven months of the year, the HFRI 500 EH: Technology Index led all strategy performance with a +23.5 per cent return. In addition to strong performance of the HFRI Indices, the HFR Cryptocurrency Index surged +52 per cent in November, bringing the YTD return to +156 per cent.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

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