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Covid-19 Diligence Briefing

Our briefing for Wednesday September 30, 2020:

  • In the United States, seven former commissioners of the US Food and Drug Administration (FDA) wrote a commentary for the Washington Post condemning the White House’s pressure on the agency they once were the head of. “The White House has said it might try to influence the scientific standards for vaccine approval put forward by the FDA or block the agency from issuing further written guidance on its criteria for judging the safety and benefits of a potential COVID-19 vaccine,” they wrote. The former commissioners, who had served under both Democratic and Republican administrations, said actions like these were undermining close to 115 years of work the FDA has put in to build public trust. The group of seven said if people doubt the safety of any COVID-19 vaccine, they won’t get immunized.
  • With 625 new COVID-19 cases confirmed on Wednesday, Canadian health authorities are saying the country’s most populous province situation is about to get worse, before it gets better. The new forecasting from Ontario’s provincial government say the region could see 1,000 cases per day during the first few weeks of October. The number of new cases are doubling every 10 to 12 days, which will account for the “remarkably high surge” in the coming weeks. Health officials will wait to see if measures such as closing strip clubs and limiting hours of operation for bars and restaurants will help limit the spread of the virus before possibly implementing any further restrictions.
  • In a televised address on Wednesday, United Kingdom Prime Minister Boris Johnson, flanked by his chief medical and scientific advisers implored its citizens to observe social-distancing rules. The plea was made on a day where the UK confirmed over 7,100 new cases and Johnson said he would “not hesitate” to enact further restrictions to slow the spread of COVID-19 in the country. Prime Minister Johnson’s comments are seen as a show of defiance to Conservative MPs who are becoming increasingly worried about the economic damage caused by further restrictions. 
  • Spain and its government are planning new national coronavirus rules that will impose tougher restrictions on country hotspots, such as Madrid. The government plans to reintroduce rules restricting people’s movements and gatherings in urban areas with high levels of infections and hospitalizations. The new controls come just over three months after Spain emerged from a tough three-month lockdown. As of Tuesday night, the health ministry confirmed 10,000 active cases in Spain, with a third of them in Madrid, the country’s capital city. 
  • A Bloomberg article notes India’s recent explosion in COVID-19 cases is thanks in large part to super-spreaders. The conclusion is based on a study conducted by United States researchers and published in the journal “Science”. A group of patients that included about 8% of India’s confirmed cases later led to almost two-thirds of its total infections. The research was based on tracing more than three million contacts in the southern states of Andhra Pradesh and Tamil Nadu through August 1st. Researchers said COVID-19 transmitters tended to spread the virus during prolonged close contact on buses and other forms of transportation. In settings such as these, there was a concerning 79% chance of an infection occurring.
  • In Japan, the government announced a plan on Wednesday to offer vacations against COVID-19 free of charge to all of its citizens. The government is expected to spend ¥670 billion up until June 2021 to secure sufficient supplies of a COVID-19 vaccine, whether it be domestically, or abroad. The government has already signed basic agreements with U.S. drugmaker Pfizer and British drugmaker AstraZeneca PLC to secure vaccines when they become available. On top of the funds to purchase COVID-19 vaccines, Japan will also ensure local governments have the funding to provide vaccinations to their residents.

Covid-19 – Due Diligence And Asset Management

Hedge Funds May Escape Fed Blame Over Market Mayhem in March

Brief: Hedge funds can rest easier for now. Federal Reserve Vice Chairman for Supervision Randal Quarles said he doesn’t think the investment firms deserve the lion’s share of blame for tumult that swept financial markets in March -- contrasting statements from other policy makers that the funds’ overly leveraged Treasury trades were a crucial factor. “Our view is that was not a significant source of the pressure that we were seeing in the Treasury market,” Quarles, who also heads the Financial Stability Board of global regulators, said Tuesday during a University of Maryland webinar. Still, he added that market watchdogs lack the “granular data” to fully substantiate that assessment. The comments are significant because Quarles has been leading an effort by global central banks to examine whether hedge funds and other non-bank financial firms should face more oversight. Hedge funds have feared that regulators would clamp down on them since June when the Bank for International Settlements called the firms’ rapid unwinding of so-called basis trades “a key driver” of the March turmoil. The transactions involve buying Treasury securities using leverage via repurchase pacts while simultaneously selling futures contracts.

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Morgan Stanley Said to Start Search for New London Headquarters

Brief: Morgan Stanley has begun looking for a major new London headquarters, countering fears the coronavirus crisis will crush demand for office space in the world’s financial capitals. The U.S. lender has contacted a handful of developers as it assesses options for a potential move from its current premises in Canary Wharf, people with knowledge of the process said. The bank wants at least 600,000 square feet (about 55,740 square meters) of space and will likely focus on options in the east London financial district as well as developments in the City of London, the people said, asking not to be identified as the process is private. The search is at an early stage and is unlikely to result in a deal until late next year at the earliest, with no certainty a move will take place at all, the people added. A spokesman for Morgan Stanley declined to comment. Morgan Stanley would become the latest in a series of major investment banks to move to new premises in London as firms seek modern, efficient buildings that can help attract and retain staff, and keep a lid on costs. While the search for a potential new building comes several years before the bank’s current leases expire, there’s a scarcity of large new development plots in the capital, and putting up a building on such a scale would take years. The lender currently occupies about 800,000 square feet of space across two buildings in Canary Wharf. One option being considered is to move into a single large new premises, bringing all of its London staff together. 

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M&A Spikes in Record Third Quarter as Boards go on Pandemic Deal Spree

Brief: Mergers and acquisitions came back with a bang in the third quarter as executives rushed to revisit deals left on hold at the height of the coronavirus pandemic and boardrooms regained confidence after a roller-coaster year. A deal frenzy in September led to a record third quarter with more than $1 trillion worth of transactions around the world, mostly focused on coronavirus-resilient sectors such as technology and healthcare, according to Refinitiv data. The third-quarter spike, however, failed to take up all the slack after a lacklustre start to the year. M&A deals overall were down 21% at $2.2 trillion in the first nine months of 2020, with U.S. transactions coming in at $800 billion, a 43% slump from the same period last year. "The way out of this crisis is through M&A and we have started to have really engaging conversations with CEOs and boards around strategic positioning post-COVID," said Alison Harding-Jones, Citigroup's C.N head of M&A for Europe, the Middle East and Africa (EMEA) and vice chairman of EMEA banking, capital markets and advisory.

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Most Executives Think Covid-19 Changed Their Companies Forever

Brief: Many of the changes to global business triggered by Covid-19 will prove lasting. A survey released Wednesday by the IBM Institute of Business Value identified a “culture shift” at corporations worldwide, and concluded that “executives must accept that pandemic-induced changes in strategy, management, operations and budgetary priorities are here to stay.” One big dividend from this culture shift: Two-thirds of respondents said they’ve been able to complete initiatives that encountered resistance in the pre-Covid work world. The survey of almost 3,500 executives in 22 countries found cash flow along with cost and liquidity management among the highest priorities through 2022. About 60% said they were accelerating the digital transformation of their organizations. Three-quarters plan on building more robust IT capabilities. The digital transformation is expected to increase the actual number of jobs, “but the skills required for those jobs are going to be very different,” said Jesus Mantas, senior managing partner of IBM Services. That means potentially millions of workers who can’t transition to the new world of work could be left behind. In a move away from the recent practice of just-in-time delivery, 40% of executives highlighted the need for spare capacity in their supply-chains.

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Sarasin & Partners Poised for Further Growth After Weathering Covid Storm

Brief: Sarasin & Partners, a global thematic investment manager which invests responsibly on behalf of charities, private clients and institutions, has seen its assets under management (AuM) rise by 5.4 per cent (from GBP14.7 billion at the end of 2019 to GBP15.5 billion as at 9 September, 2020) over the course of a highly volatile 2020. This follows a period of significant growth for the Sarasin Group in the prior year, when a GBP338 million net investment inflow, coupled with strong market performance, which helped grow Sarasin & Partners’ AuM by 19 per cent over the course of 2019. Managing partner Guy Matthews attributes the robust performance and AuM growth to its strong foundations, solidified by the completion of a four-year restructuring and reinvestment programme and the maintenance of a commitment to continue investing in people, processes and technology. “While much of our immediate focus has turned to the pandemic and addressing operational continuity and client service excellence, we want to take this success and build it out even further,” says Matthews. A primary factor behind the AuM growth has been strong investment performance for its thematic global equity and multi-asset capability – successfully enhanced under head of global equities Jeremy Thomas and head of multi-asset Phil Collins respectively.  Sarasin’s global thematic approach to investing, which has underpinned the group’s equity selection process since 1996, along with its commitment to stewardship, has been further refined to both capitalise on long-term secular megatrends shaping the global economy such as ageing, digitalisation, automation, evolving consumption and climate change, and all the while integrating responsible stewardship principles such as embedded ESG analysis and active ownership.

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Hedge Fund Launches at “Historically Low” Levels Despite Q2 Recovery, but Liquidations Ease Following Covid Crash

Brief: The rate of new hedge fund launches grew between April and June following the coronavirus-fuelled first quarter slump, as hedge fund performance recovered – but the number of new roll-outs over the past 12 months remains “historically low”, Hedge Fund Research says. New hedge fund launches totalled an estimated 129 in the second quarter. That number was a sharp increase on Q1 which proved the highest quarterly launch total since 153 funds were rolled out in Q2 2019, according to HFR’s latest Market Microstructure Report. But the number of estimated fund launches during the preceding four quarters reached just 404 – an “historically low” figure - stemming in part to the Covid-19 pandemic which drove down Q1’s launch total. At the same time, the industry appears to be recovering from a spike in hedge fund liquidations, which reached a four-year high in the three-months between January and March this year. An estimated 178 funds liquidated in Q2 2020, down from 304 liquidations the previous quarter. But just as virus volatility has driven fund launches to fresh lows, fund liquidations over the past four quarters are at an “historically high” 821.

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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 September 29, 2020:

  • As the coronavirus has now claimed over one million lives worldwide, United States President Donald Trump announced the federal government will be distributing 150 million rapid tests. One hundred million of those tests will be sent to states with the President wanting governors to use them in nursing homes, assisted living facilities and schools, so in-person instruction can either resume or continue full-time. However, once the tests are obtained by the states, it will be at the governor’s discretion on how they want to distribute. America has surpassed 100 million COVID-19 tests in the last week, but public health experts say even more testing is needed as the country moves into the autumn and winter months.

  • In Canada, Quebec, the province hit hardest by COVID-19 are ordering new restrictions to help curb the “more complex” second wave. Premier Francois Legault announced the curbing of social gatherings and limiting bar and restaurant service to takeout only for the next 28 days, as of this Thursday. The restrictions will be in place for Quebec’s largest city Montreal and two other regions. Businesses and schools in the three regions will remain open. 

  • In the United Kingdom, thousands of students across the country have been forced into a two-week isolation just weeks after arriving for their academic year due to outbreaks across several campuses. For instance, 1,700 students in a northern England university were asked via email to self-isolate in their residences for the next two weeks, regardless of whether or not they have symptoms. Officials claim the outbreaks are linked to illicit parties, while students claim it is unfair to blame them when they received little support from schools, or the government.

  • German Chancellor Angela Merkel claimed the country could be facing 19,000 new infections per day by Christmas unless more efforts are made to curtail the virus. Chancellor Merkel issued new rules on social gatherings – a maximum of 50 people can gather in public or rented premises and those rules will only apply in areas where there has been 35 or more coronavirus cases per 100,000 people over the last week. Germany has seen its daily COVID-19 case count rise from 300 in late July to 2,400 in late September.

  • Philippine President Rodrigo Duterte has extended the partial COVID-19 restrictions in the capital region of Manila until October 31st in order to keep the spread of the virus in check. The country continues to have the highest COVID-19 case count in Southeast Asia with over 307,000 confirmed infections and close to 5,400 deaths. People must still wear masks, face shields and observe one-metre social distancing, while children, elderly and pregnant women are urged to stay home. President Duterte also appealed to the country’s telecommunications firms to “do a better job” as public schools are set to resume classes remotely on October 5th. Many areas of the Philippines have been struggling with preparations due to access, availability and speed of data services.

  • In China, the capital of Beijing has ordered importers of frozen foods to avoid countries suffering from severe COVID-19 outbreaks after several incidents of imported seafood tested positive for the virus. While health authorities, such as the World Health Organization (WHO) and America’s Centers for Disease Control and Prevention (CDC) have claimed the possibility of obtaining COVID-19 through food supply is low, China has for the most part, stopped domestic transmission of the virus and are on high alert for any possible resurfacing.

Covid-19 – Due Diligence And Asset Management

Airline, Hotel Industry Reps Both Say Their Rebound Depends on the Return of the Travel Business

Brief: U.S. airlines received $25 billion of payroll stimulus help from the government back in April. Now that relief is set to expire this week, the near future for the industry is little improved, and now its workers are desperate for another $25 billion in government help. Delta Air Lines, United Airlines, and American Airlines all have plans to lay off or furlough tens of thousands of airline employees this week if Congress doesn’t agree on another relief package. Air travel has yet to return to even half of the pre-pandemic daily levels, and the International Air Transport Association (IATA) in July pushed back its target to 2024 for when air travel will return to pre-pandemic levels. Much has been made about whether Americans are ready to travel again and feel safe doing so, but industry representatives say the issue isn’t passenger comfort level or pleasure travel: it’s the dearth of business travel. (Business passengers typically comprise 75% of airline profits.) Over the Labor Day weekend, airlines on average saw 50% passenger capacity from one year prior, which was actually an improvement over the past few months. But they only saw 25% of the revenue from one year prior, due to blocked-off seats, slashed ticket prices, and lack of business travelers.

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Haywire Signals Leave Investors Guessing on Business Cycle

Brief: The once-in-a-century pandemic is wreaking havoc on the market’s tried-and-tested barometers for the business cycle. At first glance, Wall Street looks like it’s teeming with the kind of greed usually reserved for the end of an economic expansion. Corporations globally have already issued a record $2.7 trillion of debt. Private-equity firms are borrowing to pay lavish dividends. Tech stocks are at dot-com-era valuations. Yet that’s the wrong interpretation, according to market players like the strategists at Morgan Stanley and fund managers surveyed by Bank of America Corp. They reckon an economic recovery is just getting started, and once the virus is controlled it will power the cross-asset rally in earnest. That makes it a confusing time for anyone allocating assets based on where we are in the cycle. “You’ve got this early cycle and late cycle melding going on,” said Kevin Gaynor, founder of Rational Research and former head of international economics at Nomura Holdings Inc. “You’ve got a really simple answer for that: it’s interest rates.” Lower borrowing costs have helped juice market valuations since the March maelstrom as investors tried to front-run a recovery. The danger now is that risky assets are priced for the best-case scenario, offering none of the premiums that might be up for grabs at the start of an economic upswing.

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Rich Finance Workers to Flee Britain over Virus and Brexit Fears

Brief: The City is bracing for Brexit — but not the one you think. Some of the finance sector’s richest are planning to leave the UK as a double-whammy threat of a second Covid-19 wave and the Brexit fallout forms “a dark cloud” over the country, according to wealth, property and tax advisers. Wealth manager London & Capital’s clients, who include hedge fund managers, have indicated that the UK is the “least attractive” place to live amid the pandemic, according to Iain Tait, the head of its private investment office. Tait, who advises around 100 wealthy individuals with assets totalling around £1.25bn, said some of his clients were considering moving out of the UK to avoid a second lockdown and the ramifications of the impending end of the Brexit transition period. “There’s definitely been a pickup in enquiries that might give high-net-worth families greater optionality, if this pandemic and the potential for lockdowns continue,” Tait said. “[Clients] want to continue to have lifestyle and business optionality, both post-Brexit and [without] a continuing Covid cloud over one’s family life,” he added. “It’s a mixture of the two, which together form a pretty dark cloud [over the UK for] high net worths that we work with.”

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How do Family Offices Manage Risk Amid Pandemic?

Brief: Anyone longing for a return to a more predictable economic era? A time when a rise in interest rates immediately triggered more overseas investment, leading to an inevitable strengthening of a country’s currency? Well, get prepared for a rather long wait, as ultra-low rates and aggressive central bank monetary supply – not to mention the ongoing geopolitical uncertainty around the US election – signals anything but a move to more conventional times. It is not like we have not been here before. What we are currently living through draws parallels with the post-World War I period, which led to hyperinflation and a prolonged global recession. The difference this time, other than inflation currently being kept down due to ultra-low interest rates, is that this environment will likely be concentrated into a much shorter time period, as opposed to the decade of pain experienced after 1923.   If the macro was not enough to think about, there is also a particular global health pandemic fundamentally disrupting traditional working practices. This begs the question, with remote working looking likely to be here for some time and markets bracing themselves for a second wave of volatility, just how does a family office, set in its ways, manage risk right now?

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CFTC Charges Georgia Man with Fraudulent Scheme to Profit from COVID-19

Brief: The Commodity Futures Trading Commission today announced that it has filed a complaint in the U.S. District Court for the Northern District of Texas against Kenzley Ramos, a Georgia resident, charging him with fraudulent solicitation, misappropriation, operation of an unlawful commodity pool, and failure to register with the CFTC.  According to the complaint, Ramos falsely promised individuals the ability to profit from the COVID-19 pandemic by trading in off-exchange foreign currency (forex) and binary options with guaranteed 300 percent weekly returns. This is the second enforcement action brought by the CFTC alleging misconduct directly tied to the pandemic. [See CFTC Press Release No. 8195-20 “We will continue monitoring our markets and will pursue any individuals who choose to use COVID-19 as part of their illegal schemes,” said Division of Enforcement Director James McDonald… The complaint alleges that from at least December 2015 until the present, Ramos fraudulently solicited individuals across the country by using online advertisements and aliases to further his ongoing scheme, incorporating COVID-19 into his solicitations earlier this year. He falsely represented himself as a highly successful and experienced binary options and forex trader who could profit from the coronavirus even while stock prices were falling.

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U.S. Pension Funds Sue Allianz After $4 Billion in Coronavirus Losses

Brief: Pension funds for truckers, teachers and subway workers have lodged lawsuits in the United States against Germany’s Allianz, one of the world’s top asset managers, for failing to safeguard their investments during the coronavirus market meltdown. Market panic around the virus that resulted in billions in losses earlier this year scarred many investors, but no other top-tier asset manager is facing such a large number of lawsuits in the United States connected to the turbulence. In March, Allianz ALVG.DE was forced to shutter two private hedge funds after severe losses, prompting the wave of litigation the company says is "legally and factually flawed". Together, the various suits filed in the U.S. Southern District of New York claim investors lost a total of around $4 billion. The fallout has also prompted questions from the U.S. Securities and Exchange Commission, Allianz has said. A spokesman for Allianz Global Investors said in a statement to Reuters: “While the losses were disappointing, the allegations made by claimants are legally and factually flawed, and we will defend ourselves vigorously against them.”

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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 September 28, 2020:

  • In the United States, House Democrats are preparing a new coronavirus relief package that will be a scaled down version of the one proposed back in May. Speaker Nancy Pelosi has instructed her committee chairs to put together a proposal with a topline of about $2.2 trillion - one trillion less than what the Democrats originally proposed back in May. However, this scaled back version is still almost one trillion more than the high-end Republicans are willing to agree to. A few weeks ago, the Trump administration said it would be willing to consider a proposal around $1.5 trillion. Even politicians are seemingly fed up with the process with one Democratic representative saying if this new proposal is nothing more than a messaging exercise by his party, it will be worthless. 
  • In Canada, the country’s most populous province had its highest daily COVID-19 case count since the outbreak began in late January. Ontario reported 700 new cases on Monday and Premier Doug Ford said the province is indeed experiencing its second wave, which will be more complicated and complex than the first wave. While Premier Ford has called the case count deeply concerning, he is not yet willing to move on any new public health measures, but a group of medical doctors and experts want the government of Ontario to return to Stage 2 of its reopening plan, which would put a halt to things such as indoor dining. Elsewhere in the country, Quebec is expected to move its two largest cities – Montreal and Quebec City from orange to its highest COVID-19 alert level – red. Both cities have experienced triple digit numbers in daily cases, and the province’s health minister has urged the public to stop socializing for the next month to help slow the spread of the virus. 
  • In the United Kingdom, Boris Johnson’s government has raised the prospects of even tougher coronavirus rules as they try to get the latest wave under control. Speaking on BBC radio, health minister Helen Whately was asked if the government was considering a “total social lockdown” and her response was that it couldn’t be ruled out. The Times are reporting new restrictions under consideration include a ban on different households mixing and shutting down pubs, bars and restaurants yet again.
  • In France, hospitals in the Paris and Marseille regions are delaying scheduled operations to free up space for COVID-19 patients. Coronavirus admissions in southern France have tripled since the beginning of September with 55 ICU beds occupied on September 1st and 170 by September 27th. Due to the situation getting more dire in the Marseille region, bars and restaurants will be closed for seven days as of Sunday night and will be reviewed upon completion. If the situation shows no improvement, the closures could be extended.
  • India surpassed six million coronavirus cases over the weekend. Concerns are now mounting the situation could get worse as the country approaches its autumn festival and wedding season. This will cause people to gather for religious ceremonies and social celebrations. India’s capital city of Delhi is also bracing for its pollution season, which is caused by farmers in the surrounding areas burning the stubble of their rice fields. Health experts have warned the pollution could worsen the conditions of people infected with the virus.
  • In Australia, the premier of Victoria state and the Prime Minister of the country seem to be at odds on a lockdown implemented almost two months ago. Over the weekend, Victoria state Premier Daniel Andrews announced the end of a night curfew in Melbourne sooner than originally expected as infections in the country’s second largest city slows. However, Prime Minister Scott Morrison is looking to urgently reboot Australia’s struggling economy and needs Melbourne to do so. “As it stands this lockdown is already longer than that faced by residents in many cities around the world, said Morrison. We remain deeply concerned about the mental health impacts of a prolonged lock down on Melbourne residents.” Premier Andrews has angered pro-business groups in the region with his plan to keep most businesses and restaurants closed until the state reduces its 14-day rolling average to 5 new cases per day. The figure is currently 20.3 as of Monday.

Covid-19 – Due Diligence And Asset Management

Foresight White Paper Reveals Significant Differences in Pandemic Resilience Across Infrastructure Sub-Sectors

Brief: A new study published today by Foresight Group (Foresight) into the resilience of infrastructure to global pandemics reveals that renewable energy, telecoms and primary care have proved to be the most pandemic resilient.The analysis, which examines 23 infrastructure sub-sectors spanning economic and social infrastructure, shows that while infrastructure as an asset-class has proved to be highly pandemic resilient, with many sub-sectors largely immune to the impact, there are substantial differences in the performance of various infrastructure sub-sectors. Foresight’s white paper “Infrastructure Pandemic Resilience: a true test of infrastructure’s defensive characteristics”, considers the resilience of infrastructure to global pandemics through five investment fundamentals: revenues; costs; financials; political and regulatory environments; and operations. The study was based on a proprietary pandemic resilience framework developed by Foresight, a leading independent infrastructure and private equity investment manager.

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Investors ‘Freaking’ Over Possible Contested Outcome of US Election

Brief: A disputed result in November’s US presidential election is now the number one concern for investors – even ahead of a second wave of Covid-19, according to a new global survey. The poll carried out by deVere Group, one of the world’s largest independent financial advisory and fintech organisations, asked more than 700 clients ‘What is your biggest investment worry for the rest of 2020?’ A contested U.S. election was the number one (72%); the impact of a Covid-19 second wave (18%) and U.S.-China trade war (5%). The remaining 5% was made up of other geopolitical issues, including Brexit. 735 people resident in the UK, North America, Europe, Asia, Africa, Latin America and Australasia took part in the poll. Of the poll’s findings, deVere Group CEO and founder, Nigel Green said, “Investors around the world are beginning to freak about the U.S. presidential election. “But not about whether Trump or Biden wins, rather over the looming possibility of a disputed outcome. “President Trump is already questioning the legitimacy of the election, heightening the chances of a contested result and an ensuing constitutional crisis in the world’s largest economy.

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Geopolitics and Investment in Emerging Markets After COVID-19

Brief: As investors ponder the impact of the world’s greatest economic crisis since the Great Depression, emerging markets (EMs) face a swift reversal of fortune. Some of the fastest-growing economies in the world have been brought to a virtual standstill, reeling with the effects of an exogenous shock to demand, a public health emergency, and nascent infrastructure with which to combat the pandemic.While multilateral development banks and international financial institutions have moved swiftly to address critical funding shortfalls, the COVID-19 pandemic has dealt severe challenges to the EM growth model — and to the livelihoods of people within these countries. As governments in emerging markets and developing economies (EMDEs) have less fiscal space at their disposal — but harbour an ongoing need for spending on relief and stimulus measures — credit downgrades from the ratings agencies may be inevitable.Yet, even in the wake of downgrades, this juncture of COVID-induced distress might open up a propitious opportunity for international investors and companies to invest in infrastructure in EMDEs.

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Eurozone Recovery Could Face More Setbacks

Brief: The next stage of the eurozone's recovery from the impacts of the COVID-19 outbreak could be challenging, according to a report by S&P Global Ratings. The rating agency and research firm revised its forecast for eurozone gross domestic product downward to 7.4% this year, from the 7.8% it estimated in June. The firm said the eurozone will see a 6.1% rebound in 2021, up from the 5.5% it forecast in June. "We are lowering slightly our expectations for unemployment, which we forecast will peak at 9.1% in 2021," said Marion Amiot, senior European economist, in a news release. S&P's report said the eurozone's unemployment rate will gradually reduce to 8.4% in 2022 and 7.8% in 2023. The unemployment rate is currently 8.1%, up from 7.6% in 2019. European economies are operating at around 5% below their pre-COVID-19 output levels and are estimated to return to pre-COVID-19 levels only in 2022. The eurozone recovery is currently considered to be shaped like a check mark, with flat growth expected to follow the 2021 rebound, according to the firm's analysis. "The eurozone is now entering a tricky transition period from gradual withdrawal of government support toward implementation of the European Union's economic reform program. Liquidity, households' behavior and demand will be crucial in enabling the European economy to weather this transition, and much could go wrong along the way," Ms. Amiot said.

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Hedge Funds Are Slow-Walking Wall Street’s Return to the Office

Brief: As the finance world tiptoes back into the office, some of the biggest hedge funds are opting to keep their workers at home into 2021. While Wall Street firms including JPMorgan Chase & Co. and Citigroup Inc. ramp up attendance at their global headquarters, staff at Bridgewater Associates, D.E. Shaw & Co. and Two Sigma Investments are unlikely to be back until next year, according to people familiar with the matter and company officials. Banks often have their own buildings, but hedge funds usually work in shared locations with less control over how the lobby and elevators are managed. Some are choosing to wait and learn from how others’ returns pan out, a position helped by the fact that productivity has stayed high, according to the people. Two Sigma, which has about 1,500 U.S. employees, told workers they won’t be required to return before July 4, one of the people said, asking not to be named because the information isn’t public. Those who miss being at their desks can go in from January. Still, some hedge funds are pushing ahead. About 40% of Capstone Investment Advisors’ New York staff is in the office. To give employees time for creative thinking, the firm has created “meeting-less Wednesdays.”

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Emerging Markets on Edge as Goldman and Deutsche Bank Flag Risks

Brief: Emerging markets are heading toward the end of the third quarter with more reasons to be cautious than optimistic. Developing-nation stocks, currencies and bonds had their worst week in the five days through Friday since the coronavirus pandemic rocked global markets in March. The gap between implied volatility in emerging-market currencies and their Group-of-Seven peers is at the widest since June amid concerns over renewed lockdown measures and delays to further U.S. fiscal stimulus. Emerging-market exchange-traded funds suffered the biggest weekly outflow since early July as assets tumbled. Manufacturing reports from China, India, Brazil and South Africa that are being published this week are potentially less decisive for investors than the global sentiment toward risky assets. Investors are bracing for higher price swings around the U.S. November elections, with the first presidential debate between Donald Trump and challenger Joe Biden scheduled for Tuesday. And they’re being encouraged to move to the sidelines. Deutsche Bank AG is taking a “more defensive stance” on emerging-market credit as it expects increased volatility from the U.S. election to fuel a selloff in risky assets. Never mind that the wave of central-bank stimulus and investors’ hunger for yield had lifted developing-nation dollar debt for five months.

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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 September 25, 2020:

  • United States Senator Elizabeth Warren (D-Mass.) and Representative Ro Khanna (D-Calif.) have penned an inquisitive letter to the Defense Department’s acting inspector general Sean O’Donnell on Friday questioning the use of $1 billion in Cares Act stimulus funding for purposes other than coronavirus relief. According to Warren and Khanna, the Defense Department has repurposed funds intended to aid with pandemic resources and channeled them into funding drone technology, body armor and dress uniforms. The stimulus package which was set aside in March was intended to be used to “prevent, prepare for, and respond to coronavirus.” The letter also questions whether the defense contractors that were subsidized by the stimulus package had also received coronavirus relief loans from the Small Business Administration.

  • Prime Minister Justin Trudeau today announced that Canada will spend $440 million to ensure that COVID-19 vaccines are available world-wide and will not be available only to the wealthiest countries. Canada, along with 64 of the world’s richest nations, has joined the international COVID-19 Vaccine Global Access Facility, dubbed COVAX. Meanwhile, the federal government has already committed over $1 billion to gain private access to millions of doses of potential coronavirus vaccines that are currently undergoing late-stage testing. The 6th and most recent deal between the federal government and pharmaceutical company AstraZeneca will see Canada receive up to 20 million doses of its vaccine, however, if the vaccine is not approved for use, the cost incurred by the government is almost entirely non-refundable.

  • The United Kingdom has seen its largest single-day increase in new cases of COVID-19 since the pandemic began. The country recorded 6,634 infections on Thursday, soaring past any number seen before the country was put on a nationwide lockdown. The news comes as the rest of Europe is experiencing a resurgence of the virus. The U.K. is pointing to increased testing to explain the extraordinarily large number of new cases, Health Secretary Matt Hancock is insisting that the country is still in better shape than when the virus first emerged. Government estimates are suggesting that nearly 100,000 people were being infected daily at the start of the pandemic, “now we estimate that it’s under 10,000 people a day getting the disease,” Hancock said. “That’s too high, but it’s still much lower than in the peak.”  

  • Similar to the situation in the U.K., France has also broken a daily record for new cases of COVID-19. Just over 16,000 new cases were confirmed on Thursday, marking the fourth time that record has been broken over the past 14 days. The French government has announced a new round of lockdown protocols which will see all restaurants and bars closed in Marseille and a strict diminishment of business hours for those in Paris. The announcement is met with distain from local politicians and businesses, with some dissenters suggesting that they should ignore the government regulations altogether. Prime Minister Jean Castex is calling for “responsibility” and said, “what I don't want is that we go back to March,” when forms were required for leaving French households.

  • There was an unlikely occurrence in South Korea on Friday after an apology was sent to President Moon Jae-In from North Korean leader Kim Jong Un. The letter from the North’s United Front Department said that Un was “greatly sorry” for the shooting death of a South Korean official in North Korean waters. A man was shot and burned, according to South Korean reports, as he was caught floating on a raft and suspected of defecting. The letter claims that the incident was “unexpected” and “unfortunate,” it also explains that such actions were taken due to North Korean guidelines on coronavirus management. The anti-coronavirus rules in North Korean include “indiscriminate shooting” at anyone who approaches the border without consent.

Covid-19 – Due Diligence And Asset Management

'Headwinds outnumber tailwinds' for the global economy in 2021 and a vaccine is the answer, JPMorgan says

Brief: The global economy is emerging from the depths of the coronavirus crisis. US earnings have smashed expectations and central banks are on permanent stand-by to step in and provide support. And yet the headwinds to the economy easily outnumber the tailwinds, JPMorgan EMEA chief executive Viswas Raghavan says. The coronavirus, which has claimed almost a million lives around the globe and unleashed the worst recession in recent history, has elicited an unprecedented response from the world's central banks and governments. At least $7 trillion in cash to shore up national economies, plus billions in employment protection schemes and other benefits have washed into the financial system, while interest rates are near, or even below, zero to encourage consumption and ward off total economic collapse.

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COVID-19 Private Sector Global Facility announced at SDG Business Forum

Brief: The United Nations Development Programme (UNDP), the United Nations Global Compact (UN Global Compact) and the International Chamber of Commerce (ICC) have established the COVID-19 Private Sector Global Facility, a global initiative and collaboration bringing together public and private sector partners to help local communities recover better from the pandemic. Deutsche Post DHL Group, Microsoft Corp. and the PwC network (“PwC”) have already joined the COVID-19 Private Sector Global Facility, and the initiative is open for other like-minded private sector organizations that want to contribute. The Global Facility is a response to corporate calls to action for private sector leaders and governments to work together to address the negative impacts of the coronavirus pandemic. The initiative has been established to better coordinate their responses, helping to ensure that immediate stimulus efforts flow into the real economy. The Global Facility will operate at both the global and national levels. It aims to co-create solutions that are tailored to the phase of the COVID-19 pandemic in a given area and the specificities of the local private sector and government context.

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Manager due diligence in times of Covid-19

Brief: A lively debate is currently taking place amongst allocators as to whether onsite due diligence and face-to-face meetings are still necessary given the current environment. The simple answer must be a resounding: yes, absolutely. Due diligence, both investment and operational, has always been an integral part of a well-structured investment process. Those of us who have been around since pre-2008 can certainly attest to the fact that a lot has changed since, and the days are long gone when it was possible for managers to simply refer to their stellar track records and assume that investments would be forthcoming without any other questions being asked. Investors have learnt that having a detailed understanding of a strategy is just the beginning and that the operational framework in which a strategy is implemented is also of great importance.

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Deal Or No Deal: M&A Litigation In Light Of COVID-19

Brief: The COVID-19 pandemic has caused significant challenges to M&A transactions. Negotiations have crumbled, closings have been delayed and overall M&A activity has declined. While uncertainty remains about when M&A activity will return to normal, it appears that M&A litigation will increase in the coming months. Cases are being filed across the country as buyers and sellers who entered into M&A deals prior to-or in the early stages of-the pandemic seek legal relief to enforce or excuse obligations under their respective agreements. One of the more talked about disputes involves Victoria's Secret owner, L Brands, who sued Sycamore Partners after Sycamore terminated the parties February 20, 2020 merger agreement based on the material adverse effect (MAE) provision.

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Goldman Sachs picks the emerging market currencies to back when ‘the dust settles’

Brief: Goldman Sachs has marked out the Mexican peso as its top emerging market (EM) currency pick “once the dust settles” from the coronavirus pandemic. In a note Thursday, Goldman strategists suggested that while it may be too early to engage with high-yield EM bets, with risks still prevalent and the dollar on the move, it is not too early to start thinking systematically about opportunities once the crisis subsides. Co-Head of Global Foreign Exchange Kamakshya Trivedi and Head of EM Cross-Asset Research Caesar Maasry, along with a team of strategists, identified the peso as the most attractive among “high cyclical beta, high carry longs.” It was closely followed by the South African rand (ZAR) and Russian ruble (RUB).

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COVID-19 Forces One of the Biggest Surges in Technology Investment in History

Brief: Companies spent the equivalent of around US$15bn1 extra a week on technology to enable safe and secure home working during COVID-19, reveals the 2020 Harvey Nash/KPMG CIO Survey. This was one of the biggest surges in technology investment in history – with the world’s IT leaders spending more than their annual budget rise2 in just three months, as the global crisis hit, and lockdowns began to be enforced. The largest technology leadership survey in the world of over 4,200 IT leaders, analyzing responses from organizations with a combined technology spend of over US$250bn, also found that security and privacy is the top investment during COVID-19, and cyber security (35%) is now the most “in demand” technology skill in the world. This is the first time a security related skill has topped the list of global technology skills shortages for over a decade. Four in 10 IT leaders report that their company has experienced more cyber attacks, with more than three quarters of these attacks from phishing (83%) and almost two thirds from malware (62%), suggesting that the massive move to home working has increased exposure from employees.

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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 September 24, 2020:

  • Two days after hitting 200,000 deaths from the COVID-19 pandemic the United States is seeing major upticks in cases in more than 20 states. The University of Washington's Institute for Health Metrics and Evaluation (IHME) newest calculations suggest that the country could lose another 150,000 people to the virus in the next three months as flu season quickly approaches. Midwestern states are seeing the majority of increases while infection numbers have gone down in only 7 states over the past week. Dr. Robert Redfield, director of the Centers for Disease Control and Prevention said that “the preliminary results on the first-round show that a majority of our nation – more than 90% of the population – remains susceptible.” Although the vaccine created by Johnson & Johnson is in Phase 3 trials, experts suggest that it likely won’t be available to the public until spring 2021 at the earliest.

  • The government in the Canadian province of Ontario is in the process of unveiling their fall pandemic preparedness plan to avoid forcing another lockdown if cases in the province skyrocket in the coming months. The documents suggest that the province is looking to isolate individual areas as opposed to going through with a large-scale lockdown similar to that seen at the beginning of the pandemic in March. With 386 new cases on Wednesday, Ontario is seeing its highest number of new cases in four months, causing lawmakers to rethink their reopening plans. According to the preparedness documents, individual businesses, high-traffic area’s or high-risk events will be targeted, while environments deemed safe will continue to operate. The plan is scheduled to cost roughly $2.2billion with most of the funds being allocated to increased testing, contact tracing and health care operations.

  • The UK Department for Business, Energy, and Industrial Strategy (BEIS) is exploring the possibility of deliberately infecting volunteers with the novel coronavirus COVID-19 in order to better understand the effectiveness of a vaccine. In the aptly named “challenge trials,” volunteers would be given a vaccine and then exposed to the virus to document whether the vaccine proves effective in combating illness. The World Health Organization has said that these challenge trials prove to be much quicker than conventional testing and have seen positive results in previous attempts to cure smallpox, malaria and other infectious diseases. Despite ethical concerns, the subjects in the trials would only be able to participate under specific conditions. The study would only select “young and healthy adults as participants, starting with low doses, ensuring public engagement, and providing high-quality care and close monitoring.”

  • Spanish Prime Minister Pedro Sanchez has refused to return the country to a nation-wide lockdown. His decision has drawn the attention of a leading Spanish epidemiologist and former director of public health for Madrid, Juan Martinez. Martinez says that country “deserves” to put back in a strict lockdown and that the measures would “probably” be the only way to slow the recent surge of infections the country is currently experiencing. The city of Madrid and the island of Ibiza are two of the hardest-hit areas in Spain and remain primarily in a lockdown state. Residents are only allowed to leave their houses for emergencies or essentials with the army now being brought in to enforce regulations. In an interview on national television, Martinez said that a national lockdown should be a logical decision and “what should concern us is the number of people who are seriously ill and dying.”

  • The Japanese government will greatly increase the number of people allowed to enter the country come October. Starting in early September a small number of Japanese citizens were allowed to re-enter the country after closing the borders earlier in the year. Businesspeople and students from abroad have been able to return home as the country is becoming increasingly desperate to kickstart the economy. The borders will remain closed to tourists but may make exceptions for foreign students without government grants, people from low-risk countries and those coming for cultural activities, without giving specifics on what events may be given priority. The government has ramped up its testing at major Japanese airports in Tokyo and Osaka and intends to roll out more vigorous testing at all airports as the border reopens.

Covid-19 – Due Diligence And Asset Management

Early Pandemic Bets Paid Off Big for Handful of Asia Hedge Funds

Brief: A few Asia-based hedge funds benefited from early insight into the pandemic’s impact to post outsized gains this year, while regional peers are on track to outperform global funds for the eighth time in 12 years. Funds overseen by Anatole Investment Management Ltd., Aspex Management (HK) Ltd., CloudAlpha Capital Management Ltd. and Franchise Capital returned more than 50% this year to the end of August, making money on bets ranging from electric cars to e-commerce, while some shorted hard-hit tourism sectors. Anatole’s $2 billion flagship fund returned more than 60% in the first eight months, said a person with knowledge of the matter. Aspex, which oversees more than $3 billion, gained 54%, said another person. CloudAlpha’s global technology fund surged 135% in the same period, and Franchise’s $1 billion fund jumped 133%, according to investor newsletters seen by Bloomberg News.

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COVID-19 Private Sector Global Facility announced at SDG Business Forum

Brief: The United Nations Development Programme (UNDP), the United Nations Global Compact (UN Global Compact) and the International Chamber of Commerce (ICC) have established the COVID-19 Private Sector Global Facility, a global initiative and collaboration bringing together public and private sector partners to help local communities recover better from the pandemic. Deutsche Post DHL Group, Microsoft Corp. and the PwC network (“PwC”) have already joined the COVID-19 Private Sector Global Facility, and the initiative is open for other like-minded private sector organizations that want to contribute. The Global Facility is a response to corporate calls to action for private sector leaders and governments to work together to address the negative impacts of the coronavirus pandemic. The initiative has been established to better coordinate their responses, helping to ensure that immediate stimulus efforts flow into the real economy. The Global Facility will operate at both the global and national levels. It aims to co-create solutions that are tailored to the phase of the COVID-19 pandemic in a given area and the specificities of the local private sector and government context.

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HSBC, Goldman Sachs and PwC delay return to offices in England

Brief: HSBC, Goldman Sachs and PwC have postponed plans to bring staff back to their offices in England after the government’s U-turn on its back-to-work drive. A memo sent to staff at HSBC informed them that the investment bank, based in London’s Canary Wharf financial district, was pausing its planned return of “phase one” teams to the office. The bank said its staff working in branches and those supporting customers in call centres would continue to go into work, although the majority of office-based staff would work from home. Goldman Sachs, which brought about a third of its 6,000 UK workers back into its London building from mid-June, also postponed plans to expand its back-to-work operation, which involved bringing back staff on a rotating basis.

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Insurers' hedge fund investments may face chop after dismal pandemic performance

Brief: Having complained for years about hedge funds’ high fees and lacklustre performance, insurance firms may be preparing to cut allocations to the sector after its poor performance during recent market upheaval left many of them nursing losses. That would be a problem for hedge funds, as insurance companies are huge investors, managing around $20 trillion of assets globally. It would also be a challenge for insurers, which have been hoping hedge funds would deliver market-beating returns to help them meet billions of dollars in pandemic-related payouts. One of the primary objectives of hedge funds is to preserve clients’ capital during market downturns. But the industry mostly failed to do that in the first six months of 2020, losing an average of 3.5%, according to Hedge Fund Research (HFR).

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The world’s largest hedge fund is operating out of tents in a Connecticut forest

Brief: Dozens of employees at the world’s largest hedge fund have been working from tents in the Connecticut woods for months, Fortune magazine reports. Bridgewater Associates, which manages roughly $140 billion in assets, attempted to reopen its offices this spring but found that constant mask-wearing and other safety protocols added a new layer of stress. So roughly 50 employees moved outdoors, setting up shop in a rustic pine grove outside the firm’s Westport, Conn., headquarters. The open-sided tents were equipped with fast WiFi, furniture spaced at socially distanced intervals and noise-canceling software that drowns out the sound of birds during video calls, according to Fortune. Employees were given weather-resistant computer screens and webcams after nature began taking a toll on their electronics, and access to kayaks for occasional breaks. The makeshift outdoor office had to briefly shut down in August when a hurricane approached New England and will probably be packed away by the end of October, when sitting outside in coats and hats ceases to be comfortable.

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Investors are returning to hedge funds, as industry enjoys positive capital flows for second month in a row

Brief: Investors continued to add more money to hedge funds last month – after pouring more than USD9 billion into the industry in July – as the sector recovers from a bruising four-month run of withdrawals and allocators drift back to the sector, new industry data shows. Altogether, hedge funds attracted some USD7.36 billion of positive inflows in August, according to eVestment, whose latest flows report highlighted an “impressive” breadth of allocations despite a reduced volume of asset movement compared to recent months. But it also warned of a “rocky” outlook, with investor sentiment hinging on how successfully hedge fund strategies of all stripes can seize on what it calls the “large” opportunity set ahead.

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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 September 23, 2020:

  • In the United States the fourth large-scale trial of a Coronavirus vaccine has begun. The Janssen Pharmaceutical Companies of Johnson & Johnson intend to recruit up to 60,000 volunteers to test their newest single-dose injection at over 215 test sites across the country and abroad. The investigational tests will be funded by the U.S. Department of Health and Human Services’ Office of the Assistant Secretary for Preparedness and Response. The vaccine employs a human adenovirus that causes the common cold which has been modified so that it no longer replicates and causes disease. The same adenovirus has been employed in a vaccine for the Ebola virus which has recently been cleared for use by the European Commission. The Janssen vaccine is designed to prevent moderate to severe cases of COVID-19 and avoid the need for medical intervention if a vaccinated person contracts the virus.

  • Without stringent compliance with the safety measures similar to those taken in the early stages of the pandemic, COVID-19 is projected to continue to grow in Canada according to a federal document released on Tuesday. The documents states that Canada is on track to have 155,795 total cases and 9,300 deaths by October 2nd if Canadians are unable to revert back to stricter lockdown procedures. Infections are set to rise as numbers over the past two weeks show significant transmission throughout the country. If Canada continues on its current path, the virus will return "faster and stronger," said Dr. Theresa Tam, Canada's chief public health officer. At Tuesday’s briefing, health minister Patty Hajdu said that "all of us have the future in our hands in terms of the decisions we're making today," and that Canadians need to “ensure that we're not socializing more than absolutely necessary.”

  • The British pound took a dive in the early morning trading hours on Wednesday following announcements from Prime Minister Boris Johnson that the U.K. will strictly enforce new regulations to slow the spread of COVID-19. The pound slipped against the American dollar by 0.3 per cent to $1.26. Johnson warned that even stricter measure may be put in place over the next six months if the reproduction – or “R” – number does not decline. The reproduction number is the amount of secondary infections that come from a single infected person. The current “R” number in the U.K. sits between 1.1 and 1.4. Fines for breaching the COVID regulations in Britain range from £200 for the first offence and up to £10,000 for secondary infractions.

  • Indian parliament is scheduled to close its current session on Wednesday, a week earlier than anticipated after 30 parliamentarians have tested positive for COVID-19. The new session began on September 14th and was the first time the lawmakers had met in six months. New cases of the virus surged again on Wednesday after having reported the lowest number of new cases in over a month on Tuesday. India has consistently recorded the highest number of daily infections worldwide for the last few months and that number is continuing to grow as the country tries to alleviate the burden on an increasingly strained healthcare system. In the last 24 hours, there were 83,347 new cases, with 1,085 deaths, federal health data showed.

  • In Australia, lockdown restrictions in parts of the country are beginning to ease with South Australia and Queensland opening their borders to residents from neighbouring New South Wales. There have been no new community transmitted cases of the virus in New South Wales for the last 14 days prompting the easements at the border. However, travel restrictions are still firmly in place for the state of Victoria which has seen the largest number of cases in the country, primarily in the metropolitan area of Melbourne. Travellers from New South Wales entering South Australia will no longer have to quarantine for the required 14-day period starting on Thursday. “This will be a massive, massive relief to people who have been dislocated from friends, from family, from business opportunities,” said South Australian Premier Steven Marshall. The move will be welcome to country’s economy which has fallen into a recession for the first time since 1991.

Covid-19 – Due Diligence And Asset Management

UBS AM sees 'emergency' vaccine approval in fourth quarter, hot tech to cool

Brief: An emergency approval of one to three Covid-19 vaccines is likely in the coming months UBS Asset Management predicted on Wednesday, a milestone that could finally end the surge of mega-cap U.S. tech stocks. The full approval of the vaccine that allows for broad inoculation is more likely during the middle of 2021, the asset management arm of the Swiss bank said. After the recent correction led by tech stocks, UBS AM said its hopes for a vaccine meant it was adding “exposure” to other sectors and regions that could benefit from a normalisation of the economic cycle. “A vaccine announcement is likely to reinforce this trend (rotation to cyclicals) by increasing visibility into the earnings recovery outside of technology and other work-from-home beneficiaries,” UBS Asset Management’s investment team said.

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Hong Kong and China stocks snap two-day run of losses after changing direction at least 10 times

Brief: Hong Kong and China stocks rose for the first time this week, as traders assessed prospects of global growth and the fallout from a resurgence in the coronavirus epidemic in Europe. The Hang Seng Index added 0.1 per cent, or 25.66 points, to 23,742.51 at the close on Wednesday after changing direction at least 10 times. The benchmark snapped a 3 per cent decline over the previous two days. The mainland’s Shanghai Composite Index rose 0.2 per cent to 3,279.71. HSBC Holdings rebounded from its lowest level in 25 years and Joy Spreader Interactive Technology, one of Hong Kong’s most sought-after initial public offerings, dropped below the offer price on debut. Most equity gauges in Asia retreated except Australia, after the Federal Reserve chairman Jerome Powell said that the US economy has a long way to go before it fully recovers from the damage of Covid-19 and will need more support.

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HSBC halts return to office plan in Britain

Brief: HSBC HSBA.L has paused its plan to return more staff to office working in Britain, in common with other financial firms after Prime Minister Boris Johnson on Tuesday urged workers to stay home to combat the coronavirus. “We will pause any further consideration of ‘phase one’ teams returning to offices,” HSBC said to its staff in Britain in a memo seen by Reuters on Wednesday. A spokeswoman for the bank confirmed the contents of the memo. Critical workers needed for the bank and its branches to operate will continue to go in to the office, the memo said.

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ASIC extends COVID-19 relief for certain capital raisings and financial advice

Brief: ASIC is extending the temporary relief for capital raisings and financial advice due to the continuing uncertain impacts of COVID-19. ASIC is also extending the financial advice relief related to the COVID-19 early release of superannuation scheme in light of the extension of the scheme by the Government. The capital raisings relief aims to assist listed entities affected by the COVID-19 pandemic to raise capital in a quicker and less costly way without undermining investor protection. It was originally announced on 31 March 2020 (20-075MR). The temporary relief enables certain ‘low doc’ offers (including rights offers, placements and share purchase plans) to be made to investors without a prospectus, even if they do not meet all the normal requirements.

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PwC says majority of its UK employees will now work from home

Brief: Accountancy firm PwC, which had seen a number of staff return to offices from lockdown, has said most UK employees will now be working from home in the wake of new government guidance. The Big Four firm joins the long line of businesses that have this week had to review back-to-office plans in light of new government guidance telling people to work from home if they can. Many employers had invited staff to come back into offices from last month after a period of remote working during lockdown. Kevin Ellis, PwC UK chairman and senior partner, today said: “We’ve seen benefits for our people, clients, suppliers and communities of using our offices in recent weeks and they will continue to play an important role - but only when appropriate to do so. Safety and wellbeing is paramount, and we will follow the government’s new guidance.”

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Asia hedge funds continue to hire in 2020 despite COVID-19, KPMG and AIMA survey finds

Brief: Hedge funds in Asia have continued to increase their headcount and still have appetite to hire more talent despite the economic uncertainty brought about by COVID-19, according to a new joint report by KPMG and the Alternative Investment Management Association (AIMA). The report titled Agile and Resilient: Alternative investments embrace the new reality surveyed 144 hedge fund managers globally, representing an estimated USD 840 billion in assets under management (AUM). Seventeen percent of the respondents are headquartered in Asia Pacific, while 11 percent are in Hong Kong. The survey was conducted in real-time throughout the pandemic and the report also includes one-on-one insights from key players across the industry.

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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 September 22, 2020:

  • In the United States, as the coronavirus death toll reaches 200,000, the vast majority of Americans want to see their elected politicians do much more to mitigate the economic fallout from the pandemic. According to a survey from the Financial Times and the Peter G Peterson Foundation, almost 90% want Washington to pass a new stimulus package, but they are equally split on who is to blame for the delay. Thirty-nine per cent say the Democrats and Republicans are equally responsible, with 26% blaming the Republicans and 23% blaming the Democrats.

  • In Canada, Prime Minister Justin Trudeau is expected to make one of his most anticipated speeches on Wednesday as he outlines his government’s plan to take the country through the next wave of the COVID-19 pandemic. Sources are saying Prime Minister Trudeau’s Throne Speech which outlines the government’s priorities – will focus on a three-pronged attack. There will be a focus on the immediate task of tackling the coronavirus, a medium-term commitment to support Canadians through the pandemic and a “resiliency agenda” to spur recovery and reconstruction. The prime minister’s speech isn’t expected to establish budget targets, which will be left to the finance minister to update later in the year.

  • United Kingdom Prime Minister Boris Johnson is waving the white flag for Britons return to the office due to a surge in coronavirus cases. Addressing the House of Commons on Tuesday, Prime Minister Johnson said he is asking workers who can work from home do so for at least the next six months and is scrapping a plan to bring 80% of civil servants back to city offices, which have been abandoned during the pandemic. The government also announced a plan to close all pubs, restaurants and bars at 10 PM, starting Thursday. 

  • In Germany, the city of Munich has unveiled mask-wearing requirements for popular outdoor areas due to rising coronavirus cases. The capital city for the state of Bavaria has surpassed a national threshold of 50 cases per 100,000 residents for seven consecutive days, which means local governments must tighten regulations such as these. Over the weekend, Germany as a whole recorded 2,300 daily cases on Saturday, the highest total in the country since April.

  • Philippines President Rodrigo Duterte has extended a state of calamity for the country by one year. By issuing this extension, President Duterte’s government can draw emergency funds faster in order to fight the COVID-19 pandemic and also call on the power of the police and military to maintain law and order. President Duterte first placed the Philippines under a state of calamity back in March due to the pandemic.

  • China has sentenced a prominent real-estate tycoon in a Beijing court to 18 years in prison for alleged corruption. Ren Zhiqiang grew up as the son of a Chinese Communist party official, which granted him an opportunity to speak more freely than most, which he did, speaking critically of the government over the last several years. Earlier this year, Ren criticized President Xi Jinping’s handling of the coronavirus pandemic calling him not “an emperor in his new clothes, but a bare-naked clown.” It is comments like these that led to Ren being found guilty in a one-day trial for charges including bribery, embezzlement of public funds, and abuse of power.

Covid-19 – Due Diligence And Asset Management

Deutsche Bank to Close 20% of German Branches in Coronavirus Shift

Brief: Deutsche Bank plans to shutter one in five branches in Germany as it seeks to save costs and capitalise on the changing habits of customers during the coronavirus pandemic, an executive said. Philipp Gossow, who oversees the retail banking business in Germany, told Reuters that the reduction to some 400 branches from around 500 currently would occur primarily in urban locations and take place “as quickly as possible”. The cull comes as Deutsche Bank undergoes a broad overhaul of its global operations that began in 2019 after years of losses. German banks traditionally operate large numbers of branches compared with those in the Netherlands or Britain, where customers are more comfortable with digital banking. Banks throughout Europe are rethinking their branch strategies in the wake of the coronavirus crisis. Deutsche’s rival Commerzbank recently opted to shut 200 of its 1,000 branches and is considering closing hundreds more. “Coronavirus has further changed the demands placed on advisory services and the branch business,” Gossow said.

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Citadel, United Among Lenders in Avianca’s $2 Billion Plan

Brief: The hedge fund Citadel Advisors LLC, United Airlines and an El Salvadoran air mogul are among investors offering loans as part of Latin American airline Avianca Holdings SA’s $2 billion bankruptcy financing plan, according to court documents. The companies, which were stakeholders in the air carrier before it filed for Chapter 11 protection in May, would help provide about $722 million in loans. Together with a separate tranche of roughly $1.3 billion of debt, Avianca said it has commitments for $2 billion in debtor-in-possession funding. “Securing these financing commitments is another concrete step forward in our Chapter 11 reorganization process,” said Anko van der Werff, chief executive officer in a statement. The plan needs approval from the U.S. Bankruptcy Court for the Southern District of New York. Avianca shares were flat in Bogota trading. Bonds due in 2023, which will be rolled up in the financing plan, were unchanged, according to data compiled by Bloomberg. The debt being offered by an affiliate of Citadel -- the famed hedge fund founded by billionaire Ken Griffin -- United, and El Salvadoran Roberto Kriete’s Kingsland Holdings would be eligible to roll over into common shares when Avianca emerges from the Chapter 11 reorganization, according to court filings.

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Brookfield Properties’ Retail Arm is Laying off 20% of its Workforce, as Pandemic Hits Malls

Brief: One of the biggest retail real estate owners in the country, Brookfield Properties, is going through a major round of job cuts, CNBC has learned, as the coronavirus pandemic takes a toll on its business and new leasing activity at its malls dries up.  “While many companies were quick to implement furloughs and layoffs at the onset of the pandemic, we made the conscious decision to keep all our team employed while we gained a better understanding of its longer-term impact on our company,” Jared Chupaila, CEO of Brookfield Properties’ retail group, said this week in an email to employees, which was obtained by CNBC.  However, he said, the mall owner has now decided to make cuts “to align with the future scale of our portfolio.”  Chupaila said the reductions are going to affect roughly 20% of the company’s workforce, across both its corporate headquarters and leasing agents in the field. Brookfield Properties’ retail division employees about 2,000 people.  Brookfield Properties has more than 170 retail properties in 43 states, according to its website, including Brookfield Place downtown in New York City and Fashion Show Mall in Las Vegas… Brookfield Asset Management’s real estate businesses employ roughly 22,000 people globally, according to its latest annual filing, which includes other asset classes like office space. 

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How to Impact European Real Estate in a COVID-19 World

Brief: The economic implications of COVID-19 are yet to be fully realized, but the expectations of the detrimental impact are sobering. The pandemic has not only shaken up reality but has woken the world up to addressing underlying societal and economic issues that may have previously been dismissed. The virus is a major global threat, but it will not be the last such threat that we face in the coming years. Climate change, pollution, and growing social and economic inequality, among other issues, all have the power to massively disrupt our way of life. But from these threats comes greater awareness of the need for reinvention, and with reinvention comes great opportunity to align and contribute toward our modern, more sustainable future. A key opportunity for investors to combat the effects of the pandemic is through real estate investing. This can be achieved in a multitude of ways, such as providing low income housing options, rent-relief for hospitals and built-for-purpose medical centers for pandemic efforts, with climate change efforts at the core of each investment. During times of distress, there is a silver lining: unique industry advancements and unprecedented innovation. We have seen strides in technological development and increased private market participants, all working together to fill gaps caused by the pandemic.

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Here’s What Investors With $3.4 Trillion Are Buying During Covid

Brief: Oil pipelines, hotels, convenience stores and automaker bonds are among the assets being bought by some of the world’s biggest asset managers as they look for value in a world thrown into turmoil by the coronavirus pandemic. In interviews with sovereign wealth funds, pension firms and asset managers across Asia and Europe that collectively manage about $3.4 trillion, one thing was clear: many of them are avoiding the overheated stock market. The most common outlook was one of caution. They are mindful that much of the rebound in markets and private-company valuations is thanks to ultra-low interest rates, massive central bank stimulus and government fiscal support, some of which could start to be wound back in coming months. With asset values still seen as inflated, even in some hot areas like healthcare and technology, many are waiting for a potential second downturn after stimulus measures end but before mass vaccinations enable economies to restart without risking widespread infection.

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London Financial Firms See Long-Term Shift to Working from Home

Brief: The heads of Man Group Plc and Schroders Plc say the shift to working from home during the pandemic will become the new normal for financial firms. Man Group expects to have about 10% of employees back in the office next week unless the government imposes new restrictions on London, where the majority of its roughly 1,500 staff work, Chief Executive Officer Luke Ellis said at a virtual event on Monday. The world’s biggest publicly traded hedge fund firm won’t even try to get back to having more than about 70% of staff working in the office on any given day. At Schroders, about 20% of its employees are in the office now, and if that number rises to 50% in the future that would be “very positive,” CEO Peter Harrison said at the City Week event. The London-based asset manager, which has about 5,000 employees worldwide, recently loosened its rules to make it easier for staff to work from home when they need to. “We have gone forward 20 years in terms of the future of work,” Harrison said. “People don’t want to come in five days a week, and I don’t think it is helpful for them and I don’t think it is good for them.”…  Ellis said that the average worker in the City of London spends about 10% of income on commuting. “If they don’t have to do that apart from occasionally, that is a significant benefit for them, that in the long run means lower cost for the company,” he 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 Monday September 21, 2020:

  • The United States’ Centers for Disease Control (CDC) made its second bizarre move in a matter of weeks. On Monday, the federal public health agency said it had mistakenly issued guidance on airborne transmission of the coronavirus and that another update would be coming soon. In language that was posted Friday and now removed, the CDC said COVID-19 was most commonly spread through close contact with other people, but growing evidence showed droplets and airborne particles can remain suspended in the air and travel beyond distances of six feet such as in restaurants, fitness classes, choir practice, etc. Last week the CDC had updated its coronavirus testing guidance after a New York Times article stated CDC scientists didn’t write the original update back in August.
  • In Canada its two most populous provinces continue to see the largest increases of COVID-19 cases it has seen in months. In Quebec, 586 new cases were reported on Monday, the highest daily increase since May. Montreal and Quebec City, the province’s two largest cities had their COVID-19 alert level raised to orange, just one stage short of its highest level. Ontario reported 425 new cases on Monday, its highest total in three-and-a-half months. The new cases have remained consistent; happening mostly in the province’s high-density populated areas and close to 70% of those new cases are people under the age of 40. 
  • In the United Kingdom, the country’s chief medical officer and chief scientific adviser said it is in for a very challenging winter. In a televised address, the two said coronavirus cases could hit almost 50,000 a day within weeks on the current trajectory and deaths could top 200 a day by November unless action is taken. Therefore, it is numbers and projections such as these that are forcing Prime Minister Boris Johnson to make his next move on how the government plans to fight the pandemic, which he plans to do on Tuesday.
  • In Spain, the city of Madrid is displaying Europe’s highest rate of coronavirus infections. Therefore, as of Monday at midnight, the country has ordered 850,000 people not to leave their neighbourhoods. The new rules will apply for two weeks and people can only exit or enter the affected areas for work, education, health or similar reasons. The city has recorded more than 45,000 new cases in the past two weeks alone.
  • Germany will set-up pop-up clinics that will take patients with typical coronavirus or flu symptoms away from the general hospitals. The “fever clinics” as they are being called, are part of the government’s strategy for the expected rise in cases over the autumn and winter months. The country’s health minister said the clinics should be up and running in the autumn, while Germany also aims to step-up protection measures and testing for high-risk groups, such as nursing homes.
  • The Czech Republic’s health minister Adam Vojtech resigned on Monday after criticism of his handling of the COVID-19 pandemic, especially during this latest surge. Before the start of the summer, the government lifted almost all of its restrictions imposed during the first wave of the pandemic. Thanks to that move, the Czech Republic has seen the number of infections double in the last month and trail only Spain for Europe’s second fastest COVID-19 new case rate in recent weeks. Roman Prymula, a top epidemiologist who helped lead the country through its initial response back in the spring will be the new health minister, replacing Vojtech.

Covid-19 – Due Diligence And Asset Management

Bank Shares Slide on Report of Rampant Money Laundering

Brief: The financial sector was hit hard Monday following a report alleging that a number of banks, JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank and Bank of New York Mellon among them, have continued to profit from illicit dealings with disreputable people and criminal networks despite previous warnings from regulators. According to the International Consortium of Investigative Journalists, leaked government documents show that the banks continued moving illicit funds even after being warned of potential criminal prosecutions. The report compounded a massive sell-off across global markets because of gloom and doom over COVID-19 infections and the economic damage from the pandemic. The consortium reported that documents indicate that JPMorgan moved money for people and companies tied to the massive looting of public funds in Malaysia, Venezuela and the Ukraine. The bank also processed more than $50 million in payments over a decade for Paul Manafort, the former campaign manager for President Donald Trump, according to the documents, which are known as the FinCEN Files.

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Investors Brace for Months of Big Market Swings as Virus, Political Worries Loom

Brief: Investors are bracing for an extended period of market volatility, as worries over a potential resurgence in coronavirus cases and political uncertainty roil stocks. The Cboe Volatility Index, known as “Wall Street’s fear gauge,” hit its highest level in nearly two weeks as concerns over waning fiscal stimulus and the long-term economic consequences of the coronavirus pandemic took the S&P 500 down to a seven-week low on Monday. [.N] Market participants aren’t expecting the turbulence to die down any time soon. VIX futures show that investors are betting that market swings will persist beyond the Nov. 3 U.S. presidential election and into December, reflecting worries over the possibility of a contested election and concerns that a deeply divided government will fail to agree on providing more fiscal stimulus to support the U.S. economy. “It’s not just Election Day that matters to this market,” said Stacey Gilbert, portfolio manager for derivatives at Glenmede Investment Management. “It’s also ‘do we get fiscal stimulus or do we not?’” Those concerns, some investors say, have been sharpened by the death of Supreme Court Justice Ruth Bader Ginsburg, which observers expect to deepen partisan divides as it sets up what promises to be a fierce fight in the U.S. Senate over President Donald Trump’s eventual nominee to replace her.

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Carlyle to Acquire Data Company TriNetX in Health-Care Drive

Brief: Carlyle Group Inc., the alternative asset manager overseeing $221 billion, is buying a majority stake in clinical data company TriNetX Inc. Equity capital for the investment came from the $18.5 billion private equity fund, Carlyle Partners VII, the company said Monday, declining to comment on deal terms. Closely held TriNetX has built a global network of research hospitals and academic institutions, biotechnology and drug companies, contract research organizations and other specialty data partners. Carlyle’s investment will help the company, founded in 2013, bring more technologies such as artificial intelligence and machine learning to researchers, according to Gadi Lachman, chief executive officer of Cambridge, Massachusetts-based TriNetX…  The deal adds to Carlyle’s growth investments in the health-care industry. The firm said earlier this month it led a $175 million round for Grand Rounds. Carlyle also backed 1Life Healthcare Inc., the primary-care clinic chain that went public in January. Other deals have focused more broadly on technology…

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Hedge Funds See Opportunity in Battered New York, San Francisco Apartment Markets

Brief: In the wake of the COVID-19 outbreak, as businesses across the country urged employees to work from home, rents plunged in New York City, San Francisco and other densely-populated cities. Still, prominent hedge funds, including D1 Capital Partners and Long Pond Capital and mutual fund giants Capital Group and T. Rowe Price, purchased shares in the second quarter in companies that rent residential real estate in urban markets, buying in at beaten-down levels and possibly betting on a faster rebound than Wall Street forecast. Now, nearly three months later, shares of real estate trusts that specialize in urban apartment rentals are down more than the broader real estate sector and the benchmark S&P 500 stock index for the year-to-date and since the March market rout. Shares of Equity Residential, founded by billionaire Sam Zell, are up 7% since the March low, AvalonBay Communities, which owns the Avalon Morningside Park with views of Manhattan, and UDR are up 26% and 14%, respectively, while the S&P 500 is up 48%. “The next three to five years are going to be very challenging,” said Jonathan Litt, whose hedge fund Land & Buildings Investment Management concentrates on real estate. “The key is to stay alive until 2025 in these markets.”

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Hedge Funds Wanted After Investors Lose Complacency

Brief: Hedge fund managers that have successfully navigated their way through the first half of this year and are producing good returns are in demand by institutional investors that are adding more hedge fund exposure to their portfolios and/or are upgrading lackluster managers with better choices. "There's a sense of optimism from hedge fund managers, backed up by investors," said Thomas P. Kehoe, managing director and global head of research and communications for the London-based Alternative Investment Management Association. "More investors are interested in hedge funds, and are seeing a real tool they can latch on to in this difficult environment for preserving capital, managing volatility, mitigating risk and producing returns," Mr. Kehoe said. In fact, high volatility in the first quarter this year was the catalyst for investors to consider more investment in hedge funds, said Kenneth J. Heinz, president of index provider Hedge Fund Research Inc., Chicago. "A year ago, institutional investors were very complacent. They aren't anymore because of ultra-high equity valuations. They're building out their hedge fund portfolios by putting the unallocated portion of their hedge fund target to work," Mr. Heinz said.

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U.K. GDP Faces $14 Billion Impact from Closed U.S. Air Links

Brief: The closure of passenger air links between the U.S. and the U.K. will strip at least 11 billion pounds ($14.21 billion) off U.K. gross domestic product in 2020, according to a report commissioned by British Airways’ parent IAG SA, London’s Heathrow Airport, the Airlines U.K trade group and airport services firm Collinson Group. The authors called for the creation of city or state-based travel corridors between the U.S. and the U.K. as well as airport testing for Covid-19. Keeping the routes closed will cost the U.K. economy 32 million pounds a day by the beginning of October, according to the report. “Government inaction on aviation and its impact on Britain’s economy couldn’t be clearer,” British Airways Chief Executive Officer Alex Cruz said. “Ministers must reach agreement with their U.S. counterparts on a testing regime that minimizes quarantine and permits regional travel corridors to re-open the U.K.-U.S. market.” Airlines have been campaigning to lift restrictions on trans-Atlantic travel which have been in place since early March. New York to London is BA’s most profitable route, with business travel a key driver of demand. The route generated about 7 million seat sales last year. The U.S. is the single biggest source of visitors to the U.K., with almost 4 million people visiting annually, according to the report.

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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 September 18, 2020:

  • In the United States, a New York Times article is stating politics seem to be trumping science more and more when it comes to the coronavirus. The article points to a controversial move made by the Center for Disease Control and Prevention (CDC) last month which said people without COVID-19 symptoms didn’t need to be tested. The recommendation was not written by CDC scientists, but instead from the Department of Health and Human Services. The guidance came at a time when health experts were pushing for more testing, not less. On Friday, the CDC updated their guidelines yet again, rolling back the controversial changes saying testing should include asymptomatic persons, including close contacts of a person diagnosed with COVID-19. Other than the New York Times article, it is difficult to see what changed over the last month, which could lead to more confusion for Americans when it comes to testing.

  • In Canada, the premiers of Ontario, Quebec, Manitoba and Alberta have issued a joint call to the federal government and Prime Minister Justin Trudeau. The call comes days before the government’s throne speech and the premiers are looking for an increase to boost federal health transfers, which have become more urgent thanks to the COVID-19 pandemic. The four provincial leaders want the funding increased from $42 billion to $70 billion per year, with an additional demand to cover 35% of health-care costs going forward. The prime minister’s office indicated no date for the call, but it is expected to take place before September 23rd, which is when the throne speech was expected to take place.

  • In the United Kingdom, ministers on Friday announced plans to extend socializing restrictions to 3.3 million more in England. As of Tuesday, households will be prohibited from meeting indoors in Merseyside, Lancashire, excluding Blackpool, and parts of the Midlands and West Yorkshire. The new restrictions mean about 20% of the UK’s population or 13 million people, will be living under restrictions. Recent data has shown the number of new COVID-19 infections in the UK are growing up to 7% a day. Leading scientists are even suggesting to the government a nationwide lockdown for two weeks in October to help curb the spread, but Prime Minister Boris Johnson is said to be strongly against such a measure.

  • India’s doctors are accusing their leader Narendra Modi and his government of callous disregard for their lives as they battle the coronavirus pandemic. The Indian Medical Association (IMA) said that 382 doctors have died from COVID-19 since the pandemic started and the situation is only getting worse as frontline healthcare workers deal with daily infections that are approaching 100,000. The IMA have stated the Modi government has tried to conceal the number of causalities and that the rate of fatality for infected doctors were nearly four times greater than the general public. The government’s pushback has been they have established an insurance scheme for healthcare workers infected with the coronavirus, but the IMA complained the program didn’t work and benefits were not reaching the intended recipients.

  • The metropolitan government of Seoul, South Korea have stated they plan to seek $4.6 billion won, or close to $4 million USD in damages against a church for causing the spread of the coronavirus by disrupting tracing and testing efforts. Back in mid-August, a fresh wave of infections erupted at a church whose members attended a large protest in downtown Seoul. The outbreak has caused triple-digit increases in daily COVID-19 cases for more than a month.

  • In Australia, the country is set to increase the cap on the number of citizens allowed to return home from 4,000 to 6,000. The move was confirmed by Prime Minster Scott Morrison during a Friday news conference as there are more than 25,000 Australians abroad waiting to return home. All travellers who intend to come back home are required to spend 14 days in a quarantined hotel at their own cost. Prime Minister Morrison also noted during the news conference that he is working with New Zealand towards the first elements of a travel bubble between the two countries.

Covid-19 – Due Diligence And Asset Management

Bank of America’s CEO Says More Stimulus Needed to Help Last of Recovery

Brief: Bank of America Corp. Chief Executive Brian Moynihan called for another round of federal stimulus to help the U.S. reach a full economic recovery from the coronavirus pandemic. “You’re back up to where 95% of the economy is back,” Moynihan said Friday in an interview with David Westin in advance of next week’s Bloomberg Equality Summit, adding that more help is needed for restaurants, airlines, performing-arts venues and state and local governments so they can “cross that same bridge” as housing, health-care and other recovered industries. “We’ve got to help everybody else get across.” Moynihan said a year-over-year increase in consumer spending is a sign of the economy’s resilience. U.S. retail sales rose 0.6% last month, following a 0.9% gain in July, the Commerce Department reported earlier this week. Government support for small businesses is running dry with the Paycheck Protection Program having closed in early August, and a supplemental $600 a week in unemployment benefits having expired at the end of July. Some House Democrats are keeping pressure on Speaker Nancy Pelosi to bring a new coronavirus relief bill up for a vote next week as they look to signal that the party is pursuing a deal to bolster the economy. Pelosi has held firm that the White House should first agree on a $2.2 trillion plan Democrats have put on the table.

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Wall Street’s Return-to-Office Push Finds Virus Won’t Cooperate as Infections Hit Trading Floors

Brief: Wall Street leaders made the case this week for bringing more workers back to the office, while a rash of COVID-19 infections on trading floors showed how quickly they could be sent back home. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc all had to quarantine groups of traders after employees tested positive for the coronavirus. The setbacks threaten a ramp-up of return-to-office efforts that executives have said are necessary to preserve productivity and firm cultures… But ending the lockdowns will mean trying to head off new outbreaks. Goldman Sachs had to send some traders back home after at least one employee tested positive for COVID-19 at its Manhattan headquarters. The firm hasn’t seen any transmission of cases within its offices, according to a person monitoring the situation “Our people’s safety is our first priority, and we are taking appropriate precautions to make sure our workplaces remain safe for those who choose to return,” Leslie Shribman, a spokeswoman for Goldman Sachs, said in a statement Thursday.

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How Covid-19 Permanently Changed the Way Businesses Operate

Brief: Companies looking to return to the norms of January 2020 should rethink their expectations. The Covid-19 pandemic has permanently changed how businesses operate, according to a report from the Carlyle Group. The virus caused a sudden and swift shock to the U.S. economy. In March, U.S. businesses switched from all staff working in the office to many working from home in just days. The big surprise? Companies of all sizes were able to meet or exceed prepandemic business volumes, according to Jason Thomas, Carlyle’s managing director and head of global research, who wrote the report When the Future Arrives Early. Don’t expect any big changes to remote working once the economy recovers, which could take a few years, wrote Thomas, adding the virus broke the inertia of companies requiring staff to be in the office full time. “Some people may never go back,” Thomas wrote. “In the future, work arrangements will be optimized based on what works best for the employees and the business rather than expectations that had been inherited from a different time.”

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A “Psychological Placebo”: Why This Hedge Fund Manager is Betting Against Drug Companies in the Race for a Covid Vaccine

Brief: The frantic hunt for an effective vaccine against coronavirus could leave some pharmaceutical companies highly exposed in a fiercely competitive race – and UK hedge fund Argonaut Capital is weighing in with several key bets against the sector. Argonaut’s CEO and CIO Barry Norris, who runs the firm’s Argonaut Absolute Return equity long/short fund, is avoiding large blue-chip drug names such as AstraZeneca and Pfizer (“the vaccine doesn’t really move the dial for them,” he says) as well as small-cap stocks, where there is a liquidity risk. Instead, he has built short positions against the “five biggest pure plays” in the sector, including Moderna – which has a USD25 billion market cap – along with US-focused German companies BioNtec and CureVac, as well as Novavax. “None of them have ever brought a drug or a vaccine to market successfully,” Norris says of his targets, which he sees as being overvalued. “Between them they’ve got about USD500 million of revenues this year, but they’ve got a USD50 billion market cap. There’s a lot of hope and speculation in those share prices.”

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Investec Sees Profit Falling as Much as 68% on Virus Fallout

Brief: Investec Ltd. expects first-half profit to slump as much as 68% because of the economic slowdown caused by the coronavirus pandemic. Headline earnings including the bank’s demerged asset management unit will likely fall to between 7.3 pence and 9 pence in the six months through September, compared with 22.7 pence a year earlier, the Johannesburg-based lender said Friday. “The first half of the year has seen lower average interest rates, reduced client activity and a 22% depreciation of the average rand against pound sterling, compared to the prior period,” it said in a statement. “Capital and liquidity ratios remain robust and are expected to be stable.” The owner of banks and wealth-management businesses is restructuring its U.K. lending operations and planning as many as 210 job cuts -- about 13% of staff -- in order to remove redundant roles and save costs. Investec spun off its asset management unit in March to provide Ninety One Ltd. with more scope to scale-up, while creating a more focused banking unit. Investec Plans to Cut 210 Jobs at Its U.K. Banking Division In line with regulatory guidance in South Africa and the U.K., Investec doesn’t expect to declare an interim dividend, the bank said. In May, the lender scrapped its final dividend and doubled loan-loss provisions as it braced for further fallout from the pandemic.

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A $700 Million CMBS Portfolio Is on the Brink as Malls Collapse

Brief: Bond investors who wagered on a group of malls owned by Barry Sternlicht’s Starwood Capital Group are starting to take losses after the Covid-19 pandemic shuttered stores and wiped out emergency cash reserves that had been keeping interest payments flowing. The commercial-property bond, known as Starwood Retail Property Trust 2014-STAR, is backed by an almost $700 million defaulted loan. It’s cutting interest payouts to investors for a second time, after a reserve account dried up in June and a sharply lower property valuation led to the servicer holding back some funds. The bond’s performance shows how rapidly the pandemic is deepening losses in a sector that was already getting crushed by online shopping. Even the part of the bond deal that was once rated AAA -- meaning bond raters saw virtually no risk of taking losses just two months ago -- have now been cut deep into junk territory. “The experience of the mall CMBS from Starwood is certainly symptomatic of the larger narrative,” said Christopher Sullivan, chief investment officer of United Nations Federal Credit Union. Weakening mall asset fundamentals and fewer willing investors “will present ongoing financing problems.”

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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 September 17, 2020:

  • United States President Donald Trump is urging Senate Republicans to increase the size of the stimulus proposal. Ahead of the upcoming election, President Trump is trying to channel his dealmaker persona that was key to him winning the election the first time around and is keen to reach a deal with Democrats before November 3rd. In a tweet on Wednesday, Trump urged Republicans to “go for much higher numbers” than the $500 billion plan, which was blocked by Democrats last week. Earlier this week, a 50-member group of House Democrats and Republicans put together a $1.52 trillion stimulus plan.

  • In Canada, the new federal Conservative leader who is in self-isolation after being exposed to COVID-19, via a staff member, is blasting the leading Liberal government for the current state in testing. “The Trudeau Liberals have created this mess by refusing to approve other testing methods – despite all our allies having, for months, multiple tests including much faster and invasive methods,” said Erin O’Toole. The opposition leader and his family were turned away from an Ottawa testing site on Wednesday after waiting hours because of capacity issues.

  • In the United Kingdom, seven areas in Northeast England have been placed under strict pandemic restrictions amid a “concerning rise” in COVID-19 infection rates. The announcement was made by Health Secretary Matt Hancock on Thursday and affects 1.5 million people overall, including the cities of Newcastle, Sunderland and Durham. The restrictions will include a ban on socializing outside households, or support bubbles, and a mandated closing time of 10 PM for all bars, pubs, restaurants and leisure centres. The measures will come into effect as of midnight Friday morning.

  • France is following a similar plan as the UK, applying new restrictions soon to the cities of Lyon and Nice, while Marseille could face even tighter measures than those already in place, including the closures of bars and bans on public meetings. The new restriction call was made by Health Minister Olivier Veran and also said the pandemic course in other major cities such as Paris, Toulouse, Rennes and Lille are being watched with concern. “This is now a reality. The epidemic is once more very active in our country. We have to learn to live with the virus for several months,” said Veran.

  • India’s city of Mumbai, considered to be the commercial capital of the country, is set to see new enforced restrictions from its police department. As of midnight local time on Friday, and continuing until the end of September, Mumbai city residents’ movement across the city will be prohibited. The order will stunt any movement in containment zones – sections of the city deemed “hot” spots – except for essential activities. For the rest of the city, certain exemptions pertaining to the last order will be in place. A list issued by state government gives exemptions to government offices, service providers, banks, ports and essential service providers.

  • Ahead of an election next month, New Zealand’s finance minister was left trying to defend the government’s decision on one the world’s toughest COVID-19 lockdowns. The result to the economy was a 12.2% drop in GDP from April to June, compared to the previous three months. The contraction, similar to a lot of other countries in the world now has New Zealand in its first recession in a decade. However, the country’s finance minister, Grant Robertson is pointing to an outbreak in Auckland, the nation’s largest city last month. The situation was brought under control fairly quickly and according to Robertson, highlighted the benefits of sticking with a policy to eliminate, rather than suppress COVID-19.

Covid-19 – Due Diligence And Asset Management

Fink Laments Eroding Corporate Culture in Work-at-Home Era

Brief: BlackRock Inc. Chief Executive Officer Larry Fink said he worries that working remotely results in a lack of productivity and collaboration. “The most difficult issue for all of us is retention of a culture,” Fink said Thursday during a virtual conference hosted by Morningstar Inc. “Cultures were not meant to be done in a remote fashion.” Fink said that although he’s proud of how the New York-based company has performed through the Covid-19 pandemic, he’s concerned about 400 new young hires who joined in July, who have never been to the office. BlackRock, the world’s biggest asset manager, said last month that it would allow employees to work remotely for the rest of the year. While some big Wall Street firms are seeking to get staff back to the office, there are already signs of how challenging that could be. JPMorgan Chase & Co. sent some workers home this week after an employee in equities trading tested positive for Covid-19. JPMorgan CEO Jamie Dimon said this week that he sees prolonged remote work inflicting serious social and economic damage. “Going back to work is a good thing,” Dimon said in a panel discussion Tuesday.

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Nuveen CEO Says Staff Will Not Return to Offices Until 2021

Brief: Nuveen’s staff will not return to its offices until 2021, Chief Executive Officer Jose Minaya said. That decision was “heavily debated” and so far the company has found that its operations have fared well with staff working remotely, he said at the FT Future of Asset Management virtual conference Thursday. Chicago-based Nuveen is the investment arm of retirement savings giant TIAA. “The engagement with clients is the highest ever,” Minaya said. Minaya also said about 4% of Nuveen’s investment staff took voluntary buyouts and the company expects no layoffs for the foreseeable future. The rate is comparable to the company’s turnover for investment personnel in 2019, he said. In May, TIAA offered a voluntary separation program for most of its global workforce. The buyout offer went to 75% of the company’s 16,500 employees. Asset management firms have been closely scrutinizing expenses as investors have flocked to low-cost index funds. The move has cut into profit for some firms and made it difficult for smaller investment companies to compete against behemoths including BlackRock Inc.

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How to Launch a Hedge Fund in a Pandemic

Brief: New manager Hickory Lane Capital Management has launched a $100 million equity long-short fund with seed money from Investcorp-Tages, a joint venture formed in May, as well as capital from outside investors, including family offices and peer hedge fund managers. Investcorp and European asset manager Tages earlier this year consolidated their absolute return businesses to form a new venture that includes customized portfolios, a hedge fund seeding business, and multi-manager portfolios in private debt and other alternative investments. Prior to forming the joint venture, the two firms had deployed $2 billion in assets between them and seeded 42 emerging managers, mostly hedge funds. Hickory Lane founder and chief investment officer Joshua Pearl, who spent nine years investing in stocks as a partner at Brahman Capital, never expected that he’d build his first hedge fund firm in a pandemic. But shortly after leaving Brahman, the spread of Covid-19 shut down economies around the globe.

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The Richest Got $37 Billion Richer During COVID-19, While Millions Lost Their Jobs

Brief: As millions of Canadians lost their jobs during the COVID-19 pandemic and the economy collapsed, the country’s richest got richer — more proof that the economy and the stock market do not always move in lockstep. Canada’s 20 richest have collectively added $37 billion to their fortunes since March, according to a new report from the Canadian Centre for Policy Alternatives. None of them experienced a drop in net worth. David Thomson and family, who’s consistently at the top of the country’s richest lists with their media and publishing empire, led the way with a $8.8 billion increase in wealth. Shopify’s skyrocketing stock price gave founder and CEO Tobi Lutke a $6.6 billion increase. The continued rise in e-commerce helped Alibaba’s Joseph Tsai come in fourth place, with a $4.5 billion increase. Lululemon founder Chip Wilson was next with a nearly $3 billion gain — evidence that the pandemic has kept athleisure in vogue. And 92 year old James Irving, head of the J.D. Irving conglomerate, rounded out the top five by adding $2.1 billion. But as their wealth grew COVID-19 took a record toll on Canada’s economy and the unemployment rate hit an all-time high of 13.7 per cent in May, 1.1 million people are still out of work.  “At the same time as billionaires like Loblaws owner Galen Weston have seen their wealth balloon, front-line workers stocking shelves and scanning groceries at his stores have continued to risk their health and that of their loved ones by coming into work,” said Alex Hemingway and Michal Rozworski in the report.

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Fund Managers Confident of a Recovery in Next 12 Months, says Bank of America Survey

Brief: Following a historic rally from March lows, Bank of America Securities' latest Fund Manager Survey showed that a majority of the respondents believed a new bull market had started. The survey, conducted between September 3 and 10, involved 224 managers with assets worth $646 billion under management. Around 58% percent managers said that the market is bullish, compared to 25 percent in March. However, 29 percent were of the view that the market is still bearish. While 41 percent of those surveyed said that COVID-19 vaccine could trigger higher bond yields, 37 percent said that inflation would be responsible for higher bond yields. On recovery, 37 percent said that it would be U-shaped or W-shaped and 20 percent said that recovery charts would be V-shaped. Around 51 percent of fund managers preferred the balance sheet discipline, whereas 37 percent wanted increased capital expenditure as compared to 13 percent in April. While most managers believed that a vaccine announcement would be made in the first quarter of 2021, some 32 percent were optimistic of an announcement in the Q4 of 2020.Around 84 percent of the managers said they expected global growth to go up within the next 12 months.

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Vast Majority of Managers Still on Lockdown – Survey

Brief: The number of money management firms with employees working from home has barely budged over the summer, a Callan survey released Wednesday showed. Callan said 81% had not opened their offices as of Aug. 15, nearly the same as the 84% that had reported keeping their doors closed in June. The investment consultant's second "Coping with COVID-19" survey report said 44% of the 98 responding firms have not set a date for returning to the office. Of the remaining universe of managers surveyed in August, 36% said they don't expect to go back until 2021. Just 2% of firms picked that time frame in the June survey. A September opening date was named by 12% of August respondents vs. 25% in June; an October date was picked by 7% in the recent survey, compared to 1% in the previous survey; and just 1% of those recently surveyed cited November as the month they might reopen vs. zero in the June survey. By region, more managers — 38% each — in the U.K. and Southeastern U.S. now have staff in the office. The level of office openings was 20% on the U.S. West Coast, 12% in the Northeast and 9% in the center of the country. The offices for the two managers surveyed in the Mountain West are both closed.

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