An FPM principal noticed this
headline today 10th March 2014: “Carlyle
commodity fund Vermillion's assets halved to below $1 billion” on Reuters.
One may be forgiven for thinking that another hedge fund losing money in a
zero-sum game – no great news! Once again, FPM reading between the lines and emphasizing joined-up thinking scored a humble bullseye in our outlook
perspectives.
Here’s why we hit the bullseye on
the investment-dartboard, and not just on paper: In our 2012 risk assessments
entitled “Product Convergence or
Incestuous Orgy in Alternatives”, published
in two parts (Part
1 & Part
2 here), we highlighted specific and broad risks in the alternative
investment industry infrastructure.
Serving as a review of our
rambling blogs and demonstrating understanding of risk trends we show excerpts
published from the June and September 2012 about orgies in alternatives:
Excerpt 1:
“In literary terms
we think The Carlyle Group’s [CG] activity represents Jacob Marley’s ghosts
showing Ebenezer Scrooge things that have been in the past, are currently and
will come to pass. Carlyle’s activity in asset management deals are complex if
not opaque beyond the reported details…” (Source: Orgy Part
2 published 19 September 2012)
To appreciate the extent to which
FPM have highlighted the evolution of risks in alternative investment industry
- an industry aligned as “shadow banking”
- please DO read Orgy Part 2. In that blog presentation, FPM describe the
industry’s evolutionary risks through its operational infrastructure as “Accumulating Risk Trends – ARTs in
Alternative Investments”’ We cited “Commodity
and leveraged loan products risk – a time bomb!” as one of ARTs
(Accumulating Risk Trends) in Orgy Part 2. Today’s headline about Vermillion
Asset Management is the latest in a string of commodities strategies that
experience hot-money flows. Current Citigroup research shows that commodity
products as a sector, saw a record net outflow of $50 bn in 2013 alone.
FMT Proposal Bullseye about dynamic
creative-destruction has irrefutably and evidently seen many commodities
operators losing money though a difficult leveraged strategy (i.e. that of
using futures and options) and in a challenging global financial environment.
Challenging, not least due to effects of the finally acknowledged onset of
climate change, but also in-play factors like the policy-driven macro
environment. We have identified ARTs contributing to the end of wild-west
commodities investing. FPM have documented these hedge fund strategy risks in
exclusive subscription research called “Impending
Commodities Crash and Amaranth x 10”. Also, FPM have been monitoring and
disseminating this strategy’s risk trends since beginning of October 2012. The
examples of difficulties faced by commodity-focused hedge funds are numerous,
but our first observation and subsequent monitoring was based on an uncompleted
transaction i.e. FMT proposal on Touradji Capital Management LP.
Where FPM missed the Bullseye (i.e. not biased and only indulging in
self-praise) was in calling for completion of Carlyle’s strategic acquisition-interest
in K2 Advisors. K2 is a prestigious fund of hedge funds operator managing US$9.3
bn in assets then, and who was part-owned by another private equity investor TA
Associates, as well as the founding partnership. K2 was majority-acquired by Franklin
Resources Inc [BEN], a deal announced in November 2012. Franklin Resources’s long-only
investment management arm, in the traditional asset management mould, is called
Franklin Templeton Investments with AuM US$731 bn at the time. From industry
sources FPM tentatively understands that Carlyle walked away from the K2 bid-deal,
due to high price asked by its private-equity owner, and Carlyle balking at
taking on K2’s debt obligation. TA’s
sale price and deal term with Franklin Resources were not published.
Excerpt 2:
“We believe the
creative-destruction cycles are quicker in the alternatives space. The relative
rate of growth of assets in hedge funds versus it procreator or predecessor,
closed-end mutual funds, is a stark statistic FPM possesses. Remember,
closed-end long-only funds were the origins of hedge funds, ETFs and multitude
other pooled-assets vehicles. The first such collective investment scheme in
the world is Foreign and Colonial Investment Trust, started in 1868.
Coincidentally, the first fund of hedge funds is known to have started almost
100 years later in 1969…” (Source: Orgy Part
1 published 27 June 2012)
In our Fund Manager Transactions
- FMT investment proposals we had been recommending the vestige brand-value and
other corporate existentialism embodied in F&C Asset Management Plc [FCAM].
FPM have profitably held the London-listed asset manager in our wealth
management portfolio. Significantly, F&C traces its history to 1868 with
the founding of “Foreign and Colonial
Investment Trust”, the world’s first publicly listed investment pool.
FMT Proposal Bullseye was evidenced when in January 2014, BMO
Financial Group [BMO], the parent company announced the acquisition of F&C
for £708 mn / US$1.2 bn. Notice that BMO (short for Bank of Montreal) is
Canada’s oldest bank, established in 1817 and operating in Britain since 1870.
The bank employs about 45,000 staff globally and has divisions focusing on retail
banking, wealth management and investment banking services.
Other reviews of FPM activities and transactions available on request
to Kristian via kks@FundPortfolioManagement.com.
FPM does not represent itself on websites other than this blog site. Please
email us for further information.
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