Stealth Super Slowdown of Fossil-Fuelled Economy

Coronovirus has implications as a control of the economic ebb and flow we can expect from 2020 onwards. From global government efforts to mitigate climate change. A "Super Slowdown" of the "Fossil-Fuelled Economy" is the necessity.

Coronavirus started in December 2019 is now reportedly expected to become a pandemic virus, at least according to some "cheap" expert (as in paid-for) who was rolled-out by BBC News. The globalisation of the virus was the headline-news story of the day. As we will observe, the re-named virus, officially "covid-19" is causing business and economic disruptions.

Coronavirus Distraction More Than "Disruption"

Never mind that being the headline news, but on the same day of 24th February 2020, on which journalist Julian Assange is facing a sham hearing on whether he should be extradited to America. His alleged crime is exposing war-crimes of America via WikiLeaks. Journalistic press-freedom should be paramount concern for the world. This hearing in Woolwich Crown Courts (see below about this Court) is in remote South East London, where he is being held in H.M.P Belmarsh Prison.  (Update here: "Your Man in the Public Gallery – Assange Hearing Day 1" and another from Consortium News with Live Updates From The Hearing Here.)

"Woolwich Crown Court is nothing but the physical negation of the presumption of innocence, the very incarnation of injustice in unyielding steel, concrete and armoured glass. It has precisely the same relationship to the administration of justice as Guantanamo Bay or the Lubyanka. It is in truth just the sentencing wing of Belmarsh prison." Craig Murray 25/02//2020

Yet "Disruption" Evidenced By Stock Markets Tumble

 Also that same day saw US$ 1.7 trillion wiped-off global stock markets due to participants seemingly pricing-in coronavirus becoming "pandemic" category. Allegedly from shareholders selling stocks affected by coronavirus global disruptions. FPM's sister enterprise LineBall Tennis who agitated on Twitter, shown below; had an understanding of what has greater impact on wider population - loss of freedom of press or variant of common flu:

Fake Tweet! Source:Twitter @LineBallTennis, CNN

The crux of the matter as a coronavirus distraction. Our understanding is that Covid-19 is virulent variant of influenza also known as "flu". They both have similarities that both are deadly especially to vulnerable categories, as it is do do with breathing and respiratory systems of our body. Despite the media frenzy and hysteria (as they have to propagandise 24-hour news cycle), the less media-minded people understand that a much greater proportion of people die annually from the flu, than have globally died from Covid-19.

The Importance of Business-Cycles In Forecasting

We at Financial Portfolio Management understand business cycles since the fledgeling organisation's founder initiated a dissertation when at Middlesex Unversity in his youth about business-cycle boom-and-bust, specicially studying the "Kondratieff Cycle" economic cycle factors.

 Professional investor greed and fear means share price valuations are currently trending ever higher at near record levels (see proxy FTSE100 chart below). These dizzy heights justified or otherwise WILL cause speculator trader and real-money investors to expereince wild uncertainties / swings, especially before settling into a secular reversal or possible up-trend. This is a precept about technical chart analysis and mean reversion in market behavioural analysis. Which is more short-term orientated cycles of stocks and stock markets.

Proxy FTSE-100 Near Record Levels. Source: Yahoo, FPM

So what is the fundamental long-term catalyst for putting the brakes on global economic activity? Which is undoubtedly causing catastrophic human-added climate change. The evidence of climate-changing is before our eyes via high definition mainstream television news. We've seen flooding in wetter climates, droughts with forest fires and bush fires in drier climates, and so on. The evidence is numerous. Mainstream news source nowadays bang-on about it' but not as prominently featured 10-20 years back sadly; or even further back when the science and extrapolation of trends first suggested "global warming from anthropic activities".

Slowdown Or Disruption Of Economic Activity

 

Every NATO or UN country will manifest a particular "shock" catalyst which results in effective slowdown of the real and financial-market economies. 'Brexit' as global known enduring phenomenon in United Kingon, as a political movement is designed to curtail economic activities, especially through short-term disruption to free movement of people and goods. Since Brexit is 'not done' despite Tory rhetoric and shock democracy of 2016 referendum, reverberating as "Brexit In Name Only", it is business as usual. FPM as firm Brexit-supporters say sham European Union is continuance of neoliberalism (see FPM's meaning of 'neoliberalism'), but rolled out to the newcomers from former U.S.S.R eastern European countries. When eventually Brexit gets done intra-European Union short-haul flights will be controlled. As necessary to meet 2030-50 set emissions targets for countries. Also as a footnote, UN climate-change summit will hosted by Glasgow, Scotland UK dubbed "COP26".

FPM's Understanding of Neoliberalism in Manifestation - Source: Naomi Klein "The Shock Doctrine" 2007

FPM is expecting further geopolitical fall-out from de-globalisation of the socio-economic political process. As well as Brexit, "America First" and POTUS Trump's border-wall war-cries are all part of stealth-super-slowdown in neoliberal globalisation, but dressed-up as populist nationalism or quarantined cornoavirus. FPM further believe there is global backlash to the liberal democracies of the West, which has prosperously benefited the few at the cost of austerity for the many. Not a political slogan but a fact. Austerity or poverty also rationlise the wider population from affording holidays and travel. Therby reducing economic activity.

Of course referring to the wealth-inequality issue, and circumstances of 2007-09 global financial-crisis. Especially how the ridiculed taxpayer via its government saved banks and other financial institutions from insolvency. After banks' self-regulating profligacy of virtually gambling. And of course regime-change agenda followed by western democracies in the Middle East / Gulf region. To keep the war-machine in these old-power countries chugging along. Again, who is paying for waging wars in the Gulf? Yep, the #stupidelectorate taxpayer! (Stupid Electorate hashtag was coined for some of the UK voters after the December 2019 General Election defeat in UK of Jeremy Corbyn and Labour Party)

"Stealth Super Slowdown" has to happen in the name of saving the planet and environment as we know it. We all acknowledge China's emergence to eminent economic super-power is the future driving-engine of global economic growth in the 21st Century. So by China peddling its soft-power of business-wealth potential, it can perhaps direct a new sustainable way of achieving economic life other than from fossil-fuels based industries. But the shock-impetus towards stealth slowdown of China's powerhouse economy is underway, see below excerpt from Reuters. Reminder that generally China's economy has been growing at double-digit rate or averaging 7% economic growth.

Economic data for January had been fairly upbeat, but analysts have since sharply cut their forecasts for economic growth in China. J.P. Morgan now expects Chinese GDP to shrink 3.9% this quarter, while Capital Economics sees it outright contracting. Reuters 27-Feb-20

Plutocracy Plots With Trump

 
President of the USA Donald Trump: Examplification of Wealth in Politics (Source FPM, Twitter)

[This is an exqusite excerpt and edited narrative used by FundPortfolioManagement to understand explain and interpret the paramount risk of today #Geopolitics other than #climatechange - q.v. footnotes] 

Masterful and arrogant wealth, known as “Plutocracy”, created largely by Government protection of its profits, not content with its domination and influence within a single party of Republicans, had sought to corrupt them both. And to that end had insinuated itself into the primaries, in order that no candidates might be nominated whose views were not in accord with theirs. Such was the political socio-economic system of American democracy that manifested in turns the “Capital Crook” Clintons and “Black Lives Matter” Obama.

By the use of all the money that could be spent, by a complete and compact organization and by the most infamous sort of deception regarding their real opinions and intentions, Plutocracy had succeeded in electing its “Apprentice Trump” creature to the Presidency. There was no longer a need for the middle-men “politiciansRcriminals” at the White House. Plutocracy had a “corruption fund” of millions of dollars with which to mislead those that could be misled, and to debauch the weak and uncertain.

Plutocracy had a marvelous aptitude for political manipulation and organisation, and with President Trump’s malversation they forged a subtle chain with which to hold in subjection the natural impulses of the people. Sometimes the public had been mistaken as to the true character of their Presidential office. “Wealth” or “the interests” was openly for or against certain men and measures.
 
Trump’s first move was to confer with Plutocracy, the high priests of finance, and unfold his plan to them, explaining how essential was secrecy. Plutocracy’s influence throughout commercial America was absolute. Their wealth, their ability and even more the sum of the capital they could control through the banks, trust companies and industrial organisations, which they dominated, made their word as potent as that of a monarch.
 
Trump then transferred these corruption-fund amounts to the private bank of his son-in-law perhaps, who would then become final paymaster. The result was that the public had no chance of obtaining any knowledge of the corruption fund or how it was spent. The plan was simple, the result effective. He had no one to interfere with him. It was a one man power which in the hands of one possessing ability of the first class, is always potent for good or evil.
 
Not only did Trump win the Presidency, but he also planned to bring under his control both the Senate and the Supreme Court. He counted upon having a good majority of the Senate, because there were already fifty-one Republican Senators upon whom he could rely in any serious attack upon corporate wealth. As to the Supreme Court, of the nine justices there were three that were what he termed "safe and sane," and another two that could be counted upon in a serious crisis. Then there would be an easy working majority.
 
Trump’s plan contemplated nothing further than this. His intention was to block all legislation adverse to the interests. He would have no new laws to fear, and of the old, the Supreme Court would properly interpret them. The President was the centre, and from him radiated everything appertaining to measures affecting "the interests".

Footnotes:
Get Ready for the First Shocks of Trump’s Disaster Capitalism -Naomi Klein - January 24 2017

FPM's Macro Economic Fundamental View

FPM awarded disingenuous or mistaken journalists of the mainstream financial press "MSM Murdoch Muppets" degree and incumbent self-serving politicians pandering paymasters as reputedly "politiciansRcriminals" degree. The political economy we find now, at the turn of another new milieu, has given free field to anti-capitalism, trade unions activism and left-wing political radicalism. While we may have generalised about the character of politicians, financiers and media people - we naturally believe that their utilitarianism in an aged mature organisation of socio-economic order, ultimately carved out by politicians and legislators, calls for social and economic revolutions.

Similar to drug-testing of professional cyclists, such as at the recent Tour d'France, where the winning Sky Team (sponsored by Rupert Murdoch's media empire) are avowing full transparency to vindicate that their sponsored winner (Chris Froome) and team ARE probably drug-free; not withstanding lies of statistics! Most of the public and ex-professionals are cynical that anyone in the top-order of cyclist race finishers are NOT on drugs team (unless presumably he was Superman). Onus of proof has shifted: in cycling it is assumed you're a professional vested drug-cheat unless otherwise proven.  

Hence FPM predominantly turn to other sources for fundamental FPM's macro and markets analysis. In the “new alternative media” – NAM, which we contrast with traditional media-mogul owned / funded main stream media - MSM, we like innovative technology enabled internet sources and their breaking-the-set commentators.

Below we feature one such truth-buster, Dr Paul Craig Roberts, originally on NAM “USAWatchdog.com”. FPM discovered this alternative news media via “InvestmentWatchBlog.com”. Other NAM sources we found en route was OpenSecrets.com and PaulCraigRoberts.org. FPM have NOT exhaustively researched the independence of any of these information sources; maybe they are registered with the “Institute for Nonprofit News”. Dr Roberts’s credentials in career as a political economist are impeccable. As Assistant Treasury Secretary under President Ronald Reagan between 1981-82 he has the best perspective on World developments over the last 30 odd years to the present year 2015. Cover picture of his book below:

The public or professionals' informative value from the views of executive financiers "banksters" (or in wider industry of  CEOs and Presidents opinion) are of even less merit: as they generally are the paymasters and orchestrators of a self-serving corrupt crony capitalism. Their common interest is clearly unaligned with the proportionally bigger public at large. Yet using slick highly-paid under-the-radar PR-firms / media strategists / communications in the "dark arts"; and government lobbying to exact their bribed will in industry deregulation etc, towards ultimately lining their pockets, with trickle-down to their sycophantic cronies at expense of unsuspecting and yet trusting gullible public, we are.

FPM are not talking of systemic-wide corruption through their proverbial hats as gibberish rant! FPM principals have understood a similar broken state of capitalism leading up to and after The Great Crash 1929[1]. To validate our crony capitalism of bribes to politicians, in graphic table below we cite ONLY the bribes by the financial sector in the United States of America, referred to as Wall Street, over a roughly 10-year measurement period[2]. The financial sector invested more than US$5 bn in political influence purchasing in the United States over the last decade to 2008. Now just imagine what multiple of US$ dollars that was returned or begotten to the financial sector as payback! Absolutely a backhander or illegal payments for favours.

The Scale of Wall Street and Washinton Crony Capitalism

And now the interview discussing how the world economics and politics really does works, especially in the last 30 years or so, by someone who ought to know have been there at its instigation and observed the playout of that cycle, which is nearing its end, but not with old fashioned market volatility as we've had but with end of fossil fuels and United States Dollar debt:

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[1] “The Great Crash 1929” 1954 by John Kenneth Galbraith

[2] "Sold Out - How Wall Street and Washington Betrayed America" March 2009, by Essential Information, Consumer Education Foundation, www.wallstreetwatch.org

FPM Macro and Markets Themes for 2014

We were writing our top-down investment themes for the year ahead, deliberating in the cold day of light after the exuberance of the seasonal festivities and the New Year celebrations. Then we were distracted by putting into play one of our macro themes: Ukraine. You've seen the headlines since our chart below,which captures CDS premiums to 10 February 2014 – what do you think happened since to this chart?

We like volatility-based asset plays for 2014, especially to confirm the capital markets secular uptrend established from the ‘mirage’ economic recovery contrived by colluding central governments. If the illusory recovery, established on quantitative easing and other accommodative global government policies, has any foothold we seek policy-bucking assets with intrinsic macro-volatility.

Sovereign CDS, municipal-debt-referenced assets and other futures and options based strategies are FPM's vogue recommendation in our bumpy recovery outlook. For example, we recognise sovereign states that we expect to undergo a process of tumultuous evolution before arriving at democratic and financial stability.

We highlight one such country CDS chart below in current trading observations 

Source: Deutsche Bank, note that this chart is before the full escalations of protests into near civil war centred in the capital city of Kiev

Of course there is civil unrest in many other countries simultaneously, including Egypt, Thailand, Venezuela, South Sudan, Greece etc. However, for our asset play recommendation and outlook we point to the destabilising situation in Puerto Rico, which is a self-governing territory of the USA with its inhabitants having American citizenship. Never mind the largest USA municipality debt bankruptcy declaration to date in mid-2013 by Detroit City with US$18 bn debt; Puerto Rico's debt is said to be US$50 -70 bn! This territory's default is expected to have far-reaching systemic consequences, not only because of the size of debt, but due to its tax-advantages making it a widely and popular constituent in portfolios.

While one of our major risk thesis hangs on sovereign-sized implosion, we are also mindful that news is managed in a way as not to cause sensational market panics but drip-fed for shocks to fizzle-out. So when the Puerto Rico default does eventually materialise it would be damp-squib event.

Our joined-up thinking does not think the fall-out from the inevitable hard landing of the Chinese economy will be a mere ripple of a shock. Having analysed the historic levels of national debt accumulated in the Chinese economy in a record time, i.e. twice as much as its GDP in 5 years, unprecedented economic crash is expected. The Western foreign banks credit alone represents nearly a trillion US Dollars, currently at US$709 bn, according to a ZeroHedge article. Of that western banks' creditor total claim against China by European banks represents US$329 bn. While debt default and recovery levels in China maybe uncertain and irrelevant, what is sure is that emerging markets type exodus of hot-money is likely from any liquidity panics. Referring to the second largest economy as an emerging market may seem a misnomer but the likelihood of easy-money fuelled enterprises becoming insolvent would not be a new phenomena in the Far East markets. This writer was at a global bank and topl player in the regions at the the time of the 1997-98 Asian financial crisis and recognises the sequence of crisis. Then it was the crisis of confidence about Thailand's Bhat currency devaluation which was the trigger and catalyst for the region's crisis. For China's bursting bubble scenario some punters are looking at chain-reaction defaults in their Trust Company funding arrangements. There maybe other bubbles such as housing related write-down of investments.

In regards to China, FPM deeply shares the conclusions reached in the aforementioned ZeroHedge comment, as below:

“There is a very good chance that the crisis that began in 2008 is actually not over by any stretch – it is merely moving from one place to the next. After all, the developments discussed above are a direct result of the reaction of the world's monetary authorities to the initial crisis. China's credit bubble and ZIRP in the US and Europe are all children of the crisis and have evidently sown the seeds for the next crisis. As we always stress, we expect that the next major crisis will eventually lead to a crisis of confidence in said monetary authorities. At some point, faith in central banks is bound to crumble and then we will really experience 'interesting times'.”

This leads us to financial Armageddon in slow motion, and gathering of pace in re-rating economic values and principles, a sort of new deal for socio-economic politics. Beginning with the disintegration or greater convergence of the European union, by circa 2017. As we seemed to have hedged our original view for the breakup of European Union, we reserve any conviction trade based on the pivotal referendum on Scotland's split from Europe.

FPM principal has returned from a convalescing break in Braemar, Scotland near the Cairngorm National Park and the Royal Family's Balmoral Castle. See our next provocative post: European Indpendence By The Scottish Bravehearts.

Product Convergence or Incestuous Orgy in Alternatives - Part 2

The growth spurt in alternatives partly reflects the flow in capital to alternative managers from traditional ones, for various reasons diacussed below. Accepting plutocratic model of society, traditional manager’s time-vested and relationship-nested model of conducting a socio-politico driven economy is perhaps on the wane in its creative-destruction cycle. As an example, I am thinking of Fidelity Investment’s non-vogue long-only-securities investing since starting in 1946. Yet Fidelity is still the second largest mutual fund company in the US. In Europe, “Foreign and Colonial” a.k.a. F&C Asset Management plc, the world’s oldest manager of mutual funds, has seen its listed share price fall to a quarter of its value in 2000.   FPM believe innovation in the securities management industry with the newer mutual-fund models of Vanguard Group established in 1976, and the best of breed alternative-managers like Bridgewater, formed in 1975, are bellwethers. Additionally, lets not forget that the traditional brokers and manager’s spawned or trans-mutated into hedge funds and private equity. The ‘hedgies’ tended to be from the broking and agency or prop-trading side (secondary markets), while the corporate finance or investment bank teams did the transactions (primary markets), akin to PE-model. The closing yet untenable link between PE and hedge funds via their cross-holding ownership yet again inexorably questions Chinese walls issues. Our premise that creative-destruction via alternative assets is foreboding or to be emphatic, ill-auguring; and ultimately beneficial for FMTs.

By sampling the Carlyle Group's fund manager transactions, as one of the world's largest connected private equity investors, FPM believes their deals serve as a case study of ‘alternatives’ trends and consequences.   

Double Click to Enlarge Image

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. For instance, it is difficult to distinguish between their strategic and financial investment rationale for partnerships, despite rules of thumb about <20 being="being" financial="financial">30% being strategic investments.

Also weaving an entangled web to the already complex association of cross-holdings between asset managers, is through investments in the hedge fund and/or private equity fund (i.e. via LP shares of the fund). So we are now doubled up on exposure to GP stake and LP stake. For example, as cited in Carlyle’s activity table above, the sovereign fund of Abu Dhabi’s Mubadala Development Company also committed $500 mn to an investment fund managed by Carlyle. While the US$1.85 bn of capital involved in this particular investment is not suggestive of absolute catastrophe to Mubadala, yet considering the aggregated capital investment of other petro-dollar earning countries in the Middle-East region in global financial services, the impact maybe significant wealth destruction! The prototype for which has been set since the 2008 financial crisis. The illustrious manager of Pimco’s bonds funds, Mr William Gross, stated that on a long-term basis, governments are likely to use financial repression, where the rate of inflation is higher than bond yields, to erode the value of sovereign debt over time. The late great Barton Biggs also stated in Mid-2011 that debt devaluation via inflation is less painful than capital destruction as a long-term course. (A prophetic Barton Biggs interview)

 

The cross-holding in financial services, which is rhetorically seen as diversification benefits (and realistically, recycling of petro-dollar revenues etc) can insidiously become risky over-concentration in a financial assets. For example, the overall leverage Company A states on its books can multiply if its cross-held affiliate Company B takes a nose-dive due to its own leverage situation. Company A’s balance sheet asset takes a knock-on hit and deleveraging may be enforced. Remember that in financial services and corporate treasuries assets usually have a charge or liability against them. By putting an asset or capital to intensive use there is less cushioning from the negative domino or chain-reaction effects created by the weakest link in the chain.

Hence why every time there is a financial crisis, after the horse has bolted, so to speak, Basel regulatory capital reserve requirements convene special discussions. And After the financial crisis which unfolded in summer 2007, regulators and bankers from 27 countries gathered yet again in September 2010 to agree on the Basel III accord.

Evidence of a cross-holding implosion scenario: by cutting financing to hedge funds and raising ‘repo haircuts’ (basically ransoming the fund-firms to put up more assets / collateral to back their borrowing / leverage) prime brokers chain-reacted in the ensuing securitised mortgage crisis of 2007.  Amid systemic crisis this credit-squeeze also caused a series of hedge fund blowups, including Carlyle Capital, an affiliate of the Carlyle Group! Also see the case of Anger at Goldman Still Simmers.

Carlyle Capital Corporation, a publicly traded fund which at the time held US$21.7 bn of securities (though it had only raised $300 mn equity through the fund IPO and listing on Amsterdam Euronext exchange!), was served with a default notice from one of its prime brokers after it failed to meet initial demands for just $60m of margin calls in March 2008. This case and FPM’s database shows how hedge fund firms and their funds can blow-up even though they have a large and powerful affiliate. Carlyle Group which had assets of US$75 bn at the time provided only a $150 mn credit line to the fund, which was the limits of its exposure.

FPM reiterates a yellow-flag warning on the prospect of "distressed domino-effect sellers" of hedge fund and manager allocations. The author suggests a growing ‘secondaries’ in alternative manager and fund stakes.  The systemic-effect concern stems from numerous potential risk scenarios according to developments in hedge funds and the tectonic shift in financial services, which FPM monitors as Accumulating Risk Trends (ARTs). Some of these ARTs we follow at FPM are listed at the foot of this article. For example, the development of buyout firms buying stakes in the managers of hedge funds or other affiliations by varying degrees of investment poses threats. The author of this FPM alert experienced first-hand the UK split-capital investment trusts implosion (British version of mutual funds with preferential and other share-classes). Eventually these regulatory body authorised trusts, which were meant to be safe, were investigated and fined for mis-selling despite their hindsight-evident concomitant risks. A fiasco that ensued once cross-holdings multiplied the effect of leverage, leading to debt covenant breaches and fund closures at the height of a general market de-leveraging cycle of 2001-2003.

In extrapolating split capital investment trust experience, FPM foresees a scenario of hedge fund cross-holdings, especially between implicitly leveraged credit management units, turning sour! A domino effect of tumbling hedge- and private equity funds valuation, through LP-share redemptions or private market value (PMV) deterioration in the buy-and-hold GP stakes, would shake the foundations of alternatives if Carlyle experienced capital-flight for “whatever!” As a reminder, the tangled web-effects of Lehman’s cross-holding and counterparty relationships are still reverberating. As with Amaranth blow-up, long-term fund investors and GP stake-holders in it would have ended by receiving little residual value. In FPM research-integrity, we do not understate that Amaranth’s demise benefited the other sides of its failed trades, in the zero sum game.

To really get a domino-effect or contagion from a credit hedge fund blow-up scenario, a bubble first needs to blown. Last wave of fear was triggered in subprime mortage loans, could the next economic impalement come from leveraged loans tied to buyout activity in corporations souring! So noticeable that other large private-equity firms are inevitably buying CLO funds / contracts in a bid to capitalize on a recovery in loan prices (which we at FPM benchmark with S&P/LSTA US Leveraged Loan 100 Index). Carlyle joins Blackstone Group via its credit-arm GSO Capital Partners, and a host of other managers like Deerfield Capital Corporation, in acquiring investment firms or debt funds recently. Also, in June'12, in unison with other PE managers who have opportunistically expanded into traditional and alternative assets, Kohlberg Kravis Roberts, one of the oldest PE business models, purchased an existentialism-hit fund of hedge funds player Prisma Capital Partners. For Carlyle, this trend of PE diversification by adding alternative managers was envisioned and initially developed in 2008. However this attempt to add hedge funds failed when the firm liquidated a pool hurt by investments in mortgage securities as property prices declined and credit markets froze at the onset of the financial crisis. Highlighting such waves of consolidation in alternatives and considering their impact is this premise of this note, and consultancy service that FPM is embarked on. 

A large credit hedge fund blow-up may not cause economic waves but will have ripple-effects on already dented investment portfolios at pension managers, treasuries and other pooled financial savings. Needless to remind industry main-stayers of the widespread panic from LTCM-collapse ensuing from Russian debt debacle of Autumn 1998; similarly Lehman and Bear Stearns collapse from mortgage loans should loom large in memories still! These last two were larger interweaved entities that arguably should not have been allowed to founder by the authorities. While those and MF Global’s bankruptcy reach financial media headlines there are numerous others that will not be heard-of by busy investors. Hedge funds are not only getting larger in assets managed, but also in terms of their numbers, as the sub-text premise of this note indicates. So it stands to reason that some AI managers will become behemoths and others will launch with a strategic partner/s then strive to stay afloat or destruct on stormy / rainy investment days, with or without affiliate’s help.

And as if on cue to validate FPM visionaries: STOP PRESS! Stark & Roth LLC is winding down its multistrategy hedge fund. The firm better known as Stark Investments announced this in a filing with the state authorities in 6^th July ’12 Friday. Also, read about related impact of shareholders of the crisis at broker Knight Capital Group. This thought-paper blogged at end-June!

One of the earliest observation of this cross-holding, in particular via FOFs in-play-transaction trend was in 2007 when TA Associates, a significant specialist player in financial services transactions / deals bought a minority stake in K2 Advisors, which was then a UDS$5.5 bn AuM FoFs. Which had been transformed into a US$10 bn AuM firm by mid-2011. TA Associates was not only acquiring steady and diversified revenue streams but also significant client relationships. Relationships that FPM understand will help identify single-manager hedge funds to be in distress or otherwise put into play as a fund manager transactions. Other positives that FPM notes from cross-holdings, since transactions have myriad and opaque motives would be in the interest of acting as a cabal, coterie or cadre. For example, affiliated M&A arbitrage hedge funds discretely cooperating can effect board changes without breaching “ownership-percent-threshold” and triggering ‘posion pills’ (which more than 2/3rd of S&P 500 companies have as defences against hostile takeovers). 

Finally, as a self-fulfilling flow to FMTs, we consider whether Carlyle will turn their 2011 interest in K2 Advisors fund of hedge funds into a financial or strategic buy from TA Associate and K2 management. Deal terms and intangibles willing.

Accumulating Risk Trends – ARTs in Alternative Investments:

Stability of repo financing arrangements

Limits of advisor / management’s exposure for losses

Effectiveness of reassurance about undrawn credit lines

Chinese wall issues between PE and hedge fund activities

Opaqueness of leverage levels from multiple prime broker use

Heightened government and regulatory environment e.g. new whistle-blower rules

Capacity constraints on performance of larger managers and ‘style drift’

Sub-critical mass of small to midsize management firms

Degrees of manager connectivity in fraud, insider dealing and other breaches

Loan servicing and refinancing difficulties in high interest rate environment

Commodity and leveraged loan products risk – a time bomb!

Mass wealth destruction in assets e.g. bonds via higher dispersed-inflation