THE DAILYALTS PLAYBOOK

January 3, 2020

Good morning, and welcome to the launch week for the DailyAlts Playbook.

Each morning, we take a quick dive into the major stories shaping the universe of alternative investments. Please signup for the daily letter and send it along to others seeking insight and education in the alternatives industry.

Today, the DailyAlts Playbook talks about tensions in the Middle East, the fall of hedge fund fees, capitalists without capitalism, and a REIT’s rise of Boise, Idaho.

PRIME OVERVIEW

GAMECHANGER: Yesterday, we launched the DailyAlts Playbook with a statement from professor Inderjeet Parmar, who predicted that geopolitical tensions would impact every corner of American politics in 2020. His prediction didn’t take long to produce evidence. This morning, the U.S. dollar fell to a nine-week low, and gold hit a four-week high after the United States killed Maj. Gen. Qasem Soleimani, Iran’s top military commander at an airport in Baghdad, Iraq last night. The Pentagon confirmed the drone strike that killed the General – widely considered the second most powerful man in Iran – at a time that tensions between the U.S. and Iran are incredibly high. Soleimani led a special forces unit for Iran’s Revolutionary Guards.

OIL PRICES SURGE: WTI and Brent crude prices surged – adding nearly $3 this morning on news of the strike and Iran’s prompt response. Iranian Supreme Leader Ayatollah Ali Khamenei vowed that his country would respond with “severe revenge” for the death of Soleimani, whom he dubbed a martyr. Soleimani’s death comes just two days after Iranian-backed militia attacked the U.S. embassy in Baghdad. U.S. politicians have condemned the killing, warning that it will escalate tensions in the regions. Others worry about further erosion of relations between the two countries (as if they haven’t been paying attention since 1979). Only one thing is certain – that everyone – everyone on CNN, CNBC, MSNBC, and other networks will consider themselves experts on Middle Eastern history, military tactics, and geopolitical strategy.

MORNING MOMENTUM

CHINA OFFERS SUPPORT: Tensions between the U.S. and Iran have the world upside-down this morning. The news has limited the upside offered by China’s latest support effort for its economy. China announced Wednesday that it would slash bank reserve requirements. The decision will release roughly 800 billion yuan (roughly $115 billion) in liquidity into the Chinese economy. China’s central bank will slash the reserve requirement on Monday by 50 basis points to 12.5%. This is the eighth time that the People’s Bank of China has cut the reserve requirement ratio since early 2018.

HEDGE FEES FELL IN 2019: Yesterday, we discussed how hedge funds had their best performances since 2013; however, active investing dramatically trailed the S&P 500 and passive investment. Naturally, performance and management fees took yet another hit, according to Eurekahedge. The research firm said that the average performance fee for North American hedge funds from an average of 16.24% to just 14.81%. The figure shows a consistent decline in the post-crisis world. Back in 2009, the average NA performance fee was 18.39%. Asian hedge funds saw an even greater decline.

CAPITALISTS WITHOUT CAPITALISM: While the Federal Reserve discusses repo market support and low-interest rates with today’s release of December minutes, a curious report from Bloomberg in December warrants attention. John Authers highlights the incredible rise of “intangible companies.” Roughly 40% of pubic stocks in the United States have negative tangible book value – which means they don’t have enough tangible assets to pay off their debt. That figure is up from 15% about 20 years ago. Vincent Deluard of INTL FCStone has dug into the numbers – and he’s found that “a “negative-value” fund, composed of the shares of companies with negative tangible book value, would have beaten the main U.S. stock market, represented by the Russell 3000 Index, by 24% over the last 20 years.” Dullard suggests that the results have been driven by financial engineers and private equity investors selling assets and using leverage – and/or the de-materialization of capitalism.

ACCRUED INTEREST

SMART BETA SURGE: Smart Beta ETFs saw a huge surge in net inflows in November, according to ETFGI. The firm shows that $9.72 billion went into Smart Beta Equity ETFs/ETPs. The inflow brought total Smart Beta assets to a record of $835 billion, according to NASDAQ. At the end of November 2019, there were 1,351 smart beta equity ETFs/ETPs, with 2,530 listings, assets of $835 billion, from 167 providers on 41 exchanges in 33 countries,” the report SAID. “Following net inflows of $9.72 billion and market moves during the month, assets invested in Smart Beta ETFs/ETPs listed globally increased by 4%, from $803 billion at the end of October 2019 to $835 billion.”

YOU SAY POTATO; I ALSO SAY POTATO: According to the United Van Lines’ 43^rd Annual National Movers Study, Idaho saw the highest percentage of inbound migration among states with more than 250 moves with United Van Lines: 67.4%. It’s the first time Idaho has held this title than 25 years. People have been leaving California in droves. In Boise, it turns out that Idaho residents don’t care much for their new neighbors arriving with CA Plates. However, this could be positive news for REITs like City Office, which has a presence in Boise. The REIT also has exposure to high-growth towns like Portland, Austin, San Diego, Houston, Tampa, and Atlanta. Meanwhile, for the second straight year, more residents left New Jersey than any other state. Roughly 68.5% of New Jersey moves were outbound.

CARRIED INTEREST

TELL THEM THEY’RE SAVING THE WORLD: Millennial investors consider ESG metrics to be the top priority when examining investment opportunities by a wide margin, according to a poll by deVere Group. A survey of 1,125 Millennial investors between 20 and 40 found that about 77% wanted ESG considerations more than they cared about anticipated returns. Just 10% said that financial returns were the most important metric. Past performance sat at 7%, while risk tolerance sat at 4%. Finally, “tactical allocation” was the most important factor for just 2% of respondents. Does anyone else see the incentivization for “greenwashing” practices here? As we noted this week, Millennials are also choosing Bitcoin over Berkshire Hathaway.

PE GIANTS to DISCLOSE ESG: The Financial Times reports that private equity giants like KKR and TPG plan to disclose their ESG credentials this year. The two firms – with a combined $330 billion in AUM – has signed on board to provide principles outlined by the World Bank’s International Finance Corporation (IFC). The IFC has emerged to reduce anxiety about greenwashing and to provide necessary standards to ensure that invests get “what they hope for” when committed money to these standards.

QUOTES OF THE DAY

“One employee of the company, who is under investigation by the authorities, has admitted having falsified the records. He confirmed that he acted in his individual capacity, without the knowledge or the authorisation of the management of MNG Jet.”

MNG – the private jet leasing company – has filed a criminal complaint against one of its employees. The charge: That this staff member helped former Nissan CEO Carlos Ghosn’s now-famous escape from Japan. Financial media is still gathering information about the escape. Ghosn fled Japan while awaiting trial for charges that include financial fraud and breach of public trust.

“This year has not worked out as planned.”

That’s Russell Clark of Horseman Global Fund. The hedge fund saw a 35% drop in 2019 after aggressive short positions failed to boost profits.

ACTIVE MANAGEMENT

RAINING IN BALTIMORE: Alden Global Capital has spurred concerns all across the United States after the activist fund scooped up a 32% stake in Tribune Publishing in 2019. The fund is notorious for cutting staff and costs at papers like the Denver Post. Now, one paper – the Baltimore Sun – is trying to escape its grip from Alden Globa. Several journalists at The Sun are trying to find local owners to take over the 183-year-old publication. The Baltimore Business Journal says that the journalists have attempted to spur interest from buyers, including the Abell Foundation, the Goldseker Foundation, developer David Cordish.

CONCESSIONS: Insurance giant Argo Group International Holdings announced yesterday that it would appoint an additional board member who received a nomination from Voce Capital Management. The firm will also provide permission to the fund to seat two new independent directors to the board in the year ahead. The announcement follows news that five of its directors – including its Chairman – plan to depart Argo at this year’s annual shareholder meeting.

LIABILITIES

PONZI, MISSISSIPPI: A federal lawsuit is targeting Trustmark National Bank over its role in “doing nothing” to stop the largest-ever Ponzi Scheme in Mississippi history. The federal receiver attempting to claw back part of the $100 million lost in Lamar Adams scam is suing Adams’ personal bank. The lawsuit makes a pretty glaring accusation against the bank. After Trustmark confirmed that Madison Timber was a Ponzi scheme and confronted Adams, it gave Adams time to move Madison Timber’s business elsewhere and even agreed to extend Adams’s line of credit to make the move easier,” the lawsuit states.

BOOTSTRAPPING (PEOPLE ON THE MOVE)

• Standard Chartered announced Rene W. Keller would become CIO, Corporate, Commercial & Institutional Banking (CCIB). Based in Singapore, he will report to Dr. Michael Gorriz, Group CIO. Keller will be responsible for the business’ technology strategy, architecture, and delivery value chain that will drive strategic business outcomes.
• Former Starling Bank co-founder and CTO Mark Hipperson is preparing a January launch for a new cryptocurrency startup dubbed Zyglu. Hipperson, who left Starling in 2016, has been working on the new venture since late 2018 and is currently awaiting an e-money license from the Financial Conduct Authority.
• Hamilton Lane announced that Atul Varma will become CFO and Treasurer starting next Monday. Varma will succeed Randy M. Stilman, who retires after 22 years in the role. Varma has two decades of leadership experience in financial services. He was most recently Head of Business Strategy and Chief Financial Officer of Wealth Management at The Bank of New York Mellon Corporation. Meanwhile, Stilman will remain at Hamilton Lane into 2020 to help ensure a smooth transition of his responsibilities.

Read more People on the Move at DailyAlts.com.

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ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.