THE DAILYALTS PLAYBOOK

January 6, 2020

Today, the DailyAlts Playbook talks zero-fee hedge funds, where REITs go from here, our chat with Daniel Rasmussen, and the CFTC manhunt for a crypto manager and his client’s $147 million.

PRIME OVERVIEW

IRAN WOES: Markets continue to monitor developments in the Middle East, where Iran raised its anti-U.S. rhetoric against the United States. On Friday, markets sold off after President Trump authorized a strike that killed Iranian commander Qasem Soleimani. Over the weekend, Iran’s leadership announced it will no longer abide by the 2015 uranium enrichment limits under the nuclear deal. Meanwhile, Speaker of the House Nancy Pelosi plans to introduce and vote on a war powers resolution that would limit Trump’s military activity around Iran.

COMMODITY SURGE: Gold, oil, and palladium prices are surging this morning as concerns about a potential war accelerate across the media. Brent crude popped above $70 for the first time since early 2019. Gold prices pushed to their highest levels since 2013. Goldman Sachs said Sunday night that gold has more move to run in the face of ongoing flight to safety and concerns about growing geopolitical tensions.

GETTING PASSIVE: Should a selloff accelerate into January, the question is what sideline money will come in and offer support to the markets. The question warrants consideration considering the ongoing passive investing boom. The Financial Times notes that Europe has caught onto the craze with more than than $1 trillion flowing into ETFs in the region for the first time ever. Active management continues to struggle compared to indexing, according to the most recent data. According to FT, nine out of 10 pan-European equity funds fell short of a passive benchmark in the 12 months leading to June 30, 2019.

MORNING MOMENTUM

PRIVATE EQUITY REPLICATION: Dan Rasmussen, founder of Verdad Partners, sat down with DailyAlts recently to discuss his strategy and what he sees for the private equity industry in the year ahead. He explains why the current environment for PE is much worse than it was in 2006, how to replicate private equity performance, why credit quality has deteriorated, why industrials are intriguing, and more. This was our first Sunday interview of 2020, and one that should provide an eye-opening perspective about the state of dealmaking in today’s current environment. Read it here. 

BYE BYE FEES: In 2019, we watched brokers engage in a rabid race to zero-commission fees for trading (with Vanguard joining in last week). But what about zero management fees for a hedge fund? That radical plan is a reality at Parplus Partners. The hedge fund’s founder, James Carney, said that his firm will charge no management fee and will only receive a performance fee if it tops the S&P 500 stock index. Parplus Partners operates a volatility strategy.

A RECORD ON TAP: Remember grim-faced, dogged Steve McQueen chasing a couple of goons up and down the streets of San Francisco in that iconic car chase in Bullitt? The car McQueen drove in that chase, a green 1968 Ford Mustang, is up for auction at Mecum and may command a record price of as much as $4 million for Sean Kiernan, its owner. Here’s more.

ACCRUED INTEREST

THE TURNAROUND: Pershing Square Capital Management had a 2019 return of 58.1% thanks to timely bets and strong activist efforts at companies like Chipotle Mexican Grill. That return was also double the return of the S&P 500. In a banner year for passive investors, Ackman showed that activist investing can work with the right formula. This was a long-overdue performance for Pershing Square, which hadn’t seen a positive return in four years.

THE COLLAPSE: A new study by Hedge Fund Research shows that more than 4,000 hedge funds have liquidated over the last five years. The study comes as the industry faces more closures than launches for a fifth consecutive year. The study also coincides with breakneck outflows for 2019. Over the first 11 months of 2019, investors pulled $81.5 billion from hedge funds, according to eVestment. That figure was more than double the amount withdrawn in all of 2018.

CARRIED INTEREST

DATA CENTER GROWTH: Green Street Advisors analyst David Guarino says that data consumption trends will accelerate. This provides support to his thesis that data center demand will increase. It also signals that investors will continue to pour capital into data center REITs after a blowout 2019. From January 2019 to November 2019, the five data center REITs averaged a total return of 41.13%, according to Nareit. That figure also represented a sharp turnaround from the 14.11% loss realized in 2018. Here’s more on that trend.

WAIT – HOLD UP: Artificial intelligence has generated incredible interest across the investment world. Venture capital groups are pouring money into new projects. Back-office managers worry that the robots will come for their jobs. And headlines brag about how AI is beating the human eye at detecting cancers and other serious conditions. But is the hype worth the risk? LA Times writer Liz Szabo outlines the ethical challenge ahead for AI and the balance between the pursuit of financial gains and the Hippocratic Oath.

QUOTES OF THE DAY

“Real estate markets enjoy low vacancy rates and a balance of new supply and growing demand, supporting rent growth and REIT earnings in the year ahead. Watch out, however, for rising vacancies or slowing rent growth.”

That’s NAREIT Senior Vice President for Research and Economic Analysis Calvin Schnure discussing real estate and his outlook for 2020. Today, we discuss the recent outlook from NAREIT and explore where opportunities lie in the year ahead. Our Real Estate analyst Tim Melvin digs into the number sand explains why Lending REITs are looking quite attractive.

“Geopolitical risks had really moved to the back burner. Last night was a wake-up call that they are a factor that we may need to contend with in 2020.” 

That was Chris Zaccarelli, CIO at Independent Advisor Alliance, the day after the Trump administration killed the Iranian general. The decision to strike has led to a swell of concern around international relations and geopolitical tension. But what Jon Shazar at DealBreaker asks is why someone didn’t inform Trump that this strike could tank the stock market? Stock market performance has been a source of great pride for this administration – so it remains unclear if this topic was ever discussed.

ACTIVE MANAGEMENT

SHORT DANISH BANKS: Marshall Wace has taken a short position against Danske Bank. The Danish FSA said that the firm has a short position that reaches the threshold of 0.5% of issued shares. Danske Bank has faced public backlash in recent years over a massive money-laundering scheme that rocked Denmark’s largest bank. In addition, the company continues to face ongoing pressure from negative interest rates. Marshall Wace is the first company to pass the 0.5% threshold, according to the Danish FSA. At worst, this story gave us a chance to put pictures of reindeer on DailyAlts.com.

STAYING BUSY: Headland reports that UK managers are increasingly turning to activism. In a study separating “pure-play” activism from “conventional active managers,” the firm found that conventional managers set 55 public demands in 2019. That was an uptick from 35 in 2018, and just 13 five years ago. Here’s more on what is driving the activist pressure.

LIABILITIES

SWISS SWINDLE: The SEC and Department of Justice have charged Blacklight SA and its founders over a variety of pump-and-dump schemes. The charges center on micro-cap stock trading over a six-year period. Kenneth Ciapala, the firm’s founder, was arrested in the United Kingdom. The U.S. government seeks his extradition. Here are the documents from the Southern District of New York.

HE’S GONE MISSING – Cryptocurrency scams and frauds dominated 2017 and 2018. Perhaps that’s why Tendayi Kapfidze of Lending Tree recently called Bitcoin a Ponzi-like/pyramid scheme. Well, here’s an interesting story. The CFTC has filed a motion in with the New York Southern District Court asking for help in its action against fraudulent crypto firm Control-Finance Limited and its Director Benjamin Reynolds. You see, the CFTC attempted to digitally serve Reynolds without success. The agency called him, emailed him, and probably sent someone to peak in his window. He’s gone. They can’t find him. What was his crime, by the way? He allegedly misappropriated $147 million in Bitcoin.

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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.