THE DAILYALTS PLAYBOOK

January 9, 2020

Today, the DailyAlts Playbook talks the largest debt swell since the 70s, Black Swan babble, more hedge fund returns, insider trading codes, and AI’s shift into stock-picking.

PRIME OVERVIEW

ALL IS WELL: This morning, markets continue to act like this week’s tension between Iran and the U.S. almost didn’t happen. Futures pointed toward a triple-digit open, while analysts state that President Trump’s statements yesterday on Iran helped calm jitters. Trump hinted Wednesday that Iran appeared to be “standing down” after it fired dozens of missiles at American bases in Iraq. Today, investors will instead turn their attention to a busy day of economic data including jobless claims. In addition, we’ll hear speeches on monetary policy from Chicago Fed President Charles Evans, Minneapolis Fed President Neel Kashkari, New York Fed President John Williams, St. Louis Fed President James Bullard, and Richmond Fed President Tom Barkin.

ELECTION 2020: Meanwhile, we turn to the Financial Times because it’s nice to have a foreign perspective on soap opera that will be the 2020 election. Ahead of primary season, President Trump has received a bump from voters on his economic policy. FT reports that more than half of American voters believe that the Trump economic agenda has helped the U.S. economy. Roughly 51% of Americans say that the policies “”strongly” or “somewhat” helped the U.S. economy. That’s the first time that FT has reached a majority since it began its polling in October.

THE FUTURES FRONTIER: The Financial Times reports that JPMorgan applied to take over control of China’s joint venture in its futures market. The firm owns 49% of the Guangdong-based JPMorgan Futures. This has been a long-time coming as firms press and press for China to liberalize their markets and allow foreign ownership. Just UBS has full ownership of its futures unit, as everyone else has relied on JVs to enter the market. FT reports that China will likely deregulate hedging tools for investors in 2020.

MORNING MOMENTUM

MORE MONEY, MORE PROBLEMS: With Iran in the rearview for the moment, economists are turning to the slower-moving crisis. This week, the World Bank issued its biannual report Global Economic Prospects. The group warned about the latest wave of global debt to hit the markets since 2010. The report calls it “the largest, fastest and most broad-based increase” in global debt since the 1970s. WB director Ayhan Kose warned that similar waves of debt accumulation “tend to have unhappy endings.” The report states that even though positive trade moves could help the world, “the balance of risks is to the downside.” Read it here.

UPSIDE DOWN: Turning to South America, the Financial Times outlines the results of President Mauricio Macri 2019 loss in 2019. The Peronist victory of Alberto Fernández hammered several hedge funds that had bet on Macri’s victory. Autonomy Capital, for example, ended 2019 down 5.7%. Robert Gibbens – the fund’s founder – told FT in 2018 about his ambitious call that Argentina would become a “normal country” within 15 years. The fund lost 16.3% alone in August after the primaries. Other funds to lose money on the political shift in Argentina included Crispin Odey’s European Fund.

VENTURE BOOST: It was a busy decade at venture capital firms. Crunchbase says that between 2010 and 2019, roughly $1.5 trillion spilled into VC deals. The bulk of that figure came from an acceleration of deal-making over the last few years, the report says. The report states that deals came in at $322 billion in 2018, with a huge uptick in late-stage investment. Crunchbase expects that 2019 VC deal-making will total $294.8 billion, which would be the second-largest figure on record.

ACCRUED INTEREST

PREDICTING THE FUTURE: Artificial intelligence has a lot of promises in healthcare. It also has a lot of risks. So, naturally, fund managers want to see how well it can pick stocks instead. Deutsche Bank’s DWS Group just roughly a 25% stake in Arabesque, a British tech firm that uses AI to try to predict stock price movements. As if fund managers didn’t have enough headaches trying to beat their benchmarks, now they have to go up against WALL-E.

BLACK SWAN BABBLE: There’s something about CNBC editors, who don’t understand what a Black Swan is. This morning, Dave Ernsberger at S&P Global told CNBC that the biggest Black Swan event for 2020 could be that the Straits of Hormuz shut down, pushing oil to $100 per barrel. This isn’t something unexpected. A lot of people see this as a possibility. It’s not something that is extremely unlikely from a statistical probability. Three properties fit the definition, and this event doesn’t fit as a Black Swan. Not long ago, CNBC interviewed Mark Spitznagel, who trades with a strategy looking to capitalize on rare events. Rather than let him talk, CNBC analysts spent 10 minutes just dreaming up their own Black Swan events, while he sat in silence and listened to their prophecies. Nassim Taleb’s book The Black Swan: The Impact of the Highly Improbable is available on eBay for $4.00 used.

CARRIED INTEREST

2019 WINNERS: Hedge Fund Research says that hedge funds just had their best year in a decade. Based on the broader sentiment and the fact that the industry trailed their benchmarks, the question is whether anyone is celebrating. The HFTI Fund Weighted Composite (FWC) ended the year up 10.4%. That was the highest level since it hit 20% in 2009.

PERFORMANCE RECAP: Yesterday, we discussed the 2019 performance of several prominent managers. Today, we have a few more performance figures that trickled out across the news wire over the last 24 hours: 

• BlackRock’s Obsidian hedge fund returned more than 13% last year. The fixed-income fund struggled in August, which led to it lagging the S&P and the bond market.
• Bridgewater Associates Pure Alpha II fund slipped 0.5%, while its Pure Alpha fund was flat last year. This ended an 18-year winning streak for the funds.
• Dan Sundheim’s D1 Capital Partners rallied to a 22.4% gain on the year. It likely could have done better, but its investment in e-cigarette giant JUUL held it back.
• Finally, it was a huge year for Prescience Point. Despite the S&P’s rally last year, Eiad Asbahi’s flagship fund returned a whopping 104% last year.

QUOTES OF THE DAY

““I think it is almost inconceivable that this is the end of Iran’s reaction.”

That’s Jarrett Blanc, a senior fellow at the Carnegie Endowment for International Peace. Blanc joined CNBC’s Capital Connection to discuss recent events between the U.S. and Iran. His prediction: This isn’t over.

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time.”

That’s Bank of England governor Mark Carney warning that the world is heading into a “liquidity trap.” Carney worries that central banks around the globe don’t have the tools to stave off a future recession. It’s an interesting statement because it directly contradicts Ben Bernanke’s argument last week that the Fed has enough ammunition to prevent a recession.

ACTIVE MANAGEMENT

ELLIOTT PUSHES BACK: Elliott Advisors isn’t interested in Capgemini’s demands. The activist fund refuses to tender its stake in Altran Technologies – which received a $4 billion bid from Capgemini. The standoff is simple. Capgemini will argue that shares will fall if Elliott doesn’t accept the deal. Elliott – with its deep pockets – can handle a court case and use the time to seek a better deal. Elliott owns a 14% stake in Altran. The Altran board, however, supports the offer.

NO DEAL: Carl Icahn isn’t over the finish line yet with Xerox and HP. He might be back at the starting line again. HP once again rejected an unsolicited offer from Xerox that would create the world’s largest printer company. Icahn owns a 10.8% stake in Xerox and a 4.2% stake in HP. This week, Xerox secured $24 billion in financing for a possible deal.

LIABILITIES

B-DUBS BLUES: Ex-Goldman banker Bryan Cohen has pled guilty to insider trading after he sold confidential information and passed it on to a Swiss-based trader. The 33-year-old banker used burner phones and spoke in code to let people know that Buffalo Wild Wings had become a takeover target. How very Gordon Gekko: “Blue Horseshoe Loves Nashville Hot Chicken Sandwich.”

STILL MISSING: The CFTC still can’t find Benjamin Reynolds, who appears to have disappeared alongside $140 million in cryptocurrency investments.

BOOTSTRAPPING

• Hedge fund lobbying group Managed Funds Association (MFA) has named Bryan Corbett as its new CEO, He replaces Richard Baker, who led the group since 2008. Corbett’s most recent role was a partner and managing director at The Carlyle Group.
• Alliance Bernstein has hired two new leaders within the organization. The firm has hired Alexander Hoffmann as head of its global financial intermediaries. It also named Markus Rottler as director, sales in DACH (Germany, Austria and Switzerland).
  
• The Ontario Municipal Employees Retirement System has a new chief pension officer. The firm named Annesley Wallace to the position this week. Wallace has been with OMERS for two years. She previously served as a managing director at OMERS Infrastructure. Finally, she sits on the boards of Infrastructure Ontario, Bruce Power, and Alectra Utilities.

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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.