THE DAILYALTS PLAYBOOK

January 10, 2020

Today, the DailyAlts Playbook talks “Clown Airplanes”, Russian and Chinese-focused funds, AQR staff cuts, Brexit Beginnings, and an offer for our new readers.

PRIME OVERVIEW

BULL MARKET: The Dow Jones is pushing through the 29,000 level this morning. The Futures projected a 77-point gain ahead of today’s jobs report for December. This morning, economists anticipate that the U.S. added 160,000 new positions last month. Beth Akers of the Manhattan Institute projected that U.S. job growth would increase by 200,000 new positions, wage growth would increase, and the unemployment rate would remain flat.

INTERNATIONAL RESPONSE: Video and new reports suggest that Iran accidentally downed a Ukrainian plane that left Tehran on Wednesday morning with 176 passengers on board. “If the preliminary assessments prove accurate, the diplomatic fallout for Iran will be significant in the short term,” analysts at Eurasia Group wrote yesterday. Most of the passengers came from Iran or Canada. The crash occurred just a few hours after the country launched a missile attack at Iraqi bases housing American troops. That said, the Atlantic’s senior editor David Frum – and many other members of the media – blame President Donald Trump for Iran’s downing of the plane.

THE BREXIT BEGINNING: The House of Commons voted in favor of Prime Minister Boris Johnson’s plan for Brexit. Now, the path is clear for the United Kingdom to exit the European Union by the end of the month. The U.K. is now poised to exit the EU on January 31. The reality is – we’re really just getting started with the drama. Now, Britain must start new trade negotiations with the European Union. On Thursday, Global Capital issued a warning to investors: Prepare for a “protracted period of scattered and grueling negotiations,” author Ross Lanchester said. London and the UK are going to have to prove that the EU needs them when discussing a possible trade deal in a post-Brexit world.

MORNING MOMENTUM

“THIS AIRPLANE IS DESIGNED BY CLOWNS”: Not even a great fiction writer can come up with internal emails released by Boeing. The company released a new batch of messages from employees about the 737 Max, problems around its simulators, and how they aimed to skirt regulators. “This airplane is designed by clowns, who in turn are supervised by monkeys,” wrote one pilot in 2016. And that’s just one of the emails. U.S. Representative Peter DeFazio, who is overseeing a Congressional investigation into Boeing, called the emails “incredibly damning.” This morning on CNBC, Andrew Ross Sorkin argued that the company was slow-rolling the release of these emails. He raised concerns about the company culture, the timing of the emails, and what exactly has been happening at this company over the last year. Phil LeBeau at CNBC later explained that Boeing had a culture that aimed to avoid simulator training to make it more attractive to airlines. One employee asked another: “Would you put your family on a Max simulator trained aircraft?” The second employee simply says, “No.”

PLAYING DEFENSE: U.S. lawmakers have finished a massive defense bill to address new threats from Russia, China, and North Korea. Lawmakers reached an agreement on a $738 billion bill for the Department of Defense. The bill will include provisions to address hypersonic missiles, sanctions against Turkey over its recently purchased Russian missile defense system, and pushes for a tough response against North Korea’s nuclear program.

TAPPING INTO ALTERNATIVES: We’re finishing up our debut week strong with Friday’s issue of the DailyAlts Playbook. It’s a busy time for private equity, real estate, and the banking sector. With markets sitting at all-time highs and interest rates staying lower for longer, I recommend you check out our research around these three sectors. DailyAlts analyst Tim Melvin will be launching his REIT-focused letter in February, and it’s free for two months. Meanwhile – he will be migrating his Community Banking Letter – which has never had a losing recommendation in six years – to DailyAlts that same month. Sign up, with no obligation, today. Then, look out for our Private Equity Replication letter later this quarter. Visit here to sign up.

ACCRUED INTEREST

BOUNCING BACK: The managed futures subset of the hedge fund sector doesn’t generate too many headlines. But this morning, we’re breaking down the Societe Generale CTA Index. Managed futures saw the best year since 2014, added 6.24% on the year. That said, the subset experienced a small dip in December – falling 0.65%. A release notes that gains in December came from higher energy prices and stronger performances from the Pound and Mexican Peso. However, weakness came largely from the bond markets, which slid in the final weeks of the year.

SECRET TO WEALTH: How are China’s ultra-wealthy families building and keeping their wealth? The Strait Times reports that wealthy Chinese families are twice as likely as their global peers to make money in real estate. UBS authored a report saying that 30% of surveyed respondents said they generated their wealth from property. The number two and number three sectors, respectively, were consumer discretionary companies and industrials. UBS also reported that the combined wealth of Chinese billionaires fell by 12% in 2018 to a little less than $1 trillion.

DUMB QUESTION: An Economist article for tomorrow’s edition asks a question with the most obvious answer possible: Why have so many of America’s financial elite left Greenwich, Connecticut? In fact, they didn’t ask a question, the editors simply answered its explanative headline by stating in the sub-head “Higher state taxes and hedge funds’ fading fortunes have taken their toll.” Good thing the state keeps raising taxes, that’ll solve the problem.

CARRIED INTEREST

GLOBAL BOOM: This week, we’ve discussed 2019 performance from the top hedge funds in the United States and Europe. Now, let’s take a step back and look at global performance. New data from eVestment says that the global hedge fund industry saw returns of 9.74% in 2019. That figure was bolstered by a 1.75% gain in December. Last year was the best annual performance for the industry since 2013 (+12.58%). eVestment says that the top-performing funds centered on Russia, China, and Brazil. Russia-focused hedge funds reported gains of 26.69%. China-focused funds added 23.15%, and Brazil-centered funds closed the year up 21.68%. These gains represented sharp reversals from the losses these country-focused funds saw in 2018.

CUTTING STAFF: AQR Capital has $186 billion under management. Its $2.1 billion Style Premia Alternative Fund lost 8.2% in 2019. Now, the company is cutting its staff for the second straight year. Bloomberg reports that the firm will cut between 5% to 10% of its staff after outflows hit the company again this year. However, the New York Post cites an unnamed source who compared the cuts to carnage. “It’s bad here,” the source told The Post. “We’re hearing 15-20 percent of headcount getting chopped.” AQR isn’t the only quant shopping cutting staff. The Post also reported that WorldQuant was cutting 130 team members as well.

QUOTES OF THE DAY

“We believe evidence of the impact of climate risk on investment portfolios is building rapidly.”

BlackRock has faced a lot of scrutiny over climate change from activists like Extinction Rebellion. Now the world’s largest asset manager with $6.8 trillion under management has signed onto the Climate Action 100%, a pact pushing for large emitters to take action on climate change. The firm joins about 370 other global investors that include HSBC Global Asset Management and CalPERS. The quote above comes from BlackRock spokesman Farrell Denby, who responded to questions about its decision by MarketWatch.

“There’s a lot of emails. Sometimes people can wipe them… with a cloth, and you can never find emails, remember?”

That’s Joe Kernan on Squawk Box this morning being Joe Kernan. The top discussion this morning between the three hosts centered on Boeing’s emails. After Andrew Ross Sorkin questioned the timing of the emails and culture of Boeing, Kernan lobbed a small grenade at Hillary Clinton because it was 6:07 a.m. Sorkin questioned the culture of the firm, while Kernan blamed “bad apples” and said that sometimes great American companies “stumble.” Get these people some coffee. It only took seven minutes for the show to go off the rails this morning. New a 2020 record.

ACTIVE MANAGEMENT

SELECT CROWD: BMO Global Asset Management (GAM) shows that the gains among hedge funds aren’t distributed nicely across a bell curve. In fact, a new report shows that just 2.4% of funds were responsible for the top-quartile gains over the last decade through the end of 2019.

LIABILITIES

HACKING, THERE’S AN APP FOR THAT: Cybersecurity firm Kaspersky Labs warns that North Korean hackers have developed “enhanced capabilities” to target cryptocurrency users. Hackers are able to deliver malware through the messaging app Telegram.  The group has been investigating techniques used by hackers since the AppleJesus attack targeted multiple cryptocurrency exchanges in 2018.

HOPE THE TRIP WAS WORTH IT: Jason Rhodes of Sentinel Growth Fund Management has pled guilty to charges of defrauding investors in a $20 million Ponzi scheme. The 47-year-old raised money from about two dozen investors over four years and promised to invest in the market. Instead, he diverted money to an unrelated civil lawsuit, personal trips to Dubai, his own timeshare, and to his wife’s trucking company. He also paid $4.2 million to an investor who realized that his cash hadn’t been invested in the market. Rhodes is facing up to 20 years in prison.

BOOTSTRAPPING

• Ares Management Corporation has named Stephane Etroy from Caisse de dépôt et placement du Québec as a Partner and new head of European private equity. A press release states that Etroy will be based in London and lead private equity activities for the firm’s European credit and real estate platforms. Etroy will start on February 6 and also serve on Ares Private Equity Group’s Corporate Opportunities Investment Committee.
• Axa Investment Managers announced Godefroy de Colombe will become the firm’s global COO. The executive takes this gig at the €801 billion firm from Axa’s Direct Assurance business. He served as CEO at that group since 2012. Prior to this role, he worked as chief of staff to the group COO, before leading the firm’s retail business.

• The Iowa Public Employees’ Retirement System, Des Moines will be looking for a replacement for CEO Donna Miller. The CEO will retire at the end of her term on April 30.

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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.