-
Em
erg
ing
Mar
kets
Eq
uity
Eq
uity
L/S
Cre
dit
Dis
tres
sed
Eve
nt
Dri
ven
All
Fun
ds
Mac
ro
Fixe
d In
com
e
Mu
lti-S
trat
egy
Mar
ket
Neu
tral
CB
& V
ol A
rb
CTA
/ M
anag
ed F
utu
res
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
75th Median Average 25th MSCI World
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
October 2012 Executive summary*
Deutsche Bank Research Highlights: “Asset Allocation: Will Q3
earnings mark the inflection point?” and “Global Economic
Perspectives: Saving the euro with the ECB’s balance sheet”Our
Global Markets Strategy Research team argues that earnings have
been bottoming and are set to rise.
In the second piece, our Macro Research team argues that the
risk to inflation from the ECB balance sheet expansion is
overestimated. While the monetization of government debt will lead
to inflation, the threshold is higher than it seems at first
glance.
Investor Sentiment In the US, two clear themes emerge from
recent conversations with hedge fund allocators. Firstly, downward
pressure on fees is continuing, with many endowments and
foundations sharing that they would be willing to take longer locks
or invest via a hybrid/drawdown structure in exchange for lower
fees. Secondly, more investors are seeking smaller, less
established managers, with the hopes that they will have superior
alpha generation.
We provide detailed investor colour from Germany, Finland,
Norway and the Netherlands. The outlook is positive, with
allocators sharing that they are actively screening managers, and
many are increasing allocations. Further, we continue to see the
trend of European pension funds redeeming fund of funds
allocations, and beginning to invest directly.
In Asia, we are seeing increased interest for China-only
strategies. We have historically seen some reluctance towards
investments in these managers, largely due to concerns about the
macro outlook.
PerformanceThe median fund finished the month up 0.88%, with
emerging markets equity strategies leading the pack (up 2.44% in
September). CTAs continue to have a challenging year, with the
median fund down 1.04% for the month. CTA is the only strategy in
negative territory in the US and Europe this year.
Credit and distressed strategies continue to extend their gains
for the year, up 9.04% and 8.23% respectively. The median hedge
fund is up 4.15% for the year.
Leverage MSCI World 30 day volatility declined over 21% in
September, ending the month at 11.29. There was no change in gross
fundamental equity exposure, ending the month at 2.36, although net
fundamental equity exposure was up 5.66% ending September at
0.47.
Securities Lending This month we highlight the increased short
interest in US homebuilders and European luxury goods retailers. We
also discuss the impact of Yen appreciation and anti-Japan
sentiment in China, the launch of the iPhone 5, and some noteworthy
capital raising and M&A activity from various regions.
Regulatory This month we highlight noteworthy developments in
AIFMD, Short Selling Regulation and Certain Aspects of CDS, EMIR,
MiFID 2, Market Abuse Directive and Regulation, UCITS, CSD
Regulation, the Liikanen Group Report on Bank Structure, the
Banking Union, and LIBOR Rate Setting.
We also discuss the latest developments in derivatives
rulemakings under Dodd-Frank in the US, new legislative
developments with regards to GAAR and KYC norms for FIIs in India,
updated short selling rules in Korea and the short-selling ban
review released by the Australian Securities and Investments
Commission.
September 2012 Cumulative Median Performance by Strategy
Global performance
September 2012 Performance Dispersion
10.90%
9.04%
8.23%
5.33%
5.28%
4.91%
4.18%
4.15%
4.66%
2.08%
0.40%
-1.54%
-3.99%
-2.00%-4.00% 4.00% 6.00%0.00% 2.00% 8.00% 10.00% 12.00%
Market Neutral
Macro
Emerging Markets Equity
Multi-Strategy
CB & Vol Arb
Equity L/S
Fixed Income
Distressed
Credit
CTA / Managed Futures
Event Driven
MSCI World
All Funds
Source: Hedge Fund Intelligence (HFI), October 2012
Source: Hedge Fund Intelligence (HFI), October 2012
5 Time Voted No. 1 Prime BrokerGlobal Custodian Prime Brokerage
Survey
2012, 2011, 2010, 2009, 2008
Marketing material - For institutional investors only
Markets Prime Finance Monthly Hedge Fund Trends
Deutsche Bank
Median
Emerging Markets Equity 2.44% Macro 0.71%
Equity L/S 1.31% Fixed Income 0.70%
Credit 1.20% Multi-Strategy 0.51%
Distressed 0.99% Market Neutral -0.01%
Event Driven 0.89% CB & Vol Arb -0.11%
All Funds 0.88% CTA / Managed Futures -1.04%
* This document contains extracts and opinions from various
departments and business areas within Deutsche Bank, including
extracts from Research Reports, as well as from external reports
specifically referenced herein. It is not, however, a research
piece and has been produced by a front office function. Also,
please refer to the body of the document for a more detailed
description of and proper references to the topics covered in the
Executive Summary section.
mailto:MPF.Trends%40list.db.com?subject=
-
2
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
Monthly Hedge Fund Trends - Deutsche Bank Research
Highlights
Marketing material - For institutional investors only
Asset Allocation: Will Q3 earnings mark the inflection point?
2
Earnings have been bottomingAfter the rally in equities despite
what look to be flat to down earnings for some time now, the case
for significant further upside hinges on a resumption of earnings
growth. On an LTM basis, US EPS have been flat for six months and
global EPS have fallen for a year. With the last few reporting
seasons characterized by negative pre-announcements and weak
results, investors have approached Q3 earnings with some
trepidation. In our reading, there are signs that earnings have
been bottoming and are set to rise:
− Fewer negative pre-announcements; downgrades abated early.
Guidance has not been as bad as Q2, while downgrades abated two
months ago in contrast to recent seasons when cuts continued right
up until reporting began (Alcoa);
− On a sequential basis, global EPS have already risen well
above the H2 2011trough. US earnings have been flat since Q3 2011.
Ex-US EPS fell sharply in H2 2011, bounced significantly in Q1 2012
and held most of the gain in Q2;
− The rebound in financial markets is supportive of FEM
earnings. We have noted that the decline and rebound in global EPS
owed almost entirely to the market-sensitive FEM sectors
(Financials, Energy, Materials) (Global Earnings Pause or Stall?
Aug 3, 2012). FEM earnings are expected to rise slightly in Q3;
− Ex-FEM earnings are set to rise for the third consecutive
quarter, back near peaks. Sales have maintained their solid
recovery channel while a bottom in margins outside the US holds the
key to a resumption of global EPS growth.
The bar for Q3 is not low but a US beat would mean solid
underlying growth; meets in Europe and even slight misses in EM
would confirm a bottoming
− A US beat would mean more this time. Both because of the
stability of estimates coming into earnings season and because it
would imply solid underlying earnings growth. Consensus expects Q3
EPS to fall 2.3% qoq. Seasonally adjusted, however, growth would be
+1.2%. An overall beat at the rate of the early reporters (3.5% vs
avg 7.3% since 2009) would mean underlying earnings growth of 4.7%
qoq (18.8% annualized);
− The bar is not low in Europe, a meet would confirm a
bottoming. Q3 estimates see 5% qoq growth (31% yoy). Industrial and
Discretionary EPS are expected to rise considerably, back to H1
2011 levels while Financial earnings would have rebounded from
depressed H2 2011 levels, holding most of the gains. Margins are
projected to be weak in Healthcare, Materials and particularly
Tech. But overall, Europe sales growth of 8% yoy in a recession and
margins holding onto gains would be a big positive;
− The bar is high for EM, even slight misses would imply
stabilization. As we have noted, EM top line growth has remained
strong but margin contraction meant weak EPS growth. A bottom in
margins would thus be very positive. Consensus expects Q3 earnings
to grow a robust 19% qoq (14% yoy). Sales are projected to be up 8%
yoy (3% qoq) and fairly consistent across sectors. Tech margins are
expected to rise notably while margins in most other sectors are
expected to recoup much of the ground lost over the last year.
Key issues to watch and what to listen forOur constructive
stance on equities over the last three years has been predicated on
the thesis that corporates would spend their operating cash flows
(capex, M&A, buybacks, dividends) to prevent their cash hoards
from rising further. And firms would increase
production/inventories to meet rising consumer demand. This thesis
has been playing out. But the recent collapse in core durable goods
orders and drop in IP raises the question of whether they are
signaling a change in corporate behavior. In addition to corporate
spending plans, comments on global and regional growth outlooks
hold the key to assessing whether the economy has stopped
deteriorating. But overall, confirmation that firms can grow
profits in this lower growth environment will alleviate pressure to
cut spending; and rising earnings typically portends increased
capex/investment/payouts.
Global Economic Perspectives: Saving the euro with the ECB’s
balance sheet 3
− Some politicians and academics in Germany are advocating
Eurobonds in order to avoid ECB involvement in stabilizing EMU.
Implicit in the call for eurobonds is the view that inflation risks
from the extension of the ECB’s balance sheet due to bond purchases
are higher than financial risks for the government from
guaranteeing debt of its EMU partners.
− Our analysis in this note suggests that the proponents of this
view overestimate the risks to inflation from ECB involvement in
the management of the euro crisis (and underestimate the risks
emanating from debt mutualisation). First, the ESCB seems to have a
substantial financial cushion, allowing it to absorb considerable
losses resulting from support operations before engaging in
monetization of government debt. Second, even if losses accumulated
to a level exceeding the ESCB’s capital and reserves, higher
inflation is not inevitable. Both theoretical considerations and
empirical observations suggest that central banks can operate for
years with negative equity without inducing an acceleration of
inflation.
− This does not mean that a central bank can fund government
debt on a large scale and an open-ended basis. Eventually,
monetization of government debt will lead to inflation, but the
threshold is higher than it seems at first glance. Hence, whether
the ECB’s OMT programme will eventually lead to inflation depends
on EMU member countries’ use of it. Should they fail to undertake
the necessary economic reforms and become addicted to ECB support
of their debt markets EMU would eventually turn into a soft
currency, high inflation monetary union.
2 Deutsche Bank – Markets Research: Strategy; “Asset Allocation:
Will Q3 earnings mark the inflection point?” 4th October 2012.
http://pull.db-gmresearch.com/p/3243-4B3F/39899501/Asset_Alocation.pdf
3 Deutsche Bank – Global Markets Research: Macro; “Global
Economic Perspectives: Saving the euro with the ECB’s balance
sheet” 4th October 2012.
http://pull.db-gmresearch.com/p/3210-1F12/38594875/DB_GEP_2012-10-04_0900b8c085cac9ce.pdf
Equities tied to earnings
90
100
80
70
50
60
40
S&P 500
650
750
850
950
1050
1150
1250
1350
1450
1550�8%
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
LTM EPS (lhs) Price (rhs)
Source: Bloomberg Finance LP, Factset, Deutsche Bank
Size of the Eurosystem’s balance sheet
3,000,000
3,500,000
2,500,000
2,000,000
1,000,000
1,500,000
500,000
99 00 01 02 03 04 05 06 07 08 09 10 11 12
Mil € Euro Area: total assets
Source: ECB, Haver Analytics, DB Global Markets Research
mailto:MPF.Trends%40list.db.com?subject=http://pull.db-gmresearch.com/p/3243-4B3F/39899501/Asset_Alocation.pdfhttp://pull.db-gmresearch.com/p/3845-2AB8/15690738/Asset_Alocation.pdfhttp://pull.db-gmresearch.com/p/3210-1F12/38594875/DB_GEP_2012-10-04_0900b8c085cac9ce.pdfhttp://pull.db-gmresearch.com/p/3210-1F12/38594875/DB_GEP_2012-10-04_0900b8c085cac9ce.pdf
-
3
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
Monthly Hedge Fund Trends - Investor Sentiment 4
Marketing material - For institutional investors only
Upbeat about the US & EuropeAt a macro level, our
discussions with some investors this month have revealed a more
constructive view regarding European-focused strategies than they
had at this time last year. Further, investors seem to be
tentatively optimistic about the prospects of the US’ economic and
investment environments going forward. Some, however, have
expressed skepticism over Asia/China’s ability to sustain current
levels of growth. Many of the family offices we spoke with
expressed concern for the underperformance of their hedge fund
portfolios but didn’t plan to make any material changes to their
overall hedge fund allocations or even specific managers.
US investors exert fee pressure & increase their focus on
smaller managersOur recent discussions with endowments and
foundations have revealed two clear themes. Firstly, fee pressure
on managers can be expected to continue, if not intensify, from
these allocators. That said many are willing to take longer locks
or invest via a hybrid/drawdown structure in exchange for lower
fees. Despite the ongoing discussion around fees, investors have
indicated a continued interest in the hedge fund space as long as
manger and investor incentives are aligned.
A second theme we have seen is increased interest in smaller,
less established managers. Whilst many endowments and foundations
have historically focused on only the largest managers in the hedge
fund space, some have grown much more willing to consider smaller
managers ($250 million-$1 billion AUM) for investments. There are a
number of reasons for this change in investment philosophy, but it
is largely to do with the perception that newer managers are more
nimble and better able to generate additional alpha.
Allocators in Tennessee look to reshape their portfoliosHedge
fund allocators in Tennessee are a select group of tight knit
investors, with family offices representing most of the investor
space in Memphis. The investors in this region tend to have
somewhat small allocations to hedge funds ($50-$100 million), with
only a handful of exceptions. Our conversations have revealed that
a number of investors are in the process of reshaping/broadening
their portfolios. They are generally focused on equity l/s,
commodities and macro strategies. Continuing with our ongoing theme
in 2012, investors have also started to express interest in credit
strategies. We have also seen a few investors starting to look at
the emerging markets space (debt and equities), primarily in
Brazil. Most choose to invest in managers with less than $5 billion
AUM.
Texas pensions looking for higher returnsThe public pension
plans in Texas who we spoke with were very focused on increasing
the expected return of their hedge fund portfolio. To achieve this,
they are willing to accept more volatility in their portfolio,
longer lock-ups, and higher-fees. They also stressed that headline
risk was a big concern because many of the plans are in the middle
of passing legislation and negotiating with beneficiaries to
reduce/control their pension liabilities. Two of the pensions said
they put investments into funds with high headline risk on hold for
this reason.
Fund of funds moving towards an advisory relationshipThe sub-$5
billion funds of funds are clearly under stress, as clients make
the move to direct hedge fund investing. One fund-of-fund manager
said that they were pro-actively reaching out to their large
clients to suggest converting the relationship from discretionary
to advisory. Another fund-of-fund manager revealed that they are
responding to RFPs for building customized portfolios and expect
most of their future growth to come from that area.
Canadian pensions maintain their commitment to alternativesOur
team was in Canada this month and met with several institutional
investors in Toronto and Montreal, including pensions, endowments,
funds of funds, and private banks. Investors displayed interest
across a wide variety of strategies, including credit, equity l/s,
multi-strategy and quantitative. While the focus was varied across
asset classes, most of the investors we spoke to indicated they are
maintaining or increasing their alternatives portfolio. Some of the
investors we spoke to shared with us that they are willing to pay a
full level of fees for more complex strategies when the manager can
clearly demonstrate that they can generate alpha.
German investors warm up to hedge fundsInvestor sentiment was
positive on our recent trip to Germany. Some of the traditionally
guarded German family offices have shared with us that they are
actively allocating over the next 18 months. German pension funds
are also growing allocations, with some historically more
conservative names planning to move into the asset class.
Strategy-wise, discussions tended to focus on CTA, credit and
relative-value strategies. Investors were wary of equity strategies
that do not deliver “true alpha”. Of those who are actively seeking
equity-related strategies, they expressed that they are seeking
very fundamental strategies, niche to specific sectors or
regions.
Managers can differentiate themselves by discussing German tax
transparency with their tax advisors and fund administrators before
meeting with German investors.
Finnish & Dutch pension funds focus on credit, distressed
and macro managersFinnish pension funds continue to stay active in
the credit space, a trend that started early 2009, with many
increasingly focused on longer-dated, distressed vehicles. With
longer-term investment horizons, these institutions appear to be
among the few hedge fund investors who are willing to accept longer
term lock-ups. Macro is another strong area of interest,
principally because the alternatives bracket tends to act as a
diversifier to the larger equity and fixed income portfolios. If
investors show appetite for equity strategies, they are generally
biased towards market neutral or low net profiles, with little to
no interest in equity l/s.
In terms of geographic preference, the market is very oriented
towards the US, with many investors investing up to 90% of their
portfolios with US-based managers. Finnish pension funds continue
to show preference for blue-chip managers, specifically those with
a 3 to 5 year track record and a minimum AUM of $500 million.
A recent trip to the Netherlands has revealed that there are
some large Dutch pension funds making the initial move away from
funds of funds, and into direct hedge fund investing. This should
result in continued flows from the region.
Strategy-wise, there was again a large focus on credit
strategies. Of those who are looking for equity hedge fund
strategies, it is the market neutral strategies that are of the
most interest. Once again, allocators are not seeking to increase
their beta, as they see their hedge fund portfolio as a diversifier
against their other investments. Norwegian allocators stay positive
on equity strategiesIn Norway, hedge fund allocators tend to be
more positive on equities than their Finnish peers, with several
seeking equity long/short managers both in Europe and in the US.
Investors prefer well-established managers, with 3 to 5 year track
records. Some investors are increasingly interested in looking at
emerging managers and new funds but will admit that, to date, they
have not been early-movers. Solvency II requirements remain a
concern for insurance companies, and as such these investors are
increasingly looking at managed accounts and UCITS III compliant
products, amongst other alternative solutions.
Investor appetite for Chinese strategies, and feedback from the
Deutsche Bank Japan Hedge Fund ForumDeutsche Bank’s Hedge Fund
Capital Group hosted a very successful third annual Japan Hedge
Fund Forum in Tokyo on September 11th. Six hedge fund managers from
the US, Europe and Asia presented their strategies to a variety of
local hedge fund allocators, including banks, insurance companies
and pension fiduciaries.
The forum revealed that Japanese investors continue to focus on
multi-billion dollar hedge fund managers, particularly in the
equity space. However, we are starting to see increased interest
towards other strategies. These have tended to be those that have
performed well this year, such as credit and loan strategies.
Many investors in Asia have intrinsic Chinese exposure through
their pan-Asian managers, but this month we wanted to know more
about sentiment regarding niche Chinese credit and equity
strategies. Our conversations have illustrated that many perceive
China-only strategies to be particularly challenging, largely due
to an uncertain political outlook for the Chinese economy as the
18th National Congress of the Communist Party of China (CPC), which
will formalize the nation’s once-a-decade leadership change, kicks
off this month. Despite this, Japanese investors are beginning to
show increased interest. Interestingly, much of this has come from
the funds of funds and asset managers, who are mainly managing
pension fund money.
4 From Deutsche Bank’s Hedge Fund Capital Group
mailto:MPF.Trends%40list.db.com?subject=
-
4
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
Monthly Hedge Fund Trends - Performance
Marketing material - For institutional investors only
Americas
2012 Year to date median performance
Europe
2012 year to date median performance
Asia
2012 year to date median performance
Americas
September 2012 Performance dispersion of returns
Europe
September 2012 performance dispersion of returns
Asia
September 2012 performance dispersion of returns
Glo
bal
L/S
US
L/S
Eve
nt
Dri
ven
Dis
tres
sed
Cre
dit
Fixe
d In
com
e
All
Fun
ds
Mac
ro
Mu
lti-S
trat
egy
CTA
/ M
anag
ed F
utu
res
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
75th Median Average 25th S&P 500
Source: Hedge Fund Intelligence (HFI), October 2012
Em
erg
ing
Mar
kets
Eq
uity
Glo
bal
L/S
Cre
dit
Eu
rop
ean
L/S
All
Fun
ds
Mac
ro
Fixe
d In
com
e
Mu
lti-S
trat
egy
Eve
nt
Dri
ven
Mar
ket
Neu
tral
CTA
/ M
anag
ed F
utu
res
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
75th Median Average 25th Stoxx 600
Source: Hedge Fund Intelligence (HFI), October 2012
Asi
a ex
-Jap
an L
/S
Ch
ina
L/S
Pan
-Asi
a L/
S
All
Fun
ds
Mac
ro
Jap
an L
/S
Mu
lti-S
trat
egy
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
75th Median Average 25th MSCI AsiaPac incl Japan
Source: Hedge Fund Intelligence (HFI), October 2012
9.15%
14.56%
6.86%
6.24%
5.81%
5.95%
5.05%
4.98%
3.32%
-0.53%
8.00% 12.00% 14.00% 16.00%6.00%4.00% 10.00%2.00%0.00%-2.00%
Distressed
9.09% Credit
Fixed Income
CTA / ManagedFutures
Global L/S
All Funds
Multi-Strategy
Event Driven
S&P 500
US L/S
Macro
Source: Hedge Fund Intelligence (HFI), October 2012
9.79%
8.76%
4.63%
4.14%
3.83%
3.71%
3.50%
2.99%
1.81%
1.12%
0.79%
-4.18%
2.00% 4.00%-2.00%-4.00%-6.00% 6.00% 8.00% 10.00%0.00%
CTA / Managed Futures
Market Neutral
Emerging Markets Equity
All Funds
Fixed Income
Event Driven
Stoxx 600
Multi-Strategy
Macro
Credit
Global L/S
European L/S
Source: Hedge Fund Intelligence (HFI), October 2012
0.00%-2.00% 4.00% 8.00% 10.00% 12.00%2.00% 6.00%
11.30%
7.56%
3.36%
3.08%
2.01%
1.92%
1.90%
0.11%
-1.54%
China L/S
MSCI AsiaPac incl Japan
Pan-Asia L/S
Multi-Strategy
Macro
Japan L/S
All Funds
Event Driven
Asia ex-Japan L/S
Source: Hedge Fund Intelligence (HFI), October 2012
mailto:MPF.Trends%40list.db.com?subject=
-
5
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
Monthly Hedge Fund Trends - Leverage 5
Marketing material - For institutional investors only
Global − MSCI World 30 day volatility declined over 21% in
September, ending the month at 11.29. There was no change in gross
fundamental equity exposure, ending the month at 2.36, although net
fundamental equity exposure was up 5.66% ending September at
0.47.
− The percentage of funds in the lower net equity leverage bands
(0 – 0.25) have decreased since the beginning of July. Managers
have increased exposure over the past three months though, leading
to an increase in the percentage of funds across the 0.25 – 1.25
net equity leverage bands.
Global Net & Gross Equity Leverage vs. Volatility
Global – September 2012 Quarterly change in net equity leverage
distribution across funds
2.42.5
2.32.22.12.01.91.81.71.61.51.41.31.21.11.00.90.80.70.60.5
0.30.4
40
30
35
25
20
10
15
5
31 Ma
y 12
31 Jul
12
31Aug
12
30 Sep
t 12
30 Jun
12
30 Sep
t 1131
Oct 11
30 Nov
11
31 Dec
11
31 Jan
12
29 Feb
12
31 Ma
r 12
30 Apr
12
MSCI World 30d Vol
MC
SI W
orld
30
day
His
tori
cal V
ol
Leve
rag
e
Gross Leverage Net Leverage
Source: Deutsche Bank Global Prime Finance Risk, October
2012
16%
8%
0%
20%
12%
4%
14%
6%
18%
10%
2%
-1 - -0.
75
-.75 - -0
.5
-0.5 - -0
.25-0.2
5 - 0
0 - 0.2
5
0.25 -
0.5
0.5 - 0
.750.7
5 - 1
1 - 1.2
5
1.25 -
1.5
1.5 - 1
.751.7
5 - 2
01 Oct12
% o
f fu
nd
s (D
euts
che
Ban
k)
01 July12
Source: Deutsche Bank Global Prime Finance Risk, October
2012
5 Deutsche Bank Global Prime Finance Risk, October 2012
mailto:MPF.Trends%40list.db.com?subject=
-
6
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
Monthly Hedge Fund Trends - Securities Lending
Marketing material - For institutional investors only
Global 6
US % short interest sector change - September 2012
US homebuilders under pressure from shorts in light of surging
valuationsDuring the month of September the nation’s homebuilders
surged as we saw the SPDR S&P Homebuilders ETF gain more than
7.5% while hitting a 52 week high on September 21st. Two stocks
performing extremely well include Lennar whose stock is up roughly
175% from a year ago and Pulte Group which is up more than 300% in
the same time period. These stocks benefitted from the Fed’s
commitment to buy $40 billion in mortgage-backed bonds per month on
an open ended basis in QE3.7
From the short interest perspective both stocks mentioned above
continue to remain crowded shorts given their surging valuations.
Lennar short interest remains near all time highs, with almost 34
million shares in short interest. This represents approximately 23%
of the existing float. Pulte Group still remains a popular short
with just less than 33 million shares in current short interest or
approximately 10% of the float. Other significant shorts in the
homebuilders sector include KB Home and DR Horton Inc whose short
interest as a percentage of float are 43% and 13% respectively.
South African miners and European luxury goods manufacturers
under pressure From a directional perspective Lonmin continues to
be in focus, with stock down over 50% this year amidst continued
worker unrest stemming from their demand for increased wages.8
Levels on new stock continue to trade in excess of 12% with limited
availability. From a sector perspective we continued to see
increased short activity in the luxury goods sector with Swatch,
Burberry and Tods S.p.A all in focus.
Yen appreciation hurts Japanese exporters The USD/JPY closed the
month at 77.88, down 0.52% month-over-month. The Yen has benefitted
from the depth of its bond market and an ongoing demand for safe
haven assets. Over the last two-weeks of September, US-Japanese
two-year bond yield spreads rose from their lows as the surprise
¥10 trillion expansion of the Bank of Japan’s asset purchase
program served to counteract previous Fed easing.9 The appreciated
yen has created an unfavorable situation for Japanese exporters.
Electronic giants like Sony Corp and carmakers like Nissan Motor
Corp, which derive a substantial position of their revenue from
international markets, took a hit on their earning last
quarter.
Anti-Japan sentiment drives shorts in Japanese firms with China
exposure Japan Foreign Trade Council (JFTC) indicated that there
are signs that China has slowed down its customs clearance of
imports from Japan as a result of rising tension over the Japanese
government’s nationalization of the Senkaku Islands.10 Firms in
sectors such as wholesale, transport equipment and electric
machinery are among those expecting the worst from the dispute
between Japan and China. Unicharm, Hitachi Construction, Nissan and
Fast Retailing are amongst the firms that have faced disruptions as
a result of these tensions.
11
http://dealbook.nytimes.com/2012/04/30/energy-transfer-to-buy-sunoco-for-5-3-billion/12
http://in.reuters.com/article/2012/09/06/us-americanrealtycapital-offer-idINBRE8850KK2012090613
http://www.businessweek.com/news/2012-09-13/vestas-said-to-weigh-share-offer-if-mitsubishi-plan-
fails14
http://www.reuters.com/finance/stocks/GEPH.PA/key-developments/article/261281615
http://www.sbrf.ru/moscow/en/presscenter/all/index.php?id114=1102128916
http://in.finance.yahoo.com/news/sony-invest-50-billion-yen-094413172.html17
http://online.wsj.com/article/SB10000872396390444358404577609810658082898.html
6 This material has been produced by the Deutsche Bank
Securities Lending Group and must not be regarded as research or
investment advice.
7
http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html
8
http://www.telegraph.co.uk/finance/newsbysector/industry/mining/9542793/South-African-miners-vow-to-bring-platinum-belt-to-standstill.html
9 http://www.bbc.co.uk/news/business-1964534910
http://www.japantimes.co.jp/text/nn20120912a1.html
European % short interest sector change - September 2012
No rush to cover in Asia Despite the resemblance of stability in
Greece twined with QE3 and positive US data, by and large,
structural shorts have remained highly disciplined with additional
shorts added as and when borrow availability appeared in our most
crowded names. Short balances in HK, Korea and Taiwan are at 2012
highs.
Capital raising and M&AThis month we saw merger arbitrage
funds trading the Sunoco/Energy Transfer Partners LP deal as the
anticipated closing date of October 4th, 2012 quickly approached.11
With the spread trading wider in the middle of the month,
arbitrageurs saw an opportunity to add to their profits in what has
been a slow year for M&A. Given the limited availability of
Energy Transfer in lending programs, rates pushed significantly
higher as an additional 2 million shares were added in short
interest since the end of August. In the last week alone spot rates
jumped from 3% to 99% as the massive demand into the closing had
primes scrambling for stock.
As we move forward into the 4th quarter, we are beginning to see
arbitrage funds increase their stake in the proposed merger of
American Realty Capital Trust and Realty Income Corp.12 With the
deal announced during the first week of September, we have seen
almost 5 million shares added in short interest throughout the
month, bringing the short interest to roughly 10% of the float.
Vestas Wind announced potential plans to raise up to EUR 500
million via a rights issue,13 stock loan rates around 16%;
Geophysique announced a EUR 414 million rights offering to help
fund a purchase of Fugro’s seismic division,14 levels in excess of
2.5%; the Russian central bank arranged a placement of 7.5% of
Sberbank,15 GDRs trading at 1.5%; Sony announced plans to invest 50
billion yen for an 11.46% stake in Olympus and a seat on the
board,16 funds locating with active flow.
iPhone 5 launch and its impact on short balances in AsiaApple’s
highly anticipated iphone 5 launch dominated much of our flow this
month. Pre-launch, negative sentiments on regional smartphone plays
drove borrow demand to 2012 highs. HTC was the hottest demand name,
as Samsung and Apple’s dominance highlighted HTC’s inability to
compete. Short interest in HTC spiked significantly, with borrow
fees in double digits. Negative sentiment extended to the likes of
Korea’s LG Electronics and China’s ZTE, both highly crowded shorts.
Meanwhile, Apple’s major patent win against their main rival
Samsung lead to a wave of short activity on Samsung Electronics17.
Mixed reception for the iPhone5 led to a divergence of views on
Apple’s supply chain. While most of the iPhone suppliers have
outperformed, we have seen 2 way flow in the likes of Largan, Hon
Hai and Simplo.
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Utilities
Energy
Info Tech
Financials
Industrials
Materials
Cons Disc.
Telecom
Cons. Stap
Healthcare
-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%
Financials
Energy
Cons Disc.
Info Tech
Healthcare
Industrials
Telecom
Utilities
Materials
Cons. Stap
Source: Data Explorers & Deutsche Bank, October 2012 Source:
Data Explorers & Deutsche Bank, October 2012
mailto:MPF.Trends%40list.db.com?subject=http://dealbook.nytimes.com/2012/04/30/energy-transfer-to-buy-sunoco-for-5-3-billion/http://in.reuters.com/article/2012/09/06/us-americanrealtycapital-offer-idINBRE8850KK20120906http://www.businessweek.com/news/2012-09-13/vestas-said-to-weigh-share-offer-if-mitsubishi-plan-failshttp://www.businessweek.com/news/2012-09-13/vestas-said-to-weigh-share-offer-if-mitsubishi-plan-failshttp://www.reuters.com/finance/stocks/GEPH.PA/key-developments/article/2612816http://www.sbrf.ru/moscow/en/presscenter/all/index.php?id114=11021289http://in.finance.yahoo.com/news/sony-invest-50-billion-yen-094413172.htmlhttp://online.wsj.com/article/SB10000872396390444358404577609810658082898.htmlhttp://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.htmlhttp://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.htmlhttp://www.telegraph.co.uk/finance/newsbysector/industry/mining/9542793/South-African-miners-vow-to-bring-platinum-belt-to-standstill.htmlhttp://www.telegraph.co.uk/finance/newsbysector/industry/mining/9542793/South-African-miners-vow-to-bring-platinum-belt-to-standstill.htmlhttp://www.bbc.co.uk/news/business-19645349http://www.japantimes.co.jp/text/nn20120912a1.html
-
7
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
Monthly Hedge Fund Trends - Regulatory 18
Marketing material - For institutional investors only
There have been a number of key developments across regulatory
dossiers in September, including EMIR, the Short Selling Regulation
and MiFID. Major announcements were made on structural issues
including the Liikanen Group on bank structure and the European
Commission proposal for a Banking Union in Europe.
Looking forward, further progress is expected on negotiations to
finalise MiFID, implementation of the Short Selling Regulation and
the publication of the implementing measures for the AIFMD.
Alternative Investment Fund Managers Directive (AIFMD) -
DelaysThe European Commission was expected to publish the delegated
acts (implementing measures) for the AIFMD by the end of September
- although there has been some delay - based on the advice it
received from the European Securities and Markets Authority (ESMA)
earlier this year.
On 27th September, ESMA finished consulting on guidelines
covering remuneration requirements under the AIFMD. The guidelines
were broadly based on global principles for sound compensation
practices and aligned to remuneration guidelines for banks that
were introduced in January 2011 under the EU Capital Requirements
Directive (CRD III). The extent to which AIFs would have to comply
with these requirements can be adjusted based on the size and
complexity of their activities, in line with the proportionality
principle. ESMA will finalise the Guidelines at the end of 2012,
after which Member States will have six months to incorporate them
into national regimes.
Regulation on Short Selling and Certain Aspects of CDS (SSR)The
Regulation is due to enter into force on 1st November 2012. In
advance of this, ESMA published a consultation paper on the
application of the market making exemption for comments by 5th
October. While in some areas the consultation paper provides useful
clarity, in other areas, it generates further uncertainty as to how
the exemption should be applied, such as the instrument based
approach and the trading venue membership requirements. ESMA will
likely publish its final guidelines in December, after which Member
States will have six months to incorporate them into national
regimes. In the interim, various national competent authorities
have also published their notification procedures for firms seeking
the market making exemption.
European Market Infrastructure Regulation (EMIR)EMIR is the
regulation which sets standards for mandatory clearing, risk
mitigation techniques for derivatives not cleared by a CCP,
requirements for central counterparties and trade reporting
requirements for all derivatives. EMIR entered into force in
mid-August apart from those obligations that are subject to
technical standards by ESMA, which will only take effect once the
technical standards become law. On 27th September, ESMA published
the first tranche of technical standards covering certain aspects
of the regulation including details of how the clearing thresholds
will operate for centrally cleared derivatives and how counterparty
risk should be reduced for non cleared derivatives.
The standards list a set of organisational, conduct of business
and prudential requirements for CCPs including margin requirements,
default fund, liquidity risk management, and investment policy of
CCPs, as well as stress and back tests. Details covering the
authorisation and supervision of trade repositories are also
included. In its initial proposal, ESMA required CCP members to
offer indirect clearing, however this requirement has now been
removed as a result of industry feedback.
The European Banking Authority (EBA) has also published
regulatory technical standards on capital requirements for CCPs.
The Commission has three months to decide whether to adopt the ESMA
and EBA standards. Member states also have three months to decide
whether to object to the texts. Under EMIR, ESMA is still to
produce guidelines or recommendations on interoperability between
CCPs by 31st December 2012, rules on contracts that are considered
to have a direct, substantial and foreseeable effect in the EU or
cases where it is necessary or appropriate to prevent the evasion
of any provision of EMIR.
ESMA will also be required to produce rules on margin
requirements for OTC derivatives that are not cleared by a CCP. The
European Commission
is still due to set a deadline for this latter set of standards.
This work has been delayed in order to incorporate the work of the
Basel Committee on Banking Supervision (BCBS) and IOSCO who have
just finished consulting on a set of framework principles for
margin requirements for non centrally cleared derivatives.
Markets in Financial Instruments Directive (MiFID 2) A key
hurdle in the lawmaking process was passed on Wednesday 26th
September when the relevant committee in the European Parliament
(the Economic and Monetary Affairs Committee) voted to agree its
position on the text.
The agreement significantly changes the initial position of the
Commission as regards the pre and post trade transparency
requirements for non-equity markets, and sets more criteria for
ESMA to determine that a class of derivatives should be
multilaterally traded. However, it limits the scope of the proposed
new Organised Trading Facility (OTF) regime to non-equity
instruments only and maintains the prohibition on the use of own
capital by an OTF operator.
In relation to algorithmic and high frequency trading the text
attempts to impose formal requirements on market makers, includes a
minimum resting time of 500 milliseconds, an apparent ban on
sponsored and naked sponsored access and a restriction on an
investment firm receiving any rebate for routing orders to a
particular trading venue. Trading venues are also required to set
position limits for trading in commodity derivatives.
Once the European Council has finalised its approach (likely to
be by November at the earliest) the two institutions, together with
the European Commission will enter trilogue negotiations to agree a
final text. The trilogue is likely to complete by Q1/Q2 2013 and
the regulation will begin applying in 2015 at the earliest.
Market Abuse Directive and RegulationThe European Council and
Parliament are continuing to debate the update to the Market Abuse
Directive. The European Parliament’s Economic and Monetary Affairs
Committee (ECON) held a debate to discuss amendments to the
directive and are due to vote on a compromise position in the ECON
committee on 9th October.
The Cypriot Presidency of the EU Council published its latest
draft position of EU Member States. Most notably, the general
prohibition against market manipulation is complemented by one
against the manipulation of a benchmark and any transmission of
false or misleading information, provision of false or misleading
inputs, or any other action that manipulates the calculation of a
benchmark, including the benchmark’s methodology.
Undertakings for Collective Investment in Transferable
Securities (UCITS)The European Council and Parliament are
continuing to debate the update to the UCITS Directive (UCITS 5)
which will include new rules on tasks and liability of depositaries
and introduce a new sanctioning regime and requirements for the
remuneration of fund managers. An initial debate between MEPs took
place on Thursday 20th September where they largely endorsed the
Commission’s proposal to clarify the scope of the depositary’s
liability, in particular its obligations to provide replacement
assets to investors in the case of lost assets where depository
duties were delegated to a third party. The Parliament is aiming to
agree its general approach on the directive by 21st January 2013.
The forward timeline in the Council is currently unclear.
Central Securities Depository Regulation (CSDR)The CSD
Regulation continues to be debated in the European Parliament.
Rapporteur Kay Swinburne presented her draft report on the
regulation to the Parliament on Wednesday 19th September which
removed a controversial “derogation” clause, which would allow CSDs
to provide banking services ancillary to settlement from a single
legal entity.
The Swinburne report will be amended by MEPs before the Economic
and Monetary Affairs Committee vote on 18th December. Once the
European Council have agreed their position, the trilogue
negotiation will commence. Adoption is not expected until late
2013.
18 Deutsche Bank Government & Regulatory Affairs Group This
is a summary of some of the themes underlying recent regulatory
developments affecting hedge
funds and their managers. It does not purport to be legal or
regulatory advice and must not be relied on for that purpose.
Deutsche Bank is not acting and does not purport to act in any way
as your advisor. We therefore strongly suggest that you seek your
own independent advice in relation to any legal, tax, accounting
and regulatory issues relating to the merits or otherwise of the
products and services discussed.
mailto:MPF.Trends%40list.db.com?subject=
-
8
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
Monthly Hedge Fund Trends - Regulatory
Marketing material - For institutional investors only
Liikanen Group Report on Bank StructureOn 1st October, the EU
group on bank structure chaired by Bank of Finland Governor Erkki
Liikanen published its final report, with a recommendation that
under certain circumstances, banks with a significant amount of
trading assets may be required to establish separate legal entities
for deposit-taking and trading activities.
The report states that, while universal banking is a model with
many benefits, the growth of trading activities has made banks too
complex and opaque. Liikanen recommends that banks with trading
assets of more than EUR 100 billion or 15% of their total assets
should be required to establish separately capitalised legal
entities for deposit-taking and other commercial and corporate
banking activities (‘deposit bank’) and for proprietary trading and
market making activities (‘trading entity’). The ‘trading entity’
would exclude client-facing derivative transactions and securities
underwriting. In relation to hedge funds, the report requires that
‘Any loans, loan commitments or unsecured credit exposures to hedge
funds (including prime brokerage for hedge funds), SIVs and other
such entities of comparable nature, as well as private equity
investments’ should sit within the trading entity. The two entities
would have to meet all regulatory and capital requirements on a
standalone basis within a holding company structure and any
transfer of funds between the two entities would be subject to
large exposure limits.
Commissioner Barnier welcomed the report, but underlined that
the potential impact of the reforms will need to be fully
considered before any decisions are made to implement the
recommendations. The EU Commission is currently consulting until
13th November and is expected to give its view by the end of the
year.
Banking UnionOn 12th September the European Commission published
two legislative proposals designed to deliver a Single Supervisory
Mechanism (SSM) for Eurozone banks.
The creation of an SSM is the first step in the delivery of a
broader ‘banking union’ in Europe which will also include a common
system for deposit guarantees and a ‘single resolution mechanism’.
Whilst there is significant political momentum behind the creation
of an SSM, agreement on the other two elements of banking union may
be harder to achieve.
Under the proposals, the ‘most significant credit institutions’
in the Eurozone would be subject to direct prudential supervision
by the European Central Bank (ECB) from 1st July 2013. All other
Eurozone banks would be covered from 1st January 2014. Amongst
other tasks, under the new regime the ECB would be responsible for
carrying out authorisation, imposition of capital and liquidity
requirements, other capital buffers and execution of stress tests.
The ECB would also be responsible for working with relevant
resolution authorities around early intervention for failing banks.
Whilst the proposals provide significant powers to the ECB, they
are clear that national supervisors will continue to play an
important role in the new regime, both by providing practical
support to the ECB in the completion of its supervisory tasks, and
by lending expertise through secondments.
It is expected that there will be strong political appetite for
quick agreement on these proposals, however given Member State
unanimity is required, some changes may need to be incorporated to
achieve that agreement. The European Parliament may also raise
objections over the limited oversight role provided to them under
the proposals.
LIBOR Rate SettingOn 28th September, Martin Wheatley, the future
Chief Executive of the UK financial sector conduct regulator,
published his review of the rate-setting process and oversight of
LIBOR. Wheatley was commissioned to carry out a review of the
governance of LIBOR by the UK Treasury.
The report rejects the replacement of LIBOR with an alternative
benchmark but instead sets out a ten-point plan to reform the
regulation of LIBOR, to ensure criminal sanctions can be imposed
for those manipulating it and to improve the rate-setting process
itself.
Specific recommendations include transfer of responsibility for
compilation of LIBOR from the British Bankers Association to a new,
independent administrator chosen by competitive tender. Individual
LIBOR submissions would not be published for three months in order
to reduce any incentive to manipulate the rate with a view to
enhancing their own perceived creditworthiness. Individual staff
members responsible for LIBOR submissions would be subject to
regulatory approval for taking up their role.
The report also said that the BBA should immediately commence
planning for the phased withdrawal of LIBOR currencies and tenors
which have insufficient trade data. These would include LIBOR for
Australian, Canadian and New Zealand Dollars, Danish and Swedish
Kronor. Overall Wheatley’s proposals would reduce the daily LIBOR
publications from 150 to around 20. In addition, he said that a
wider range of banks should submit to LIBOR and, if this is not
achieved, then regulators should be able to compel market
participants to do so.
The EU Commission is also currently consulting on issues around
regulation, transparency and governance for a wide range of
benchmarks and indices. An International Organisation of Securities
Commissions (IOSCO) task force is also due to consult on proposals
at the end of this year. IOSCO will also consider principles for
transitioning from one benchmark to another where this is
needed.
US UpdateRoughly one half of the required derivatives-related
rulemakings under Dodd-Frank have been finalized as of the
beginning of October, and implementation of various requirements
will begin shortly. One third of Title VII rulemakings are still in
the proposal stage, and regulators have indicated their intention
of finalizing these by year end. This timeline will likely slip
given the upcoming US political election in November, coordination
with international counterparts, and the recent court decision
against the CFTC’s position limit rule, detailed below.
The Commodity Futures Trading Commission (CFTC) approved in
September the application of DTCC Data Repository, LLC for
provisional registration as a swap data repository for the interest
rate, credit, foreign exchange, and equity asset classes. DTCC Data
Repository, LLC is now the second entity that the CFTC has approved
as a swap data repository, following the CFTC’s approval of ICE
Trade Vault, LLC in June. In line with the first deadline for swap
dealers to register with the CFTC, real-time public reporting and
reporting to the regulator will begin being phased-in by December
31st 2012.
In terms of other Title VII requirements, the CFTC has indicated
they hope to finalize transparency requirements (including block
sizes and trade execution facilities – or SEFs) by this fall. Once
the CFTC finalizes the first classes of derivatives to be subject
to clearing requirements, which could happen as early as this
month, central clearing will be phased-in by entity type, with swap
dealers and major swap participants making up the first group and
having 90 days to comply.
With respect to margin, on September 26th, five US federal
agencies reopened the comment period for their proposed rule on
margin requirements for un-cleared swaps. The proposal was
originally issued in May 2011 with a comment deadline of July 11th
2011, and regulators reopened the comment period until November
26th 2012 following the recent consultation by the Basel Committee
on Banking Supervision and the International Organization of
Securities Commissions on margin requirements for non-centrally
cleared derivatives. The CFTC similarly recently reopened the
comment period on their margin proposal given the international
discussions on the topic. US regulators are expected to issue final
rules on margin requirements for un-cleared swaps in early
2013.
Lastly, on September 28th, a US district court enjoined the
CFTC’s position limit rulemaking which was scheduled to go into
effect on October 12th. The rule, finalized in October 2011, limits
the size of positions held by any trader in 28 physical commodity
contracts and their economically equivalent futures, options and
swaps. The US court’s ruling upheld a challenge filed in December
2011 by two industry groups, the Securities Industry and Financial
Markets Association (SIFMA) and the International Swaps and
Derivatives Association (ISDA). The judge agreed with their
arguments that the CFTC failed to follow instructions from the US
Congress in the Dodd-Frank Act which required the agency to
determine that position limits were “necessary to diminish,
eliminate or prevent” excessive speculation. In terms of next
steps, the CFTC can appeal the Court’s decision or issue new
position limit proposals after conducting a cost/benefit analysis
demonstrating the rules are necessary.
India
Shome panel submits final report on GAAR, final guidelines
expected by month-endThe expert panel headed by Dr. Shome to make
recommendations on the GAAR proposals has submitted its final
report to the Ministry of Finance. The final report is believed to
be in line with the proposals made in the second draft asking for
dilution of some rules and deferring
mailto:MPF.Trends%40list.db.com?subject=
-
9
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
Monthly Hedge Fund Trends - Regulatory
Marketing material - For institutional investors only
implementation by 3 years. The Finance Ministry will be studying
the recommendations and finalising the guidelines by end of October
2012.
The panel also submitted its report on the retrospective tax
amendment which is under review by the Ministry of Finance. The
report will be released for public comments once the ministry has
completed their review. Mr. P Chidambram also said that the
Income-tax code will be amended if deemed necessary but it could
take more time as it will need to be passed by the cabinet.
Indian KYC norms for FIIs relaxed; collateral norms under
discussionSEBI released a circular clarifying relaxed “Know Your
Clients (KYC) norms” for various overseas entities including
foreign institutional investors, sub-accounts and Qualified Foreign
Investors (QFIs). SEBI is also looking at relaxing the collateral
rules for FIIs who have to maintain full collateral in cash for
both derivatives and the cash segment. Discussions are underway for
allowing FIIs to provide domestic instruments, such as approved
securities, bank guarantees, fixed deposits, government bonds and
mutual funds as collateral.
The SEBI circular can be found here:
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1346912729430.pdf
Korean short selling rules to be updated on 30th October The
current rules for short selling in Korea have been amended to allow
the regulator to implement a ban if they deem it necessary. The
change in the rules is not in itself a ban on short selling. From
30th October, if either the 20 day short average volume or the
total short position exceeds 5% (or 3% KOSDAQ), the KRX will report
and request for approval for a short ban on that stock to the FSC.
The KRX will post on their website stocks that are under review by
the FSC for short ban approval, and even though the short volume or
position exceeds 5% (3%), it doesn’t mean that the issue will
automatically be banned.
Regulators are still in discussion on whether they should
publish aggregate short balances in line with the publication of
data in other markets such as Hong Kong who started publishing data
on 7th September.
Australia: ‘Short selling: Post-implementation review’ released
by ASICSeptember 2008 saw Lehman Brothers file for Chapter 11
bankruptcy and global markets fall into crisis. Many regulators
reacted by introducing a temporary ban on short selling with a view
to reducing the downward slide of the stock markets. ASIC have
reviewed the data from September 2008 – November 2008 (when the
Australian ban on covered short selling was in place for non
financial stocks) and May 2009 (when the restrictions were lifted
for financial stocks) to consider whether this ban in fact had the
intended result.
It was concluded that there was reduced liquidity and a widening
of spreads at the time of the ban on covered short selling, both in
Australia and in other markets that pursued a similar course.
Although the ban may have been a contributing factor, it should be
taken in the context of the general macro conditions – the report
notes that there was extreme uncertainty and volatility. ASIC also
found that short selling tends to lag a fall in stock price rather
than leading or causing a stock price decline.
Settlement failures were found to have reduced during the ban
period although there were also increased penalties imposed for
failures. Compliance costs for implementing the short selling
measures are summarised to the right:
Costs of complying with the short selling measures (in AUD) —
AFMA members (from page 19) 19
Small organisation
Mid-sized organisation
Large organisation
IT or system build costs
$390,000 $500,000 $687,000
Compliance and legal costs
$135,000 $229,000 $438,000
Non-capital operating costs
$81,000 $125,000 $292,000
Opportunity costs
$1.5million $6million $15million
However, ASIC also stated that in exceptional circumstances,
such a move may be justified in order to reduce the risk of greater
market disorder, to bolster investor confidence and limit the
potential for international regulatory arbitrage.
19
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rep302-published-24-September-2012.pdf/$file/rep302-published-24-September-2012.pdf
For further information on market structure developments, refer to
the following report:
http://globalmarkets.db.com/new/docs/Deutsche_Bank_APAC_Market_Structure_Newsletter_Issue_21.pdf
mailto:MPF.Trends%40list.db.com?subject=http://www.sebi.gov.in/cms/sebi_data/attachdocs/1346912729430.pdfhttp://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rep302-published-24-September-2012.pdf/$file/rep302-published-24-September-2012.pdfhttp://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rep302-published-24-September-2012.pdf/$file/rep302-published-24-September-2012.pdfhttp://globalmarkets.db.com/new/docs/Deutsche_Bank_APAC_Market_Structure_Newsletter_Issue_21.pdfhttp://globalmarkets.db.com/new/docs/Deutsche_Bank_APAC_Market_Structure_Newsletter_Issue_21.pdf
-
For
furt
her
info
rmat
ion
on
any
of
the
issu
es d
iscu
ssed
in t
his
new
slet
ter,
ple
ase
con
tact
th
e M
arke
ts P
rim
e Fi
nan
ce t
eam
: em
ail:
MP
F.Tr
end
s@lis
t.d
b.c
om
10M
onth
ly H
edg
e Fu
nd
Tre
nd
s -
Deu
tsch
e B
ank
Res
earc
h H
igh
ligh
tsM
arke
ting
mat
eria
l - F
or in
stitu
tion
al in
vest
ors
only
Ab
bre
viat
ion
sA
IFM
D –
Alte
rnat
ive
Inve
stm
ent
Fun
d M
anag
ers
Dir
ectiv
eC
BR
C –
Ch
ina
Ban
kin
g R
egu
lato
ry C
om
mis
sion
CD
S –
Cre
dit
Def
ault
Sw
apC
FTC
– C
om
mod
ity F
utu
res
Trad
ing
Com
mis
sion
CR
A –
Cre
dit
Rat
ing
Ag
ency
CR
D –
Cap
ital R
equ
irem
ents
Dir
ectiv
eC
SD
– C
entr
al S
ecu
ritie
s D
eposi
tori
esE
BA
– E
uro
pea
n B
anki
ng
Au
thor
ityE
C –
Eu
rop
ean
Com
mis
sion
EC
ON
– E
con
om
ic &
Mon
etar
y A
ffai
rs C
om
mitt
eeE
IOPA
– E
uro
pea
n In
sura
nce
an
d O
ccu
pat
ion
al
Pen
sion
s A
uth
ori
ty
EP
– E
uro
pea
n P
arlia
men
tE
MIR
– E
uro
pea
n M
arke
t In
fras
tru
ctu
re R
egu
latio
nE
SM
A –
Eu
rop
ean
Sec
uri
ties
Mar
ket
Au
thor
ityE
U –
Eu
rop
ean
Un
ion
FDIC
– F
eder
al D
epos
it In
sura
nce
Cor
por
atio
nFF
Is –
For
eig
n F
inan
cial
Inst
itutio
ns
FSB
– F
inan
cial
Sta
bili
ty B
oard
FTT
– Fi
nan
cial
Tra
nsa
ctio
n T
axH
FT –
Hig
h f
req
uen
cy t
rad
ing
IRS
– In
tere
st R
ate
Sw
apJF
SA
– J
apan
ese
Fin
anci
al S
ervi
ces
Ag
ency
MA
R –
Mar
ket
Ab
use
Reg
ula
tion
MiF
ID –
Mar
kets
in F
inan
cial
Inst
rum
ents
Dir
ectiv
eO
CC
– O
ffice
of
the
Com
ptr
olle
r of
the
Cu
rren
cyP
RIP
s –
Pack
aged
Ret
ail I
nves
tmen
t P
rod
uct
sS
FC –
Sec
uri
ties
and
Fu
ture
s C
om
mis
sion
SE
C –
Sec
uri
ties
and
Exc
han
ge
Com
mis
sion
SE
F –
Sw
ap e
xecu
tion
fac
ility
SE
PA –
Sin
gle
Eu
ro P
aym
ents
Are
aS
IFI –
Sys
tem
atic
ally
Imp
ort
ant
Fin
anci
al In
stitu
tion
UC
ITS
– U
nd
erta
kin
gs
for
Colle
ctiv
e In
vest
men
t in
Tr
ansf
erab
le S
ecu
ritie
sS
ourc
e: D
euts
che
Ban
k G
over
nm
ent
& R
egu
lato
ry
Aff
airs
an
d H
edg
e Fu
nd
Con
sulti
ng
Pro
pos
ed
dat
e fo
r FT
T (0
1/01/
14)
EP
: Com
mitt
ee
vote
on
sh
adow
b
anki
ng
(22/
10/1
2)
UC
ITS
VI:
Com
men
t d
ead
line
(18/
10/1
2)
CFT
C: s
wap
d
eale
rs/m
ajor
sw
ap p
artic
ipan
ts
beg
in r
epor
ting
IR
S, C
DS
(10/
12)
SE
C-F
orm
PF:
Rem
ain
ing
ad
viso
rs s
tart
filin
g (1
5/12
/12)
Exp
ecte
d d
ate
for
imp
lem
enta
tion
of
EU
w
ide
ban
on
nak
ed
CD
S &
sh
ort
selli
ng
re
stri
ctio
ns.
(01/
11/1
2)
Bas
el II
I: C
RD
IV
fin
alis
ed
leg
isla
tion
(Q
3 20
12)
Bas
el II
I: C
apita
lisat
ion
of
ban
k ex
pos
ure
s to
ce
ntr
al c
oun
terp
artie
s,
as w
ell a
s C
RD
IV,
to b
e im
ple
men
ted
(0
1/13
)
EM
IR: D
raft
im
ple
men
ting
m
easu
res
du
e fr
om E
SM
A
(09/
12)
EM
IR:
Com
men
t d
ead
line
on m
arg
in
req
uir
emen
ts
for
non
-cle
ared
d
eriv
ativ
es
(28/
09/1
2)
Sol
ven
cy II
: R
egu
latio
n o
f in
sura
nce
acr
oss
Eu
rop
e ta
kes
effe
ct (0
1/01/
14)
FSB
: Nat
ion
al S
IFI,
secu
ritie
s le
nd
ing
an
d
rep
o re
com
men
dat
ion
s ex
pec
ted
(en
d 2
012
)E
C/E
P/E
uro
pea
n C
oun
cil:
Pote
ntia
l ag
reem
ent
on
CS
Ds
(Q2
2013
)
UC
ITS
V: P
len
ary
vote
(12/
03/1
3)
EP
: EC
ON
com
mitt
ee v
ote
on C
SD
s (1
2/12
)
FATC
A
with
hol
din
g
effe
ctiv
e (0
1/15
)
MA
R c
omes
in
to e
ffec
t (a
pp
rox
m
id-2
014
)
MA
R:
Ple
nar
y vo
te
(16/
01/
13)
AIF
MD
: Im
ple
men
tatio
n
dea
dlin
e fo
r le
vel
1 D
irec
tive
and
le
vel 2
tec
hn
ical
st
and
ard
s (2
2/07
/13)
FATC
A: D
ead
line
to e
nte
r in
to F
FI
agre
emen
ts w
ith
IRS
(30/
06/1
3)
FATC
A
with
hol
din
g
beg
ins
on
non
-com
plia
nt
FFIs
an
d
reca
lcitr
ants
(0
1/01/
14)
AIF
MD
: Dea
dlin
e fo
r A
IFM
s to
ap
ply
fo
r au
thor
isat
ion
(2
2/07
/14)
AIF
MD
: EC
du
e to
p
ub
lish
del
egat
ed
acts
(10/
12)
AIF
MD
: Mar
ketin
g
pas
spor
t fo
r n
on-
EU
Alte
rnat
ive
Inve
stm
ent
Fun
ds
(at
earl
iest
).
(22/
07/2
015
)
MiF
ID 2
& M
AR
: P
len
ary
vote
(2
2/10
/12)
Dea
dlin
e fo
r b
anks
to
con
form
to
th
e V
olck
er R
ule
(2
1/07
/14)
Fed
/FD
IC/O
CC
/SE
C/
CFT
C: A
im t
o fin
alis
e V
olck
er r
ule
(en
d 2
012
)
Dod
d F
ran
k: G
20
dea
dlin
e to
imp
lem
ent
OTC
der
ivat
ive
refo
rms
(en
d 2
012
)
Dod
d-F
ran
k: C
FTC
fin
al
rule
s on
blo
ck r
ule
; ca
pita
l an
d m
arg
in;
imp
lem
enta
tion
of
clea
rin
g a
nd
tra
de
exec
utio
n; S
EFs
; g
over
nan
ce; a
nd
ex
tra-
terr
itori
ality
. (Q
2-Q
4)
CFT
C:
Exp
ecte
d
dea
dlin
e fo
r sw
ap d
eale
rs
to c
lear
CD
S/
IRS
(02/
13)
CFT
C: R
epor
ts
du
e fo
r m
id-s
ize
and
sm
all C
PO
s (0
1/04
/13)
CFT
C: L
arg
e C
PO
’s w
ith A
UM
≥
$5b
n m
ust
file
Fo
rm C
PO
-PQ
R
(29/
11/1
2)
CFT
C: L
arg
e C
PO
’s w
ith A
UM
b
etw
een
$1.
5bn
an
d $
5bn
mu
st
file
Form
CP
O-P
QR
(01/
03/1
3)
MiF
ID: P
len
ary
vote
on
MiF
ID 2
(1
1/09
/12)
MiF
ID t
akes
eff
ect
(exp
ecte
d 3
/14)
EM
IR:
reg
ula
tion
ef
fect
ive
(01/
13)
2012
2013
2014
2015
mailto:MPF.Trends%40list.db.com?subject=
-
11
For further information on any of the issues discussed in this
newsletter, please contact the Markets Prime Finance team: email:
[email protected]
Monthly Hedge Fund Trends
Marketing material - For institutional investors only
DisclaimerThis document is intended for discussion purposes only
and does not create any legally binding obligations on the part of
Deutsche Bank AG and/or its affiliates (“DB”). Without limitation,
this document does not constitute an offer, an invitation to offer
or a recommendation to enter into any transaction. When making an
investment decision, you should rely solely on any specific final
documentation relating to a transaction and not the summary
contained herein. DB is not acting as your legal, financial, tax or
accounting adviser or in any other fiduciary capacity with respect
to any proposed transaction mentioned herein. This document does
not constitute the provision of investment advice and is not
intended to do so, but is intended to be general information. Any
product(s) or proposed transaction(s) mentioned herein may not be
appropriate for all investors and before entering into any
transaction you should take steps to ensure that you fully
understand the transaction and have made an independent assessment
of the appropriateness of the transaction in the light of your own
objectives, needs and circumstances, including the possible risks
and benefits of entering into such transaction. For general
information regarding the nature and risks of the proposed
transaction and types of financial instruments please go to
www.globalmarkets.db.com/riskdisclosures. You should also consider
seeking advice from your own advisers in making any assessment on
the basis of this document. If you decide to enter into a
transaction with DB, you do so in reliance on your own judgment.
The information contained in this document is based on material we
believe to be reliable; however, we do not represent that it is
accurate, current, complete, or error free. Assumptions, estimates
and opinions contained in this document constitute our judgment as
of the date of the document and are subject to change without
notice. Any projections are based on a number of assumptions as to
market conditions and there can be no guarantee that any projected
results will be achieved. Past performance does not guarantee or
predict future results. This material was prepared by a Sales or
Trading function within DB, and was not produced, reviewed or
edited by the Research Department. Any opinions expressed herein
may differ from the opinions expressed by other DB departments
including the Research Department. Sales and Trading functions are
subject to additional potential conflicts of interest which the
Research Department does not face. DB may engage in transactions in
a manner inconsistent with the views discussed herein. DB trades or
may trade as principal in the instruments (or related derivatives),
and may have proprietary positions in the instruments (or related
derivatives) discussed herein. DB may make a market in the
instruments (or related derivatives) discussed herein. Sales and
Trading personnel are compensated in part based on the volume of
transactions effected by them. DB seeks to transact business on an
arm’s length basis with sophisticated investors capable of
independently evaluating the merits and risks of each transaction,
with investors who make their own decision regarding those
transactions.
The distribution of this document and availability of these
products and services in certain jurisdictions may be restricted by
law. You may not distribute this document, in whole or in part,
without our express written permission. DB SPECIFICALLY DISCLAIMS
ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR OTHER
LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY
THIRD PARTY THAT MAY ARISE FROM ANY RELIANCE ON THIS DOCUMENT OR
FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF.
DB is authorised under German Banking Law (competent authority:
BaFin - Federal Financial Supervising Authority) and regulated by
the Financial Services Authority for the conduct of UK business. In
the US this document is approved and or distributed by Deutsche
Bank Securities Inc., a member of the NYSE, FINRA, NFA and
SIPC.
IN AUSTRALIA: Deutsche Bank holds an Australian financial
services licence (AFSL 238153).In SAUDI ARABIA: Deutsche Securities
Saudi Arabia (“DSSA”) is regulated by CMA under authorisation no.
07073-37. DSSA is located on the 17th floor, Al-Faisalia Tower,
Riyadh. Tel. +966-1-273-9700 / Fax +966-1-273-9777”.
IN DUBAI: This information has been provided to you by Deutsche
Bank AG Dubai (DIFC) branch, an Authorised Firm regulated by the
Dubai Financial Services Authority. It is solely directed at Market
Counterparties or Professional Clients which meets the regulatory
criteria as established by the Dubai Financial Services Authority
and may not be delivered to or acted upon by any other person.
In MALAYSIA: This document is distributed in Malaysia by
Deutsche Bank (Malaysia) Berhad.
In JAPAN: This document is prepared by Deutsche Bank AG London
Branch and is distributed in Japan by Deutsche Securities Inc.
(“DSI”). Please contact the responsible employee of DSI in case you
have any question on this document. DSI serves as contact for the
product or service described in this document.
IN SOUTH KOREA: Korea specific products or targeting Korean
investors require disclaimer in Korean language with Korea-specific
disclaimers language.
IN QATAR: Marketing in Qatar by DB non QFC registered entity is
permitted with restrictions.
IN HONG KONG: This document is intended for Professional
Investors as defined by the SFO. Deutsche Securities Asia Limited –
Hong Kong is a participant of the Stock Exchange of Hong Kong and
is licensed as a licensed corporation with the Securities and
Futures Commission. DBAG Hong Kong Branch is regulated by the Hong
Kong Monetary Authority.
mailto:MPF.Trends%40list.db.com?subject=