Equity L/S Event Driven Market Neutral Multi-Strategy CB & Vol Arb Distressed All Funds Emerging Markets Equity Fixed Income Credit Macro CTA / Managed Futures -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]August 2013 Executive summary* Deutsche Bank Research Highlights: “Global Economic Perspectives: US labor market prospects mean tension for Fed thresholds”, “Markets Research: Understanding German Federal Elections” and “Markets Research: Focus Europe – Who needs credit?” The Global Markets Research team presents their projections for the unemployment rate in the US over the next few years. They believe that labor market prospects will feature prominently in monetary policy decisions over the next several years. These projections have important implications for the pace of rate hikes and highlight a natural tension in the Fed’s desire to delay the first rate increase while committing to a more gradual pace of hikes. In our European research pieces, the Markets Research team discusses the mechanics of the German federal election process and the recent PMI trend which they believe implies the euro area is on track to post a GDP recovery in H2 2013. The team debates the theory of the ‘credit impulse’ across the big 4 euro economies. Investor Sentiment In July, the Hedge Fund Capital Group hosted a Japan Managers Forum in New York, providing investors with an opportunity to meet a variety of Japan-focused funds as well as learn about the macro and investment environment in Japan. During the month, the team also met with a variety of investors in Boston, who also showed an interest in Asia-focused strategies broadly. Finally, the team also discusses their recent “Hedge Fund Asset Raising Survey” which found that the US continues to be the largest source of new assets for global clients. Performance Recovering from the previous month’s loss, the median fund gained 0.93% in July bringing the global cumulative median fund performance to 4.85%. Regionally, equity l/s strategies continue to outperform other strategies with European l/s up 8.17% YTD, US l/s up 9.21% YTD and Japan l/s up 17.21% YTD. Global dispersion of returns across strategies remains high with equity l/s funds in the 75th percentile posting returns of 4.35% for July while CTA/Managed futures and Macro funds in the 25th percentile returned -5.19%. Leverage The MSCI World 30 day volatility decreased 3.15% in July ending the month at 14.18. Gross fundamental equity exposure increased 4.78% ending the month at 2.63, while net leverage decreased by 1.03% to 0.63. Securities Lending The securities lending team discusses the mergers & acquisition environment, which posted its strongest July since 2008. In Asia, convertible bond activity plays a key theme along with earnings reports which are driving short interest in the tech sector. Finally, the team takes a look at the performance of mortgage REITs given the possibility of Fed tapering. Regulatory As AIFMD came into effect on 22 July, the Regulatory team discusses late implementation of AIFMD in certain EU member states, cooperation agreements with global regulators, and technical standards of AIFMs. Additionally, the team discusses developments with cross border derivatives regulation and European Market Infrastructure Regulation. July 2013 Cumulative Median Performance by Strategy Global performance July 2013 Performance Dispersion -1.39% 1.51% 2.02% 2.90% 4.48% 4.55% 4.85% 4.94% 5.37% 7.36% 8.30% 8.78% 12.66% 0.00% -4.00% -2.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 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), August 2013 Source: Hedge Fund Intelligence (HFI), August 2013 5 Time Voted No. 1 Prime Broker Global 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 Equity L/S 2.41% All Funds 0.93% Event Driven 1.91% Emerging Markets Equity 0.85% Market Neutral 1.47% Fixed Income 0.74% Multi-Strategy 1.39% Credit 0.27% CB & Vol Arb 1.06% Macro -0.67% Distressed 0.94% CTA / Managed Futures -1.25% * 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.
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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]
August 2013Executive summary*
Deutsche Bank Research Highlights: “Global Economic Perspectives: US labor market prospects mean tension for Fed thresholds”, “Markets Research: Understanding German Federal Elections” and “Markets Research: Focus Europe – Who needs credit?”The Global Markets Research team presents their projections for the unemployment rate in the US over the next few years. They believe that labor market prospects will feature prominently in monetary policy decisions over the next several years. These projections have important implications for the pace of rate hikes and highlight a natural tension in the Fed’s desire to delay the first rate increase while committing to a more gradual pace of hikes. In our European research pieces, the Markets Research team discusses the mechanics of the German federal election process and the recent PMI trend which they believe implies the euro area is on track to post a GDP recovery in H2 2013. The team debates the theory of the ‘credit impulse’ across the big 4 euro economies.
Investor Sentiment In July, the Hedge Fund Capital Group hosted a Japan Managers Forum in New York, providing investors with an opportunity to meet a variety of Japan-focused funds as well as learn about the macro and investment environment in Japan. During the month, the team also met with a variety of investors in Boston, who also showed an interest in Asia-focused strategies broadly. Finally, the team also discusses their recent “Hedge Fund Asset Raising Survey” which found that the US continues to be the largest source of new assets for global clients. PerformanceRecovering from the previous month’s loss, the median fund gained 0.93% in July bringing the global cumulative median fund performance to 4.85%. Regionally, equity l/s strategies continue to outperform other strategies with European l/s up 8.17% YTD, US l/s up 9.21% YTD and Japan l/s up 17.21% YTD. Global dispersion of returns across strategies remains high with equity l/s funds in the 75th percentile posting returns of 4.35% for July while CTA/Managed futures and Macro funds in the 25th percentile returned -5.19%.
LeverageThe MSCI World 30 day volatility decreased 3.15% in July ending the month at 14.18. Gross fundamental equity exposure increased 4.78% ending the month at 2.63, while net leverage decreased by 1.03% to 0.63.
Securities Lending The securities lending team discusses the mergers & acquisition environment, which posted its strongest July since 2008. In Asia, convertible bond activity plays a key theme along with earnings reports which are driving short interest in the tech sector. Finally, the team takes a look at the performance of mortgage REITs given the possibility of Fed tapering.
Regulatory As AIFMD came into effect on 22 July, the Regulatory team discusses late implementation of AIFMD in certain EU member states, cooperation agreements with global regulators, and technical standards of AIFMs. Additionally, the team discusses developments with cross border derivatives regulation and European Market Infrastructure Regulation.
July 2013 Cumulative Median Performance by Strategy
Source: Hedge Fund Intelligence (HFI), August 2013
Source: Hedge Fund Intelligence (HFI), August 2013
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
Equity L/S 2.41% All Funds 0.93%
Event Driven 1.91% Emerging Markets Equity 0.85%
Market Neutral 1.47% Fixed Income 0.74%
Multi-Strategy 1.39% Credit 0.27%
CB & Vol Arb 1.06% Macro -0.67%
Distressed 0.94% CTA / Managed Futures -1.25%
* 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.
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
Global Economic Perspectives: US labor market prospects mean tension for Fed thresholds 1
Labor market prospects will feature prominently in monetary policydecisions over the next several years: QE is conditioned on a “substantialimprovement” in the labor market outlook; 7% unemployment offers aguidepost for the end of asset purchases; the unemployment threshold of6.5% continues to (flexibly) guide the start of the policy rate hike cycle; and 5.6% unemployment (NAIRU) will influence the pace of rate hikes.
Given its prominence in the Fed’s guidance, this week’s GEP focuses onprospects for the unemployment rate. Our analysis suggests that theunemployment rate is most likely to fall to 7% in Q1 2014, 6.5% in Q42014, and 5.6% in Q1 2016. However, the balance of risks suggests thatthe unemployment rate may fall more gradually than this baseline scenario.
These projections have important implications for the pace of rate hikesand highlight a natural tension in the Fed’s desire to delay the first rateincrease while committing to a more gradual pace of hikes. Withunemployment expected to reach NAIRU and inflation at the Fed’s 2%target in H1 2016, monetary policy rules suggest that the fed funds rateshould be back to its neutral level (4% in the FOMC’s view) by that time.Thus, if the Fed begins raising rates in H1 2015, as we anticipate, the pace of rate hikes will have to be much faster than the market expects and the Fed’s forward guidance has implied.
To be sure, the pace of rate hikes will be data driven, and if inflationpressures do not materialize, the Fed may very well have cover to hike atthe gradual pace they envision. But monetary policy operates with a lag,and if inflation appears less benign, or if financial stability concerns related to low interest rates rise, it seems unlikely that the Fed could both wait until after the unemployment rate hits 6.5% for the first rate hike andincrease rates gradually. We continue to believe that the Fed will wait toraise rates until H1 2015 and anticipate that the pace of increases will befaster than the market currently anticipates.
Markets Research: Understanding German Federal Elections 2
Markets Research: Understanding German Federal ElectionsThe next federal election will be held on 22 September. Two months before this election, we provide a guide to the mechanics of this processGerman federal election law has been changed numerous times, most recently in May 2013. The current mechanism is a mix of direct (first past the post) and proportional representation.
The size of the German parliament (the Bundestag) is not fixedAlthough the Bundestag has a target number of 598 seats, the electionmechanism virtually guarantees that the actual number of deputies can be substantially higher, particularly under the new election law.
The complexity of the process arises from the combination of party and federalm elementsElection law in Germany attempts to reconcile a number of potentiallycontradictory elements: direct representation of local candidates, a strong role of political parties including proportional representation, and the federal structure of the republic. Variability of the number of seats in the Bundestag is used to reconcile these elements.
The new law removes some distortions that currently favour CDU and CSUA particular feature of the German election system is the so-called overhang mandates. These arise when a party wins more direct mandates in a given Land than its share of proportional representation seats. Currently, all overhang mandates are held by CDU and CSU. The German constitutional court has criticised the distortions caused by these mandates and the new law largely eliminates their impact on the overall seat distribution. This will also affect election strategies.
Markets Research: Focus Europe – Who needs credit? 3
The recent PMI trend, including the stronger-than-expected July flash outturn, implies the euro area is on track to post a GDP recovery in H2 2013 (we thinkQ2 will be positive too). In fact, even if the pace of improvement in PMIs were to halve, the implied GDP path would be in line with our H2 projections. The weaker credit flow numbers challenge the conclusions from the more positive Bank Lending Survey, but with the PMIs pointing to economic recovery the ECB can sit on its hands in August while maintaining the forward easing bias. We are tempted to put the clash between the actual credit flow data and the Bank Lending Survey down to the usual noisiness of the ‘credit impulse’. Nevertheless, to answer the question, are ‘credit-less recoveries’ possible, we look at the behavior of the corporate sector in the big 4 euro economies sincethe ‘Great Recession’ of 2008-2009.
The ‘credit impulse’ story holds in general: in periods of corporate contraction, the credit impulse is negative and vice versa. However, the credit impulse often under- or overshoots the pace of economic activity. This occurs because in some cases – and particularly so in Italy and Spain – corporations draw on their existing financial assets to repay their debt, rather than ‘simply’ direct their flows of savings to deleveraging.
Across the big 4 euro economies, we see scope for business spending to improve in Germany in the remainder of 2013 without a significant uptick in the credit impulse. In Spain, we expect a demand-driven improvement in the credit impulse. We are more circumspect about the outlook in France and Italy. UK Q2 GDP growth of 0.6% qoq was encouraging and could give way to an even stronger print in Q3 if the PMIs hold current levels and confidence is supported by recent ‘good news’ stories. However, UK output remains about the same level below its pre-recession peak as US output is above its previous highs, and the recovery may yet be tested. As a result, the BoE remains likely to decide on some type of policy guidance at its next policy meeting on August 1, to be announced alongside its Inflation Report on August 7.
Divergence between improving BLS and weak euro credit impluse...
... but consistent with our projected gradual recovery
1 http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/2082-2577/29176419/DB_GEP_2013-08-01_0900b8c08716fc1f.pdf, August 2013
2 http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/2764-E90F/8770262/DB_SpecialReport_2013-07-24_0900b8c0870f4a8d.pdf, July 2013
3 http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3626-0071/15329534/DB_FocusEurope_2013-07-26_0900b8c0871407f5.pdf, July 2013
45
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-15
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Credit Impulse, lhs EA BLS - CS (mort & ent average) EA
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
Deutsche Bank Hedge Fund Capital Group hosts the Japan Managers Forum in New YorkThe Deutsche Bank Hedge Fund Capital Group hosted the Japan Managers Forum in New York on July 17th. The event featured 14 of our Japan focused hedge fund clients who presented to 108 investors through one-on-one and small group meetings. The investors included pension funds, insurance companies, endowments, foundations, family offices, private banks and fund of funds. The attendee managers manage mainly equity oriented strategies, including fundamental, systematic l/s, directional, and market neutral .The level of investment experience in Japan of attending investors varied greatly. We saw a number of investors who are relatively new to the Japan space including some investors with exposure to Asia ex Japan or Pan Asia, as well as others who do not travel to Asia to see managers. Based on investor meeting requests, we saw that the activists and managers who focus on small / mid cap equity received the most attention from investors at the event.
For the luncheon presentation, Yoji Otani from our Global Markets Research team in Tokyo asserted his view that the first two parts (monetary easing and fiscal stimulus) of the Abe administration’s three-pronged strategy are important, but that the third part, which includes policies such as deregulation, is not critical to determine if the reform is going to be successful. He also talked about the consumption tax increase planned for April 2014 as the largest risk to the economy in Japan. Overall, we found that while investors gained a better understanding of the concept of Abenomics and its potential impacts and risks, they need to understand individual stocks, especially small and middle cap, in order to feel comfortable with an investment in Japan focused hedge funds.
Boston investors show interest in Asia-focused managersOur team visited Boston during the month to meet with a variety of investors, including consultant, endowment and fund of funds. Consistent with the solid attendance we witnessed at our Japan manager event in New York, there is substantial interest among Boston investors in Asia-focused managers broadly. Particularly, and also unsurprisingly, longer-biased Asian equity managers that are locally-based in the region remain the most favored as investors continue to exhibit the willingness to tolerate higher volatility for greater potential returns. In addition, we also observed interest among some of those investors in quantitatively-driven Asian equity strategies, managed in either market neutral or directional fashion.
US team explores institutional and fund of funds communities in addition to traditional family office community in TexasAt the end of July, our team visited with investors in Dallas and Fort Worth, Texas. Large family offices and multi-family offices make up the majority of the investor landscape in these two cities, but it is important to note that there is a small community of pensions, endowments, foundations, and fund of funds in this area. The family offices the team met with were interested in a variety of managers – from more established, larger managers for client wealth preservation to smaller earlier stage managers for future generations’ wealth growth. It was a case-by-case situation per office. They did however all collectively show interest in fundamental, longer biased equity long/short managers, except for one office that has recently exited their equity exposures in anticipation of market volatility from the expected U.S. tapering in the fall.
In addition, the team met with one public pension which prefers to meet with larger managers with a long track record. They commented that their annual volatility is in the low end of their target range and they are looking to invest in higher volatility managers that focus on hedged exposures and alpha generation. They further noted that fees are a focus area for them and that they turnover one to two managers in their portfolio annually.
The team rounded out the trip with a fund of funds visit. This fund of funds has been raising assets which primarily come from local and state pension funds. This fund of funds is interested in all strategies and prefers to meet with managers early on.
The US continues to be the largest source of new assets for global clientsThe Hedge Fund Capital Group recently conducted a “Hedge Fund Asset Raising Survey”, interviewing over 40 global hedge fund managers, representing over $423bn in AUM. Results indicated that US institutional investors remain the dominant source of capital for hedge funds globally, representing 60% of assets raised. From our sample, macro and equity hedge received more than half of H1 gross inflows. It was clear that institutional investors continue to back the large, well-established firms, with this group representing 57% of flows to $5bn+ firms. When asked how their investor base has changed over the last couple of years, one third of participating managers cited a decrease in the amount of fund of funds clients. Concurrently, 24% of managers reported growth in their institutional client base, and 21% specifically cited an increase in their pension fund clientele.
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 Special Feature – Hedge Fund Marketing 5
Marketing material - For institutional investors only
AIFMD (Alternative Investment Fund Manager Directive)changes European marketing rulesAIFMD became effective on 22nd July 2013. From this date, all new alternative investment fund managers (“AIFMs”) established within the EU need to be authorized. Managers established in the EU prior to 22 July 2013 are able to make use of local transitional arrangements and have up to a year to gain their new AIFMD registration. The rules and regulations associated with AIFMD have a direct impact on the how managers can market to European investors. Whilst most of the provisions of AIFMD have been introduced in a harmonised fashion across the EU member states, this is not generally the case with the rules related to marketing under AIFMD. AIFMD sets out two mechanisms by which AIFMs can market in the EU. The first is a new route via the passport, and the second is via private placement exemptions (“PPEs”) that may exist in each member state and is the regime under which hedge funds have marketed to European investors in the past. The passport, which is the most flexible route and allows immediate access to all member states, will be available to EU AIFMs (managers) once they are authorised. It is possible that this passport will be extended to non-European AIFM’s in 2015. However given the passport is a new concept, most managers who wish to market to EU investors will continue to take the second route (via PPE), subject to local laws in each member state. Whilst AIFMD introduces baseline requirements across all member states with respect to marketing without a passport, including certain reporting and transparency obligations, it also allows member states to impose stricter rules should they wish. The result is a somewhat disjointed approach to marketing across the EU via PPE, albeit the predominant hedge fund markets remain open and in some cases the transitional period allows some immediate relief from the new rules. Managers continue to be permitted to accept investment from EU investors if initiated by the investor (a so called “reverse enquiry/ solicitation”). The principal benefit here is that any direct approach initiated by the investor is not deemed to be “marketing” and thus does require the manager to comply with the requirements of AIFMD. Managers need to be very careful to consider the local laws in each jurisdiction however, as again each member state may have differing interpretations of what activities may constitute a “reverse enquiry” and/or “marketing”. A number of AIFMD requirements have yet to be finalised, most notably remuneration and depositary liability rules. As such, most clients have yet to make any decisions around AIFMD authorisation, adopting instead a wait and see approach until further information is published.
5 From Deutsche Bank’s Hedge Fund Capital Group. This summary is for informational puposes only. Please refer to the disclaimer section of this document for further information.
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 6
Marketing material - For institutional investors only
Global — The MSCI World 30 day volatility decreased 3.15% in July ending the month at 14.18. Gross fundamental equity exposure increased 4.78% ending the month at 2.63, while net leverage decreased by 1.03% to 0.63.
— The percentage of funds in the mid-range (0 – 0.75) net equity leverage bands have increased since May. However, the percentage of funds in higher (0.75 – 2) net equity leverage bands has decreased.
Global net & gross equity leverage vs. volatility
Global – July 2013 Quarterly change in net equity leverage distribution across funds
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 7
US % short interest sector change - July 2013
Mergers & acquisitions post strongest July showing since 2008According to Thomson Reuters, mergers & acquisitions posted its strongest July showing since before Lehman Brothers collapsed in September 2008. Global M&A deals last month totaled $237.3 billion, compared to $352.7 billion recorded in July 2008.8 Throughout the first half of 2013 deal activity was lower than expected due to concerns over the euro zone crisis, the impact of potential spending cuts on the US economy, and a lack of clarity over whether central bank money-printing programs would be extended. It’s also worth noting many of the largest deals announced this month are either international or cross border mergers. Those deals making headlines include Canadian food/drug store retailer Loblaw Company’s cash or stock bid for Shoppers Drug Mart, Publicis/Omnicom in the advertising space, Community Health Systems/Health Management Associates in the healthcare sector, Canadian retailer Hudson’s Bay cash bid for Saks Inc., and finally Perrigo’s cash and stock bid for Irish pharmaceutical company Elan Corp.
As is the case with many merger arbitrage names, heavy inquiry following the announcement of the deals puts upward pressure on lending rebates in the overnight market. Lenders initially try to push stock at more expensive levels to maximize their profit, however rates will eventually ease if there is subdued demand. This was the case for Loblaw when rates post announcement jumped to 6% but settled inside of 3% by the end of July.
Convertible bond deals a key theme in AsiaKingsoft issued five year convertible bonds worth about $160 million.9 While the deal did launch with packaged borrow, the desk was active with secondary flow with borrow trading at 5-5.5%.
Kuroda Electric, which has several convertible bond issues that could be driving demand to borrow, saw a 61% jump in demand to 11.6% of shares outstanding. Japanese media firm, Kadokawa, was one of the most shorted Japanese names ahead of earnings and has seen shares out on loan increase by nearly 25%. This increase appears to be driven by convertible bond arbitrage as the firm has two, large convertible issuances outstanding.
Poor earnings reports drive short interest in mobile phonesFalling short of earnings expectations for an eighth consecutive quarter, HTC now trades at its lowest levels since October 2005.10 Onshore recalls for dividends led to $20-30 million of borrow returns over the past month.
MediaTek experienced directional demand ahead of third quarter numbers with market speculation that July shipments and sales from cell phone chip makers could miss expectations due to supply chain firms’ high inventory levels. With further turbulence in the MStar spread, which contracted to 20% at month end, the passing of the onshore dividend recall borrow fees eased as availability improved.
7 This material has been produced by the Deutsche Bank Securities Lending Group and must not be regarded as research or investment advice.
Boeing’s woes cause jump in borrow demand for ANAFollowing a recent spate of issues with its new 787 planes, the airline ANA has seen demand to borrow jump by 12% in the last month to 7.1%.11 The company is the largest operator of Boeing’s troubled airplane and will no doubt continue to attract interest from short sellers should the plane run into further difficulty.
47% year to date price appreciation garners attention for sharpTech firms Sony and Sharp are also seeing an increase in demand to borrow. Sharp has seen the largest rise with a 32% increase in the loan balance to 6.1% of the total shares. The upcoming quarter will no doubt shed some light as to whether Sharp’s 47% year to date price appreciation is justified given that the company is not expected to post a profit until the second half of the year.12
Mortgage REITs slump with possibility of Fed taperingReal Estate Investment Trusts (REITs) slumped during the first week of trading last month after a better-than-forecasted employment report suggested the Federal Reserve will begin to reduce the size of its asset purchases. Annaly Capital Mgmt and American Capital Agency, two of the larger REITs, led the downward trend. Despite an improving housing market, US Mortgage REITs have fallen by 20% in the last two months. The increased volatility has seen equity prices fall across the sector following a strong showing through the first four months of the year. Short sellers have acted on the back of this recent weakness according to Markit Data. The average percentage of shares out on loan across mortgage REITs now stands at 3.5%, which is up two-thirds from the start of the year. Those companies leading in terms of short demand are Redwood Trust Inc, Western Asset Mortgage Capital, Istar Financial Inc, Javelin Mortgage Investment Corp, and New York Mortgage Trust Inc.
In Asia, Singapore Press filed their REIT prospectus with the expected IPO launch on the horizon.13 At $700 million we continue to see the short base as the largest in Singapore with borrow fees over 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 14
Marketing material - For institutional investors only
The European Securities and Markets Authority (ESMA) publishes arrangements for the late implementation of AIFMD in certain EU member statesAlthough the main fund domiciles in the EU have implemented the AIFMD legislation, according to Ernst and Young fifteen jurisdictions to date are still to implement the rules, including Spain, Portugal, Slovenia, Hungary, Finland and Belgium.15 This creates some legal uncertainty as to whether a manager authorised in one country would be able to manage a fund or market a fund cross border in another country that has not implemented the rules. The ESMA opinion clarifies that those Member States that have not yet implemented AIFMD cannot restrict the marketing or management of funds in their country if the manager has a valid authorisation from a Member State that has implemented AIFMD. Member States that have not yet implemented AIFMD would need to disapply any local restrictions preventing marketing or management of funds in their jurisdiction.
ESMA signs seven additional cooperation arrangements between EU and global securities regulators in relation to AIFMDThe arrangements will permit managers from third countries access to EU markets. Under the AIFMD, ESMA is empowered to facilitate the negotiation and conclusion of cooperation arrangements between the competent authorities of EU Member States and the supervisory authorities of third countries. National regulators are now in the process of signing Memorandums of Understanding with those jurisdictions relevant to their market. In total, ESMA has now negotiated 38 agreements on behalf of the 31 EU/EEA national competent authorities for securities markets supervision, including Cayman Islands, the United States, including, but not limited to, the Commodity Futures Trading Commission (CFTC), the Bahamas, and Japan. The cooperation agreements allow for the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of respective supervisory laws.
Technical standards on types of AIFMs rejectedESMA also published a letter it had received from the European Commission rejecting the regulatory technical standards (RTS) on types of AIFMs that it had submitted in April 2013. The Commission states that while it agrees with the overall approach suggested by the draft RTS it does not believe that basing the distinction between open and closed-end AIFs on the frequency at which redemptions can be made is compatible with the level 1 requirements of AIFMD. The Commission invites ESMA to re-submit draft regulatory technical standards. The rejection will cause uncertainty for national competent authorities that are currently in the process of implementing the legislation.
European Commission and the Commodity Futures TradingCommission (CFTC) affirm joint approach to cross borderderivatives regulationThe European Commission and the Commodity Futures Trading Commission (CFTC) made an announcement regarding their joint understanding of a package of measures for how to approach crossborder derivatives regulation, affirming they share the view that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective derivatives regulation and enforcement regimes. On uncleared swaps, the regulators will continue to work together on similar approaches to straight-through-processing and harmonized international rules on margin for uncleared swaps. The EU and US have a broadly similar approach in terms of which market participants are covered by clearing requirements, but have agreed to a ‘stricter-ruleapplies’ approach to cross-border transactions where necessary. For the US trading requirement, the CFTC has clarified that where a swap is executed on an anonymous and cleared basis on a registered designated contract market (DCM), swap execution facility (SEF), or foreign board of trade (FBOT) the counterparties will be deemed to have met their transaction-level requirements, including the CFTC’s trade-execution requirement.
On trade reporting, the regulators will seek to resolve any material issues that may arise in line with the conclusions that may be drawn from international discussions on the topic. Lastly, with respect to central counterparties (CCPs), CCP initial margin coverage is the only key material difference and the regulators will work together to reduce any regulatory arbitrage opportunities and will endeavour to ensure that CCPs that have not yet been recognised or registered in the US or the EU will be permitted to continue their business operations. Following the agreement with the EU, the CFTC on 12 July approved final guidance on the cross-border application of Dodd-Frank’s swap regulatory requirements and an exemptive order phasing-in compliance. The exemptive order expires on 21 December 2013 or such earlier date specified in the order. The guidance includes the final definition of a US person, which is largely territorial-based and captures collective investment vehicles, including hedge funds, that are directly or indirectly majority-owned by US persons, or that have their principal place of business in the US. The guidance also clarifies which swaps should be included by non-US swap dealers and major swap participants in their threshold calculations for registration with the CFTC and outlines how various entity level and transaction level requirements will apply to cross-border transactions and sets out a substituted compliance framework.
Discussion paper published on implementation ofclearing obligation for derivatives under European MarketInfrastructure Regulation (EMIR)In the discussion paper, ESMA sets out the timescales for setting clearing obligations and the methodology for determining which contracts within a particular asset class should be captured by a clearing obligation. ESMA are proposing to take a criteria-based approach to determining which contracts should be subject to clearing obligations, based on the economic features of the product. Following CCP authorisations under EMIR, ESMA will then separately consult on draft technical standards for specific clearing obligations. Mandatory clearing is expected to take effect from as early as mid 2014.
US Fed unanimously approves Final Regulatory Capital Ruleto implement Basel IIIThe rule will apply from January 2014 for the largest US banks (more than $500 million in assets).The final rule mandates minimum capital ratios in line with the Basel III agreement (4.5% Common Equity Tier 1 (CET1); 6% Tier 1 and total capital of 8%) including a capital conservation buffer of 2.5% CET1 for all banks and a countercyclical capital buffer which can be varied up to 2.5% for banks using advanced approaches. From 1 January 2015, all banks will calculate their risk-weighted assets (RWAs) using both the standardised model and advanced approaches, and apply the most conservative of the two. This will limit variation between banks’ valuations and serve as a floor, as required by terms of Dodd-Frank. The rule also mandates that all banks are subject to a leverage ratio of 4% under US GAAP, and that banks using advanced approaches are subject to an additional minimum supplementary leverage ratio of 3%, based on a wider range of exposures defined under Basel III. Fed Governor Tarullo also announced that the Fed will shortly propose a rule for a minimum leverage ratio above the Basel III 3% minimum.
Consultation published on draft Regulatory TechnicalStandards (RTS) for EU remuneration requirementsOn 29 July, the European Banking Authority (EBA) published a consultation on draft Regulatory Technical Standards (RTS) for classes of instruments other than equity which can be used in variable remuneration. The draft RTS published by the EBA sets out the classes of instruments which can be used for variable remuneration: Additional Tier 1 (AT1), Tier 2; other debt instruments; and synthetic instruments. They also prescribe a write-down and conversion mechanism for Tier 2 and other instruments if they are paid towards variable remuneration, since this process is already defined in CRD IV for AT1. The EBA is aiming to finalise the RTS at the beginning of 2014. Comments on the consultation can be made until 29 October 2013.
14 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.
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