First Impressions

Germination And Emergence: Allison Yacker on Emerging Manager Seeding Arrangements

In the trading space, much like the rest of the world, some of the best ideas and strategies come from emerging managers, or the “new kids on the block.” The trick is finding the right right win-win partnership to help get them on their way.

Today, it is the large managed funds that control most of the assets. A recent study from hedge fund research firm Preqin shows that big funds – those with over a billion under management, manage more than 90 percent of the assets. That concentration of assets creates a problem for small or new funds, looking to get seed money that will propel the firm forward. According to Allison Yacker, partner at Katten Muchin Rosenman, part of the solution lies in “seeding arrangements,” whereby a larger, established firm provides the working capital and other elements that allow an emerging manager to focus on trading. The challenging trading environment since the 2008 financial crisis, coupled with more regulations and compliance costs, has created a more competitive environment for firms looking to attract capital.
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Quote of the Day

“You are not going to have the population as a whole understand all the nuances of what we are talking about here. They need to trust us. They need to know that we care. If they trust us and know that we care, they are going to give us the benefit of the doubt on some of the complexities they may not fully understand.”

Neel Kashkari, president of the Minneapolis Federal Reserve, in the story, “Fed must act on ‘economic anger’, says official”

Lead Stories

Fed Officials, at Meeting, Found Economic Outlook Cloudy
Binyamin Appelbaum -NY Times
Federal Reserve officials threw up their hands in January, deciding that they could not decide whether market turmoil would impede domestic economic growth.
The Fed in recent years has issued an assessment of economic conditions after each meeting of its policy-making committee, but that assessment was missing from its statement after the most recent meeting in January. An official account of the meeting, published Wednesday after a standard three-week delay, makes clear that Fed officials simply did not know what to say.

****SD: Hopefully, we can get some meatballs with that forecast.

Times are changing for US Treasury market
Joe Rennison – Financial Times
For traders, information is king. The $13tn US Treasury market — which plays a pivotal role as a benchmark for financial assets — has long been closed off to those outside the big banks that dominate trading, but now there is a push to open up access. The catalyst was a wild and unexpected swing in Treasury prices in a matter of minutes in October 2014. With regulators still struggling to explain why bond prices rose sharply and subsequently plunged that day, attention has centred on the lack of pricing and trading information generally available, unlike in other widely traded markets, such as equities and futures.

Good news for China’s economy … and bad news, too: Beijing poised to increase money supply to boost growth but risks on rise
Zhou Xin – South China Morning Post
The good news is China is ready to flood the economy with money, but the bad news is that the country’s slowdown is set to deepen, according to a senior government economist.
Zhu Baoliang, director of the economic forecast division at the State Information Centre, a think tank affiliated with China’s economic planning agency, said the central bank would maintain an accommodative monetary environment this year to ensure growth of more than 6.5 per cent and to avoid any form of financial, currency or debt crisis.

****SD: Related stories: China Debt Binge Spurs S&P Warning as Magnus Sees `Big Problems’, China’s Subprime Crisis Is Here and Chinese bank hit by $4.9bn loan fraud

The Big Long: Making a Killing in Market Everyone Left for Dead
Alastair Marsh – Bloomberg
First came the big short. Then, for Milan Patel, came the big long.
With the financial crisis raging in January 2009, Patel and a handful of colleagues hit upon the trade of their life: They would put up their own money to buy the complex securities that everyone else was dumping.

Banks cast shadow over credit market
Dan Barnes – Futures & Options World
Parts of the fixed income markets are proving too expensive for investment banks to engage with. Consequently the risk they have historically shouldered is moving on to other players. Capital charges on uncleared credit derivatives trading are punitive. Interest rate instruments appear too volatile or unprofitable. So dealers are getting out of the game.

****SD: Also see Fed Frets Corporate Credit Crunch Will Crimp Economic Growth

I’m more convinced of secular stagnation than ever before
Larry Summers – Washington Post
Foreign Affairs has just published my latest on the secular stagnation hypothesis. I am increasingly convinced that it captures what is going on in the industrialized world and that the risks of long term weakness on the current policy path are growing.
Unfortunately, since I put forward the argument in late 2013, the data have been all too supportive. Despite monetary policy being much more expansionary than was expected and medium term interest rates falling rapidly, growth and inflation throughout the industrial world have been much lower than anticipated. This is exactly what one would expect if structural factors were increasing saving propensities relative to investment propensities.

****SD: On a similar note, Are We Doomed to Slow Growth?

Muni Yields at 50-Year Lows Make Buyers Wary of Calling Bottom
Brian Chappatta – Bloomberg
Some of the biggest municipal-bond buyers have stopped trying to call the market’s peak.
Just 38 months after tax-exempt yields touched the lowest since 1965, they’re back at that level following a rally in the safest assets as investors seek havens from the global financial turmoil. For BlackRock Inc., Nuveen Asset Management and Vanguard Group Inc., which combined oversee some 10 percent of the $3.7 trillion municipal market, the plan is to keep buying — and avoiding large bets one way or another on where interest rates move next.

Macaskill on markets: The mystery of the Basel outlier
Euromoney Magazine
The Basel Committee on Bank Supervision released long-awaited guidance on a new capital regime for market risk in January. It did not, however, solve the mystery of which bank was the outlier in a study of the potential effect of a change in trading risk evaluation.

Iranian banks reconnected to SWIFT network after four-year hiatus
Global transaction network SWIFT has reconnected a number of Iranian banks to its system, allowing them to resume cross-border transactions with foreign banks after the lifting of sanctions on Tehran, a SWIFT official said.

Central Banks

Fed Minutes Lay Bare a Split on U.S. Economic Outlook, Interest-Rate Path
Jon Hilsenrath – WSJ
Federal Reserve officials struggled with uncertainty about the outlook for inflation and growth at their January policy meeting and whether rising risks to the economy might alter their plans to raise short-term interest rates.

Negative interest rates a ‘dangerous experiment’ for the world as monetary policy hits buffers
Mehreen Khan – The Telegraph
Central bank moves to impose negative interest rates mark a “dangerous experiment” in global monetary policy, posing new risks to financial stability, economist have warned.
With banking stocks around the world in turmoil, Morgan Stanley said moves into deeper negative territory threatened to unleash a new crisis of confidence in markets, eroding the profitability of commercial lenders.

Mexico delivers unexpected rate rise with eye on inflation
Jude Webber – Financial Times
Mexico’s central bank raised the key lending rate by half a point to 3.75 per cent at an extraordinary meeting on Wednesday in an attempt to nip in the bud the prospect of rising inflation. The bank — which followed the US Federal Reserve in lifting rates in December when it lifted rates by a quarter of a point, and had been expected to stay in step with the US — stressed its decision was not the start of a rate raising cycle.

Japan Economy Minister: need more data to measure impact of negative rates
Policymakers need more data on economic activity and lending to judge the impact of the Bank of Japan’s surprise adoption of negative interest rates, Japanese Economy Minister Nobuteru Ishihara said on Wednesday.

China’s central bank governor Zhou goes on the attack
Gavyn Davies – Financial Times
The long and detailed interview given by the People’s Bank of China governor, Zhou Xiaochuan, to Caixin Weekly on Tuesday is in one sense very un-Chinese. It provides a much more fulsome statement of foreign exchange policy, as viewed from the central bank, than anything available in the past. After months in which the governor has been conspicuously absent from the public fray, he has now chosen to go on the attack.

Fed must act on ‘economic anger’, says official
Sam Fleming and Shawn Donnan – Financial Times
The US Federal Reserve must do a better job of responding to the rising tide of economic anger in America that is leading to a surge in protectionist rhetoric on the presidential campaign trail, according to the newest member of its policy committee.
In an interview with the Financial Times, Neel Kashkari, who took over as head of the Minneapolis Federal Reserve at the start of the year, warned that the Fed needed to work harder to rebuild public trust and communicate with American citizens. Economic anger, he said, was “all around the country and it is non-partisan”.


The 4 Horsemen Of The Global Deleveraging Apocalypse, Part I: China’s Renminbi Devaluation
Seeking Alpha
“Declaring war on China’s currency? Ha ha.” That’s the interesting title of a recent article published by the People’s Daily (official newspaper of China’s Communist Party). It serves as a warning to legendary fund manager, George Soros, against shorting the Chinese renminbi. (Side note: China’s currency has two names, the Yuan and Renminbi, they are interchangeable.)

The Big Short: The Hong Kong Peg Is Not for Turning
Erik Tollefson – The Diplomat
Persistent uncertainty regarding China’s economic growth trajectory, coupled with volatile global markets, have brought an old target back into focus: Hong Kong’s dollar peg. Indeed, as the People’s Bank of China (PBOC) battled to keep the spread between onshore and offshore RMB in an acceptable range in January, Hong Kong’s government stepped in numerous times to defend the Hong Kong dollar-U.S. dollar peg, something it has done increasingly over the past few years. Even with greater intervention over time supporting the peg, however, traders betting on a re-pegging, or even the demise of the peg, will almost certainly be disappointed over the short term.

Understanding The Theory and Practice of Islamic Forex Trading
Kara Tan Bhala – Finance Magnates
Islamic forex trading will increasingly be in demand. Before we understand Islamic forex trading we need to acquaint ourselves, albeit briefly, with Islamic finance.

Kraken announces significant progress in MtGox claims investigation
Global bitcoin exchange Kraken today shared that “significant progress” has been made in the investigation into claims from creditors of MtGox. In November 2014, Kraken was selected to assist Tokyo District Court-appointed Trustee Nobuaki Kobayashi in the bankruptcy investigation of missing Bitcoin, receiving claims and distributing remaining assets to creditors of MtGox. Today, the Trustee provided a long-awaited update on the investigation in claims at a scheduled Creditor’s Meeting in Tokyo.

FX Algo Trends: Stealth and Choice Drive Take-Up
Anna Reitman – Finance Magnates
If history proves anything, it’s that algorithmic trading adoption is going to move rapidly, and so too will execution quality, said Jacob Loveless, CEO of Lucera: “I definitely think you are going to start to see it this year, en masse, at scale and adding value.”

Indexes & Index Products

In Battle of Havens, Treasuries Outshine Gold for ETF Investors
Alexandra Scaggs – Bloomberg
Don’t call it a gold rush: For those seeking safety in 2016, U.S. government debt is the undisputed haven of choice. The iShares 20+ Year Treasury ETF, which trades under the ticker TLT, has attracted more cash than any other exchange-traded fund in the U.S. this year, according to data compiled by Bloomberg. Investors have shoveled $2.9 billion into the ETF — 30 percent of its assets — in the fund’s longest streak of consecutive weekly inflows since its inception in 2002. It’s part of a flood of more than $12 billion into Treasury funds since Jan. 1, over three times the amount that’s flocked to gold ETFs.

Mexico’s Currency Swing Shows Why Forex Matters to ETF Investors
Chris Dieterich – Barron’s
Emerging-market ETF investors are getting a lift from Mexico’s central bank, which surprised markets with efforts to buttress the country’s floundering currency.

Hedge Fund Infatuations
Larry Swedroe –
While the field of behavioral finance has provided us with many examples of anomalies in investor behavior, the biggest anomaly of them all, in my view, is why investors (and especially the supposedly more sophisticated institutional investors) continue to ignore the evidence and pour money into hedge funds. Despite their poor performance, assets under management at hedge funds continue to grow, surpassing $2.5 trillion. What’s particularly puzzling is that we don’t see this same trend when we look at the fund flows for actively managed mutual funds, where the relative underperformance is nowhere near as poor as it is with hedge funds. While, in aggregate, actively managed funds persistently underperform, investors are taking notice and acting. For example, in recent years, while equity index funds and ETFs continue to attract net cash inflows, actively managed funds have suffered outflows.

The market wisdom of jelly beans
Rolf Agather – FTSE Russell
Market prognostication is often equated with reading the tea leaves, but in fact a simple jelly bean experiment may offer a better premise for reading investor and market behavior. To explore this theory and in an homage to James Surowiecki’s famous Wisdom of Crowds book, FTSE Russell conducted our own jelly bean experiment on collective decision-making at Inside ETFs, the major industry conference held last month in Florida. The goal was to shed light on a key question that investors need to ask themselves: do I have better information than what is already embedded in market prices?

Consumer Credit Default Rates Steady In January 2016
S&P Dow Jones
Three of the Five Cities Report Default Rate Increases in January 2016 New York, February 16, 2016 – Data through January 2016, released today by S&P Dow Jones Indices and Experian for the S&P/Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults, shows the composite rate at 0.96% in January, down one basis point from the previous month.

ETF Investors Should Lean Toward Larger Companies
Tom Lydon – ETF Trends
After one of the worst beginnings to a new year, exchange traded funds that track smaller companies have struggled compared to those that follow bigger names.
“Small-cap stocks continue to struggle relative to their large-cap brethren,” according to Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock. “Part of the challenge is that small caps still remain far from cheap.”

BitMEX Adds China A50 Bitcoin Futures To Its Offerings
Bitcoin traders have been reaping the benefits of arbitrage opportunities for many years now. In fact, there is a growing need for arbitrageurs and market makers, as they are the main providers of liquidity in any financial context. BitMEX, a platform specialized in trading Bitcoin derivatives, has integrated Bitcoin futures contracts with China stocks. This is a major step forward for the legitimacy of Bitcoin as a viable trading tool, both for investing and speculation across other markets.

Follow the Market Leader
The Options Insider
Those of you who trade the equity index ETF’s or even futures markets most likely know the frustration of having prices move within a penny of your supply or demand zone only to see them retreat without you being able to enter or exit your trade. So, what causes this failure of price touching the zones or worse, makes prices just barely break a zone and trigger your stop before moving in your favor? The leader can.


Gold: Hedging for WHAT, Exactly?
Charles Sizemore – Sizemore Insights
After looking dull for years, gold is finally sparkling again. With the market in convulsions and Fed Chair Janet Yellen broaching the possibility of negative interest rates, the yellow metal is up about 17% in 2016.
Hey, I get it. People are scared. And justifiably so. Frankly, I’m a little scared about where all of this is going. But before you run out and fill up the truck of your car with precious metals (and perhaps canned goods and ammo) let’s look at gold with a cold, analytical eye. Gold could go a little higher from here. It certainly has momentum at the moment. But if you’re looking for a true crisis hedge, gold isn’t it.

Gold sparkles amid global gloom to brighten mining sector
Brendan Clift – South China Morning Post
Gold miners have struck it lucky so far this year. With equities and non-gold commodities tanking amid slow global trade and raw materials oversupply, investors have traded risky assets for defensive options, sending the gold price soaring.

A Longtime Gold Bear Capitulates as Global Economy Turns Gloomy
Eddie Van Der Walt – Bloomberg
For years, ABN AMRO Group NV’s Georgette Boele has been a staunch bear on gold as prices tumbled. Now with gold on the brink of a bull market, she’s changed her tune.

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