Markets

(New York)

The global thirst for yield has spawned a familiar, if alarming, trend in the hedge fund space. In order for banks to better sell Triple A CLO tranches, and for hedge funds to make better returns, the pairing has come up with a new plan. Banks are now lending money to hedge funds so that the money managers can buy Triple A CLO tranches back from the banks. The trade helps hedge funds magnify returns through leverage and helps banks dispose of hard-to-sell assets. Such high quality tranches generally have relatively low yields, which has long kept hedge fund investors out of the space, but with the new ability to add leverage and magnify returns, the segment has become attractive. Many are sceptical of the new trades, saying they are highly risky carry trades that will prove hard to exit and could unwind in several ways. One high ranking banker says that there is way too much supply on the issuance side because of the reach for yield on the buyside, meaning lots of low quality CLOs are being offered.


 

FINSUM: This sounds like old-fashioned pre-crisis “risk-on” leverage that is buying into complex assets. Hopefully, if rates are raised rationality will return to the market.

(Buenos Aires)

After a months-long court battle and a failed appeal to the US Supreme Court, Argentina has officially been ordered by US courts to pay the $1.5 bn in debt it owes to creditors. Argentina had pleaded with the Supreme Court to hear their case on the basis that previous courts had misread their bond agreements and thus violated their sovereign immunity, but the Supreme Court declined to hear the case. That means that Argentina must pay the $1.5 bn before it is allowed to pay money owed to other bondholders. The situation also sets a dangerous precedent for Argentina and other borrowers as it shows that “holdout” creditors can win cases and be paid in full, therefore, potentially lowering the incentive to participate in debt restructurings in the future. 93% of Argentina’s creditors participated in debt restructuring plans, but the remaining 7% will now be repaid in full. Argentina’s next interest payments are due on June 30, so the $1.5 bn will need to be paid before then.


 

FINSUM: This story does have interesting implications for debt restructuring everywhere, especially in light of Europe still working out its debt issues. Why would one now give-in to restructurings if they have a good chance of being paid in full?

 

 

(London)

The results of a major ten-year academic study at London’s Cass Business School Pensions Institute have been released and offer some sobering insights into investing. When taking account of fees, just 1 in a hundred managers, or 1.4%, actually beat the performance of their index. The study looked at the performance of 516 funds over ten years, and found that only 1.4% delivered any value to investors. The results mean that investors would have been much better off had they simply parked their money in low cost ETF or tracker funds which simply mirror the benchmark index. Despite the findings, which build on several others released over the past few years, active management, where “star” managers are paid to pick stocks, remains by far the dominant style in the investing landscape. The paper also concluded that large funds tended to underperform smaller ones because of the way that large capital bases boosted asset prices and lowered yields.


 

FINSUM: Because of previous headlines, it likely surprises no one that active managers get consistently outperformed by their benchmarks, but the degree to which this is true is startling.

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