A recent WSJ article is highlighting once again the losses incurred at university endowments, especially those at Harvard. The Harvard endowment is reported to have lost "at least" 22 percent in the first four months of the school's recent fiscal year. This equates to approximately an $8 billion loss for the nearly $37 billion portfolio. Unfortunately, the pain may get worse as the current value does not appear to consider real estate or private equity investments, causing the university to start planning for a total decline of 30 percent for the fiscal year. While alternative investments have helped to shelter endowments at Harvard, Yale, and elsewhere from past sell-offs in the general market, this time the recent credit crisis has affect nearly every asset class. This has made the losses on relatively illiquid assets, such as real estate and private equity, potentially quite severe as portfolios are forced to sell such assets at deep discounts. Private equity investments with Harvard are reported to only be receiving bids of 50 cents on the dollar. Diversification and investing in alternative investments has its benefits, but it can also introduce new risk to manage, such as liquidity risk. Certainly a lesson we all need to be taught, even if we have to learn it the hard way.
Surprise, surprise. A GAO audit found that more oversight is needed for the $700 billion TARP bailout package (see CNN Money article). Apparently, as a result of lack of oversight, those receiving billions in funds have not been using the money as originally intended. Not only is it amazing that this is a surprise, but it is interesting how as the amount of money increases, the level of monitoring seems to go down.
Time to bailout alternative energy (see Spiegel Online article). Cheaper crude oil is decreasing the demand for clean and efficient energy. The credit crisis is also making it difficult for new renewable energy companies to get the capital they need to expand and continue daily operations. Spain and Germany are already offering incentives, and the European Commission announced a $252 billion recovery plan that included targeted investments for carbon reduction. President-elect Obama is also expected to use some of the $700 billion stimulus package on eco-businesses.
In an effort to survive the current credit crisis, hedge funds are lengthening lockup times in order to reduce the number of redemption requests (see Bloomberg article). In return, and in an attempt to raise more capital, some of the very same hedge funds are lowering management fees from 2 to 1 percent, and further lowering performance fees from 20 to 15 percent, or even as low as 10 percent in some instances.
Goldman Sachs, still adjusting to its new role as a bank holding company, is considering online banking (see WSJ article). The move in being done in part to help increase its deposit base. While a lower-margin business, the increased deposit base will allow Goldman to have a more stable capital base during difficult market conditions, one of the main reasons for changing its status to a bank-holding company.
According to information from the Preqin Global Institutional Review (by way of an Albourne Village post), institutional investors plan to continue allocating capital to hedge funds. A total of 46.6 percent still have a positive long-term view of hedge funds, while 67.8 percent have an unfilled long-term target allocation to hedge funds. A total of 75 percent reported that while hedge fund returns had fallen short of original expectations, 53 percent were satisfied with returns (compared to the market in general, I assume). Of interest in the post was the comment that while institutional investors were delaying making new investments with hedge funds, few were redeeming their original investments. Whether this means redemption requests will slow down, or whether the speculation about redemption requests driving the recent sell-offs were overblown (by many, including myself), is unknown.
Interesting article about John Paulson and some other hedge fund winners this year (see Bloomberg article). The article is long, but worth the read. There is some variety in the strategies and approaches, but funds betting against subprime and housing did the best, not surprisingly. Even a quant fund did well.
It looks like the commodity crash is taking its toll on salaries and bonuses. The top paid metal and energy traders may "only" earn $1-1.5 million in salary and bonus this year, down from $5-8 million in 2007 (see Bloomberg article). Difficult times indeed. I guess there will be no more $1,000 ice cream sundaes and pizza for a while (see blog post).
According to Treasury Secretary Paulson, there is a need for a new regulatory system that will look "at the entire financial system." See Financial Week article. "Entire" in this case applies to countries, in addition to asset classes. So the plan is to have each country overseeing the regulation of another country's financial system - this should produce some interest debate.
Man Group says that banks, and not hedge funds, are more levered, and as a result are the main cause of asset price declines (see Reuters article). Man also puts hedge fund leverage at about one-third its levels in 2007. Expect future returns to also show similar trends.
Portable alpha strategies are providing pain for various state pension funds (see WSJ article). Even the PIMCO portable alpha fund is taking a hit. You can find additional details on portable alpha strategies here.
While hedge fund redemption requests have been strong in the US, the next wave of redemption requests may come from Asia, where many hedge funds have suffered worse performance than similar funds in the west (see The Standard, Hong Kong article). In comparison, Asian hedge funds are down 22.2 percent on average, compared to an average loss of 12.2 percent for all hedge funds. As a result, more pain could be felt for international investments.
Should Treasury go back to its original plan of buying MBS in a reverse auction? Some economist believe so (see NY Post article). Having the government receive common, instead of preferred shares, would also go a long way towards further instilling confidence in private investors - who currently see the government being unwilling to take the same risk they are being asked to take.
The option strategy of buying stock and then writing call options against it - known as buy-write - is still generating some of its highest premiums in over 20 years (see WSJ article). By using a hypothetical version of the strategy using the BMX index as a comparison, the CBOE found that a buy-write strategy would have produced an 8.1 percent gross monthly premium in November, topping the second highest recent premium of 7.1 percent generated in October just a month earlier. Since June 30, 1986 until the end of October, 2008, the strategy has generated an average annualized return of 9.2 percent, while the S&P 500 index produced a return of 8.7 percent over the same time period. While volatility will not always be as high as it is now, nor will it always generate healthy option premiums and a nice return over the S&P 500, even an average 0.5 percent extra return over more than 20 years starts to look pretty good - not to mention compounds into some significant cash.
For those a little intimidated by option strategies, keep in mind that with a buy-write strategy your obligation for the written call is covered by owning the stock (a covered call). Therefore, you don't have the same potential "infinite" loss that scares away many investors from writing options. Of course, there are downsides. Besides the fact that your long position could decrease in value, an additional downside is that your long stock position could be called away if the stock produces a significant move - causing you to potentially leave some money on the table. Nonetheless, the strategy forces a sell discipline, which for many is the most difficult part of investing. For instance, if a 3-month call has an exercise price that is 20 precent away from the current price of the long stock position, then the stock could be called away once its price rises more than 20 percent in 3 months. Certainly disappointing when the stock moves much more than 20 percent, but you still lock into 20 percent (plus the premium) in 3 months or less. Not bad in my book. In the mean time, the premium provides additional downside protection, just in case you end up not picking a winner. For those interested, some additional information on buy-write strategies can be found here, here, and here.
As we begin looking at our year-end investment portfolios, and feeling a sense of dread as we see our retirement savings down a third or more, it is useful to compare the US markets with the rest of the world. As it turns out, over the last year US investors would have been better off investing more in the US, and less overseas in the "hot" markets, such as China and Brazil (see WSJ article). Just as many investors this year realized that their global exposure was a little lite, the bottom fell out in some of the very same markets they began increasing their exposure in (not to mention drops in the US market - see graphic below from the WSJ).
After rallying nearly 10% over the last week, the DJIA is down "only" 33 percent for the year. In comparison, the Shanghai Composite (China) is down over 64 percent, while the the Bovespa (Brazil) the DAX (Germany) are down over 42 percent. The FTSE 100 (UK) is down about the same as the US DJIA. The Dow Jones World Index, which excludes the US markets, is down 49 percent in dollar terms YTD. Of course, massive sales of foreign stocks by US investors has also not helped international markets. Between July and September, US investors sold $92 billion more of foreign stocks and bonds than they bought during the same time. Therefore, if you recently failed to jump on the international diversification train this year, either because you had foresight, or were simply too confused or too lazy and never got around to it, smile - you could be even worse off this year. If you jumped on board back in 2003, you have experienced a nearly lost half-decade for many markets, but you can also smile - at least you are nearly flat. If you jumped on board in late 2007, or earlier this year, well ........, at least you have your health (and a lot of company to commiserate with).
The Microsoft-Yahoo! rumors are back in full swing. The Times Online (see article) is reporting that Microsoft is in serious talks to acquire the search business of Yahoo! for $20 billion, much less than the original $47.5 billion offered for the company this past summer. Details have Microsoft obtaining a 10-year agreement to manage the search business with a two-year call option to buy the search business for $20 billion, which would leave Yahoo! with its email, messaging, and content services businesses. It is worth noting that the BoomTown blog is reporting that the story may be "Total Fiction," based on comments from those who are reported to be involved in the deal (see post). The post also mentions how the entire market cap of Yahoo! is just $16 billion. Yet, offering a premium to shareholders, even for only the most valuable part of the company, is certainly not unheard of.
The rumors have been given some leverage with the recent announcement that Jerry Yang, the CEO of Yahoo! will be stepping down as soon as a replacement can be found. Yang was thought to be the main roadblock to a summer merger. The news that Google has decided to pull out of its advertising deal with Yahoo! also helps to clear the path for a new merger agreement (see MarketWatch article). Always one to sense an opportunity, Carl Icahn has begun purchasing more shares of Yahoo! (see WSJ article), recently adding 6.8 million shares, raising his stake to about 5.5 percent of the company. The additional $67 million is a drop in the bucket compared to the nearly $1 billion that Icahn has already lost on previous positions, but does give him more bargaining power regarding any future board members and CEO.
Whether all of this is just another case of throwing good money after bad is yet to be seen. Yahoo! stock is up a few dollars to $11.51 per share after falling to a 52-week low of $8.94 a share. While Icahn has made some money on his recent purchases (average cost of around $9.88 a share), he may once again be at the mercy of any potential deal in order to realize the original value he was hoping to receive. With a larger stake, and current CEO Yang now less of a roadblock, Icahn may finally get the deal he wants, even if it ends up costing him after all is said and done. Retail investors that skipped the first and second rounds of merger talks, but have now entered after the most recent round of speculation, may fair better. Of course, this may have less to do with Microsoft and a growing Icahn put, and more to due with a market that is attempting to build a bottom and change momentum.
