Cre
dit
CTA
/ M
anag
ed F
utu
res
Mu
lti-S
trat
egy
Em
erg
ing
Mar
kets
Eq
uity
Eve
nt
Dri
ven
Dis
tres
sed
Fixe
d In
com
e
All
Fun
ds
CB
& V
ol A
rb
Mar
ket
Neu
tral
Mac
ro
Eq
uity
L/S
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
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]
May 2014Executive summary*
Deutsche Bank Research Highlights: “US Equity Insights: Can yields stay cool this summer as growth heats up?”, “Global Economic Perspectives: Japan’s expectations gap,” and “Focus Europe: Buying time”In our first research piece, the US Equity Insights team explains that the key to S&P performance is how five and ten year treasury yields react to acceleration and predicts 5-6% EPS growth through at least 2016. The team presents three reasons to wait for a dip while watching treasury yields this summer. Next, the Global Economic Perspectives team examines the widening gap between investor expectations and Bank of Japan expectations about the success of BOJ’s reflationary policy. The team concludes that the BOJ is unlikely to make significant further easing moves any time soon. Finally, the Focus Europe team discusses the EBA’s macro scenario for the 2014 euro area stress test finding that non-performing loans, pre-provision profits and risk-weighted assets will be key drivers of the stress test, but it is unlikely that the results will generate material and widespread capital needs. Investor Sentiment The Capital Introductions team met with allocators in Germany finding that sentiment towards hedge funds remains cautiously optimistic and investors are mainly looking for discretionary macro and fixed income relative value strategies. In the US, institutional allocators, as well as family offices and fund of funds, are generally maintaining allocations, but remain open to best ideas. Large hedge fund allocators in Australia have reaffirmed their commitment to hedge funds with several institutions growing their hedge fund specialist teams. PerformanceIt was a challenging month for hedge funds with the median fund flat (0.00%) over the period. There was an unusually wide dispersion of returns among equity long/short strategies in particular. Global gains in April were led by credit (+0.81%), CTA / managed futures (+0.51%) and multi-strategy funds (+0.42%). Regionally, credit strategies continue to perform well gaining 4.32% in the US and 3.10% in Europe YTD; however, Asia ex Japan l/s leads with gains of 0.29% YTD. LeverageThe MSCI World 30 day volatility decreased slightly by 0.53% over the month ending 28 April 2014. Both gross and net fundamental equity exposure increased last month ending at 2.70 (+6.21%) and 0.71 (+4.10%) respectively. Securities Lending Though another difficult month in the equities market, deal activity picked up substantially in April, especially in the pharmaceuticals sector, with offers for AstraZeneca Plc and Meda of particular notice. Merger activity was complemented by strong convertible issuance throughout the month. Recent tech-related IPO names saw strong short interest in April including Twitter, Japan Display Inc. and Hitachi Maxell. Regulatory In the US, the SEC announced its intention to examine around 25 funds over the next six months to review whether certain alternative mutual funds that follow riskier hedge-fund strategies are complying with leverage and liquidity rules. The SEC also issued a risk alert on cyber security and plans to examine more than 50 investment advisers and broker-dealers regarding their level of preparedness. In the UK, the FCA published survey results on the composition of the UK hedge fund industry finding that the UK’s top 20 firms control over 80% of AUM. In Europe, the EU rejected the UK’s legal challenge of the EU FTT and the EU Commission requested technical advice on the detailed rules of MiFID 2.
April 2014 Cumulative Median Performance by Strategy
Global performance
April 2014 Performance Dispersion
-1.81%
-1.51%
-0.80%
0.31%
1.11%
1.23%
1.27%
1.61%
1.76%
1.89%
2.57%
3.75%
4.14%
-1.00% 5.00%4.00%-2.00% 0.00% 1.00% 2.00% 3.00%
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), May 2014
Source: Hedge Fund Intelligence (HFI), May 2014
6 Time Voted No. 1 Prime BrokerGlobal Custodian Prime Brokerage Survey
2013, 2012, 2011, 2010, 2009, 2008
Marketing material - For institutional investors only
Markets Prime Finance Monthly Hedge Fund Trends
Deutsche Bank
Median
Credit 0.81% Fixed Income 0.04%
CTA / Managed Futures 0.51% All Funds 0.00%
Multi-Strategy 0.42% CB & Vol Arb -0.23%
Emerging Markets Equity 0.26% Market Neutral -0.49%
Event Driven 0.20% Macro -0.66%
Distressed 0.16% Equity L/S -1.00%
* 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.
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
Deutsche Bank Research – US Equity Insights: Can yields stay cool this summer as growth heats up? 1
How 5 & 10yr treasury yields react to acceleration is key to S&P performanceS&P 2014 EPS is becoming more certain with the plausible scenarios now in a narrow $117-120 range vs. $114-122 several months ago. Beyond 2014, we and most investors expect 5-6% EPS growth through at least 2016. The key uncertainty is the fair PE and the most important related question is: What’s the normal interest rate? This summer should help clarify the new normal midcycle interest rates across the curve and their trajectory over the next few years. US GDP growth should be >3% this summer, ending the run of mid-year soft patches and possibly opening the door to a longer period of ~3% growth. If the 10yr treasury yield can stay under 3.25% this summer against the backdrop of stronger growth, it is unlikely that it will exceed 4% through 2015. This improved clarity on low yields through the cycle should put the S&P 500 on path to 2000 within 12-months.
1Q EPS better than feared: Final EPS likely up ~3% y/y on ~2% sales growthAfter a weak start, earnings reports improved during the week of 25 April with good beats across sectors. Weighted EPS beat is now 4.0% for the S&P and 4.6% ex. Financials, a much needed improvement from barely positive beats previously. S&P 1Q bottom-up EPS climbed to $27.21 from $26.58 last week and is on track to reach our $27.50. Trimming of analysts’ estimates also slowed. Bottom-up 2014 EPS climbed to $119.00 from $118.30. ISM and payrolls during the last week of April provide the first glimpse of 2Q activity. But, a sharp ramp in growth is already expected in estimates. Our bottom-up EPS of $119 for 2014 requires remaining three quarters to average 10% y/y growth.
Three reasons to wait for a dip while watching treasury yields this summer1) PE > history: S&P trailing PE at 17 is ~5% higher than its avg. since
1960 and expected long-term EPS growth is in-line with history. Some low PE mega-caps are still attractive, but median PE at 18 is ~10% higher than its avg. and is dependent on low interest rates persisting through the cycle.
2) Higher interest rate volatility: Since 1966, the 10yr treasury yield increased by 50bps or more in 3 months at least once every year. In 2013, the 10yr jumped by 100bps during the taper tizzy. Interest rate volatility is likely to be higher this summer if the acceleration changes Fed guidance or investor expectations on the trajectory of the Fed Funds rate.
3) Summer lull increases during mid-term election years: Ex recession years S&P on avg. gains 3.9% from Jan-Apr, 0.9% from May-Sept and 4.4% from Oct-Dec. During mid-term election years, on avg. May-Sept is weaker with decline of 6.4% and Oct-Dec stronger with avg. gain of 6.7%.
Deutsche Bank Research – Global Economic Perspectives: Japan’s expectations gap 2
— The gap between investor expectations and Bank of Japan expectations about the success of the BOJ’s reflationary policy seems to be widening.
— The general expectation among investors, especially those outside of Japan, is that substantial additional monetary policy stimulus, including further substantial yen depreciation, will be needed if the BOJ is to succeed in its mission to slay deflation and return inflation to 2% on a sustained basis.
— The view within the BOJ is that the economy is close to settling into a virtuous cycle of wage and price inflation that will be self-sustaining without the help of further yen depreciation or monetary stimulus.
— We see substantial merit in the BOJ’s view based on both hard data and anecdotal information pointing to the disappearance of slack in an increasingly tight labor market and the evident closing of the output gap.
— The spell of zero wage inflation has been broken, and both price inflation and inflation expectations have risen impressively. More progress is needed in these areas, but the prospects look favorable as growth stands a good chance to remain comfortably above potential in the period ahead after a temporary tax-induced drop in the current quarter. Indeed, the early returns suggest the negative tax effects may be smaller than feared.
— These developments imply that the BOJ is unlikely to make significant further easing moves any time soon beyond a clarification of their forward guidance.
Output gap and core inflation, 1990-2013
Deutsche Bank Research – Focus Europe: Buying time 3
Having elevated expectations over the last several weeks, ECB President Draghi appeared to dial down the rhetoric during the final week of April making policy action seem less imminent. Our expectation is that the ECB makes no changes to policy in May. The latest inflation print was broadly in line with expectations and showed a rise from the April lows, the growth recovery is continuing to gather pace and the ECB remains confident that money market strains can be contained without intervention. Rhetoric should remain dovish and the options open, in our opinion, buying the ECB some time.
On 29 April the EBA published the macro scenario for the 2014 stress test. Overall the adverse scenario in the 2014 stress test is more severe than that in the 2011 exercise. We show that the treatment of three key building blocks – non-performing loans, pre-provision profits, risk-weighted assets – will be key drivers of the results of the stress test. Overall, it appears highly unlikely that the stress test will generate material and widespread capital needs.
The euro area inflation outlook remains highly uncertain, but on balance recent trends in leading indicators as well as in spot inflation seem consistent with expectations for some stabilization in inflation. That said, we would expect inflation to remain at low levels for now as food inflation could slow further in the near term (but is projected to rise again into 2015) and any recovery in core inflation is likely to be slow, not least given subdued trends in costs.
We review the experience of the 10 Central and Eastern European economies that joined the EU 10 years ago and think about what lies ahead. The strong integration into the European supply chains seems set to prevail. Strong financial integration also bodes well for growth. Long-term growth hinges on further productivity increases and the CEE-10 seem well equipped for an additional push towards more knowledge-intensive production and innovation.
A tougher but manageable stress test
1 http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/1660-06F8/9687024/0900b8c0882e60bd.pdf2 http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/1509-F2DE/7256351/DB_GEP_2014-04-
25_0900b8c088266689.pdf3 http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3793-420E/27941292/DB_FocusEurope_2014-05-
02_0900b8c08838b588.pdf
Source: Bank of Japan, Haver Analytics and Deutsche Bank Research
Source: Deutsche Bank
-4
-2
0
2
4
-10
-8
-6
-4
-2
0
2
4
6
8
90 94 98 02 06 10 14
%y/y%Output gap (ls) Core CPI (ex fresh food) inflation (rs)
0
5
10
15
20
25
30
0.00
0.05
0.10
0.15
0.20
0.25
0.30
Non performing loans andsovereign shock (NPLs)
NPLs + Pre-provision profits (PPP)
NPLs + PPP + risk weighted assets (RWA)
Illustrative total capital needs for euro-area banks as function of shocks
EUR bn % of GDP
3
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Monthly Hedge Fund Trends - Investor Sentiment 4
Marketing material - For institutional investors only
US pensions and endowments re-assess US exposure levelsThough portfolio turnover has been relatively low thus far in 2014, allocators in the US pension and endowment community continue to seek best ideas. Some have commented that they are concerned that the US is “overheated,” and as many are tactically overweight US they may start to decrease exposure slightly. A direct result has been the evaluation of other potential regions in which to invest. Indeed several US allocators have started to put capital to work in Europe over the last 6-9 months.
US family offices and fund of funds maintain allocationsSimilar to their institutional counterparts, family offices and funds of funds have not shown interest in rebalancing lately, though they are always open to best ideas across the capital structure. We have found that many of these investors are overweight equities, with no immediate plans to significantly reduce that exposure or re-allocate. Europe is also becoming more of a focus for this investor base.
Frankfurt-based investors tentatively looking at alternatives for diversificationA trip to Frankfurt this month revealed that sentiment towards hedge funds amongst local investors remains cautiously optimistic. The low yield environment, coupled with volatile equity markets, has forced allocators to start to look at fixed income replacement and portfolio diversification. To that point, a few funds did reveal that they had received new UCITS mandates from local pension funds, who are moving into hedge funds for the first time since 2008. In terms of strategies, those most frequently requested were discretionary macro and fixed income relative value.
UK pension funds pleased with current hedge fund investmentsUK private pension funds that invest directly into hedge funds are largely fully allocated within their portfolio, which contains an average of 10 to 15 investments. Strategy preferences vary significantly amongst the key players, and tend to depend on the maturity of their hedge fund portfolio. Those who have been investing for some time are more focused on fixed income replacement, credit managers, as well as taking opportunistic approach to best ideas in other strategies. On the other hand, those who are in the process of ramping up their hedge fund portfolios are more focused on diversifying away from their long only equity and fixed income exposure. As a result they are focused on multi-strategy, CTA and macro managers. Despite the strategy differences, the common theme here is that they are pleased with the hedge fund portfolio and are not actively seeking to replace managers. That said we expect that they will add best ideas on a very opportunistic basis this year. Mandate activity from the UK public pension funds remains quiet thus far in 2014.
Australian allocators evaluate returns and liquidity structuresAustralian institutional investors continue to evaluate their hedge fund allocations, particularly to macro and CTA strategies, as returns have underperformed expectations over the past few years. Liquidity in the retail superannuation space has become less of an issue with most large wealth management firms creating quarterly liquidity structures to receive allocations from their balanced/growth funds.
Australia hires hedge fund specialistsAustralia’s largest hedge fund investor, The Future Fund, showed a decline in the allocation to alternative assets in its latest quarterly update; however, it has proved its commitment to the sector by bringing on two new hires during the quarter, including the former head of hedge fund strategies from US pension fund, Calpers5. Towers Watson, one of the larger consultants present in Australia, also hired a hedge fund specialist this quarter helping to grow local expertise in the sector.
4 From Deutsche Bank’s Hedge Fund Capital Group5 http://www.futurefund.gov.au/__data/assets/pdf_file/0008/5975/2014_April_Portfolio_update_to_
Mar_2014_A353218.pdf
4
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Monthly Hedge Fund Trends - Performance
Marketing material - For institutional investors only
Americas
2014 Year to date median performance
Europe
2014 Year to date median performance
Asia
2014 Year to date median performance
Americas
April 2014 Performance dispersion of returns
Europe
April 2014 Performance dispersion of returns
Asia
April 2014 Performance dispersion of returns
Cre
dit
CTA
/ M
anag
ed F
utu
res
Mu
lti-S
trat
egy
Fixe
d In
com
e
All
Fun
ds
Eve
nt
Dri
ven
US
L/S
Dis
tres
sed
Mac
ro
Glo
bal
L/S
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
75th Median Average 25th S&P 500
Source: Hedge Fund Intelligence (HFI), May 2014
Cre
dit
CTA
/ M
anag
ed F
utu
res
Eve
nt
Dri
ven
Mu
lti-S
trat
egy
Em
erg
ing
Mar
kets
Eq
uity
All
Fun
ds
Fixe
d In
com
e
Mac
ro
Mar
ket
Neu
tral
Glo
bal
L/S
Eu
rop
ean
L/S
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
75th Median Average 25th Stoxx 600
Source: Hedge Fund Intelligence (HFI), May 2014
Mu
lti-S
trat
egy
Asi
a ex
-Jap
an L
/S
Mac
ro
Jap
an L
/S
P
an-A
sia
L/S
All
Fun
ds
Ch
ina
L/S
-7.00%
-6.00%
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
75th Median Average 25th MSCI AsiaPac incl Japan
Source: Hedge Fund Intelligence (HFI), May 2014
3.31%
4.32%
2.75%
2.28%
2.07%
2.21%
1.93%
1.72%
-1.01%
-1.52%
1.00% 2.00% 4.00% 5.00%3.00%0.00%-1.00%-2.00%
Distressed
2.97%
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), May 2014
-2.44%
-1.77%
-1.09%
-0.06%
0.21%
0.60%
0.84%
0.98%
1.28%
2.93%
3.10%
3.28%
-3.00% -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00%
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), May 2014
-5.02%
-3.00%
-2.84%
-2.28%
-1.90%
-0.86%
-0.47%
0.29%
-2.00%-3.00%-4.00%-5.00%-6.00% -1.00% 0.00% 1.00%
China L/S
MSCI AsiaPac incl Japan
Pan-Asia L/S
Multi-Strategy
Macro
Japan L/S
All Funds
Asia ex-Japan L/S
Source: Hedge Fund Intelligence (HFI), May 2014
5
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Monthly Hedge Fund Trends - Leverage 6
Marketing material - For institutional investors only
Global — The MSCI World 30 day volatility decreased slightly by 0.53% over the month ending 28 April 2014. Both gross and net fundamental equity
exposure increased last month ending at 2.70 (+6.21%) and 0.71 (+4.10%) respectively.
— The percentage of funds in the lowest leverage range (-1 - -0.25) and highest leverage range (1.25 – 1.75) has decreased since February 2014. In contrast, the percentage of funds in the middle range (0 – 0.75) has increased since February while the upper middle range (0.75 - 1) decreased over the same time period.
Global net & gross equity leverage vs. volatility
Global – April 2014 Quarterly change in net equity leverage distribution across funds
2.8
2.4
0.0
0.8
3.0
2.6
2.2
2.0
0.4
0.2
1.0
0.6
16
12
8
4
0
14
10
6
2
Apr 13May 13
Jun 13Jul 13
Aug 13Sep 13
Oct 13Nov 13
Jan 14Feb 14
Mar 14Apr 14
Dec 13
MSCI World 30d Vol
MC
SI W
orl
d 3
0 d
ay H
isto
rica
l Vol
Leve
rag
e
Gross Leverage Net Leverage
Source: Deutsche Bank Global Prime Finance Risk, May 2014
0%
2%
4%
6%
8%
14%
16%
18%
20%
10%
12%
-1 - -0.75
-0.75 - -0.5
-0.5 - -0.25
-0.25 - 00 - 0
.25
0.25 - 0.5
0.5 - 0.75
0.75 - 11 - 1
.25
1.25 - 1.5
1.5 - 1.75
1.75 - 2
01 May 14
% o
f fu
nd
s (D
euts
che
Ban
k)
01 Feb 14
Source: Deutsche Bank Global Prime Finance Risk, May 2014
6 Deutsche Bank Global Prime Finance Risk, May 2014
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 7
US % short interest sector change - April 2014
Equities market continues to fluctuate April proved another difficult month in the equities market as indices dropped sharply in the first half of the month and recovered in the second, denying investors the chance to identify any persistent trends. First quarter earnings season provided a few positive surprises including Norwegian-based chemical company, Yara, and datacenter provider, Telecity Group, two names with a meaningful short base that saw early price reaction which may have been indicative of a minor squeeze.
Merger revival in EuropeOn 7 April, global cement companies Lafarge and Holcim announced their intention to undertake a $50 billion merger with Holcim as the acquirer.8 As the merger arbitrage spread traded fairly narrowly, the market secured borrow in the target reflecting the deal’s long timeline and antitrust risk. Later in the month, four major potential deals made headlines: 1) Siemens expressed interest in a counter-proposal to GE’s bid for
Alstom’s power businesses, which is valued at $13 billion;9
2) Following a wave of consolidation in the generic drug industry, US generic-drug maker, Mylan, submitted a revised proposal to Swedish pharmaceutical producer, Meda, offering almost $7 billion. After rejecting the offer, Meda’s stock fell to its lowest in almost three years.10
3) Another US drug maker, Pfizer, proposed buying British pharmaceutical company, AstraZeneca Plc, for $98.7 billion, but was rejected.11
4) Premier Oil rejected two proposed merger deals from Ophir, which valued the combined company at almost $5 billion.12
Of the four, the Alstom and AstraZeneca situations have the most potential to develop into live deals.
Strong convertible issuance in AprilConvertible bond issuance in April was strong, with Gruppo L’Espresso,13 Vastned,14 LEG Immobilien,15 Sacyr16 and Marine Harvest17 raising a combined €1,300 million. Espresso and Sacyr both trade at 3% - 4%, with demand to hedge the convertible bonds further depleting already tight borrow situations. Other major capital raisings last month include RSA raising $1.3 billion to repair its balance sheet,18 Banco Popolare raising €1,500 million for similar reasons,19 and Intu Properties raising £500 million of growth capital.20
First quarter earnings a downward catalyst for TwitterIn reaction to its latest earnings report, Twitter, Inc. has traded down to its lowest level since its IPO. Into the earnings announcement, rates were inside of 9%, but have since traded as high as the mid-teens in reaction to the stock move.21 Forthcoming trading will determine whether this is a knee-jerk reaction by lenders that will normalize or an indication of a significant upward trend in rates. We estimate approximately 49 million shares of short interest, representing over 43% of the free float. Given the deterioration in stock price, long sales could further exasperate an already tight borrow dynamic and continue this trend in rates (Twitter has traded above 40% in the relatively recent past). Finally, we anticipate an impending lock-up expiry in early May that could significantly aid borrow liquidity.
7 This material has been produced by the Deutsche Bank Securities Lending Group and must not be regarded as research or investment advice.
8 http://online.wsj.com/articles/holcim-first-quarter-profit-falls-57-13986628099 http://uk.reuters.com/article/2014/04/29/uk-alstom-offer-idUKKBN0DF1562014042910 http://www.bloomberg.com/news/2014-04-28/mylan-s-second-offer-for-swedish-drugmaker-meda-is-
rejected.html11 http://www.bloomberg.com/news/2014-04-28/pfizer-confirms-proposing-98-7-billion-astrazeneca-deal.
html12 http://uk.reuters.com/article/2014/04/27/uk-premier-oil-ophir-idUKBREA3Q0842014042713 http://www.reuters.com/finance/stocks/ESPI.MI/key-developments/article/295888314 http://www.vastned.com/Upload/launch%20ENG.pdf15 http://www.reuters.com/article/2014/04/07/legimmobilien-brief-idUSWEB00L952014040716 http://www.morningstar.com/topics/t/90695007/update-1-spain-s-sacyr-to-sell-convertible-bonds-
shares.htm17 http://www.marineharvest.com/en/investor1/Share-info/Convertible-bond/18 http://dealbook.nytimes.com/2014/03/25/insurer-rsa-to-issue-shares-to-raise-1-27-billion/?_php=true&_
type=blogs&_r=019 http://www.bancopopolare.it/media/sites/2/2014_04_30-Disclosure-on-new-share-capital-position.pdf20 http://uk.reuters.com/article/2014/03/20/intu-prop-newissue-acquisitions-idUKL6N0MH2W32014032021 http://www.forbes.com/sites/steveschaefer/2014/04/29/tough-tuesday-for-growth-chasers-twitter-
noodles-tumble-after-earnings/22 http://nysepost.com/yingli-green-energy-hold-co-ltd-adr-nyseyge-stock-decreases-by-12-80-8455523 http://www.bbc.co.uk/news/business-2718418524 http://www.bloomberg.com/news/2014-04-28/japan-display-falls-to-lowest-since-ipo-after-forecast-
miss-1-.html25 http://online.wsj.com/article/BT-CO-20140319-703587.html
Europe % short interest sector change - April 2014
Slow improvement amongst expensive Chinese ADRsYingli Green Energy Holding Co. and NQ Mobile Inc., both Chinese ADRs, were of particular focus throughout April as borrow rates reached extreme levels. Borrow liquidity in Yingli Green Energy Holding Co. has been frozen for some time as rates reached 99% and persisted. On 23 April, the company announced an issuance of 25 million additional ADRs, settling 30 April.22 We anticipate significant easing as recent covers and new borrow supply will likely depress rates significantly. NQ Mobile Inc. traded as high as 99% briefly last month as recall pressure and borrow demand reacted to a 34% price drop in less than a week. A covering trend and stock returning to lending programs from long sales have contributed to recent easing. We foresee rates inside of 30% going forward.
Japanese consumption tax increases After the release of US employment data in the beginning of April, Japanese equity markets continued to decline during the month. The consumption tax was raised from 5% to 8% on 1 April leading to a year on year decline in sales for the retail sector; however, exporters have reported an increase in earnings with the impact from the tax increase within expectations.23 In additional to first quarter earnings, situations that may impact the market include changes to the investment committee and allocation targets of the $1.26 trillion Government Pension Investment Fund and the potential reduction of corporation tax.
Recent IPO names in Japan gain short interest quicklyJapan Display Inc., a screen supplier for handheld devices, gained short interest throughout April as its price fell more than 25% since its IPO in mid-March due to declining demand for product in the fourth quarter of 2013.24 Another recent IPO, Hitachi Maxell, saw its stock price fall over 8%. Hotel and railway operator, Seibu Holdings Inc. listed in mid-April, but gained short interest quickly as many thought the $7 billion valuation too high; however, stock advanced 13%.25
Japan considers easing consumer-lending ratesAfter a newspaper report on the potential for easing of consumer-lending rates, consumer finance companies, Aiful Corporation and Acom, saw a jump in short interest. Borrow liquidity slightly eased after the government announced that there are no immediate plans.
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Industrials
Cons Discr
Utilities
Materials
Energy
Financials
Telecom
Info Tech
Cons Staples
Health Care
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%
Utilities
Energy
Cons Disc.
Healthcare
Industrials
Info Tech
Materials
Telecom
Financials
Cons Staples
Source: Markit Group Limited & Deutsche Bank, May 2014 Source: Markit Group Limited & Deutsche Bank, May 2014
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 26
Marketing material - For institutional investors only
SEC focuses on mutual funds’ leverage and liquidity rulesAccording to comments made by Jane Jarcho, an Associate Director at the SEC examination program, the SEC intends to examine around 25 funds over the next six months to review whether certain alternative mutual funds that follow riskier hedge-fund strategies are complying with leverage and liquidity rules. The SEC also said that they want to see if the Boards of the funds have the appropriate oversight function in place. The SEC will look at non-traditional bond funds, long-short equity funds, multi-alternative funds and market-neutral funds. The announcement follows reports in the press earlier this month that the SEC plans to add additional headcount to its examinations divisions for the purpose of looking at how private equity and hedge funds value their assets, disclose their fees and communicate with investors.
SEC issues risk alert on cyber security preparednessOn 15 April, the SEC issued a risk alert regarding the SEC’s initiative to assess cyber security preparedness and threats in the securities industry, including examinations of more than 50 investment advisers and broker-dealers. SEC registered advisors are required to review the alert, assess their current level of preparedness for cyber security threats, and consider whether any changes need to be made to their current policies and procedures. As part of the exercise, the SEC may request information about cyber security governance, identification and assessment of risks, network protection, vendor and third party risk and experiences of dealing with cyber security threats.
Bank of England Director speaks about policy issuesIn a speech delivered to the London Business School, Andrew Haldane, a Director of Financial Stability at the Bank of England spoke about regulatory policy issues for asset management including ‘too big to fail’ and the potential for amplification of pro-cyclical price swings. He referenced the debate about the treatment of globally systemically important non-bank financial institutions. The Financial Stability Board is finalizing a methodology to identify these entities, which could include asset managers, to potentially subject them to enhanced supervisory oversight and other policy measures. In the US, non-bank institutions designated as systemically important by the Financial Stability Oversight Council (FSOC) under Dodd-Frank will be subject to regular stress tests, capital requirements and a requirement to write living wills, but the FSOC has yet to announce which asset managers will be in scope of this requirement.
FCA publishes results of their annual “Hedge Fund Survey” – spotlight on highly leveraged funds using derivatives 27
In line with its remit and rules, the FCA expects hedge funds to monitor their portfolio and manage risks appropriately. In addition to oversight of individual funds and firms, the FCA will also monitor wider systemic risks.
The survey shows: — the UK’s top 20 firms control over 80% of AUM,
— the UK represents nearly 20% of total global hedge fund AUM,
— institutional investors represent 42% of ownership with HNW declining significantly,
— the Cayman islands still dominate other jurisdictions with two thirds of funds by domicile,
— gross leverage of funds has increased from 54x fund assets in March 2013 to 64x fund assets in March 2014 (measured as a ratio of gross notional exposure to NAV).
EU rejects UK legal challenge of the EU FTTThe European Court of Justice (ECJ) ruled against the UK’s legal challenge to the decision by 11 EU Member States (EU-11) to adopt the Financial Transaction Tax (FTT) using an enhanced cooperation procedure. This was widely expected and comes as the EU-11 attempt to reach political agreement on the FTT by EU elections in late May. On 6 May, 10 EU Member States reiterated their commitment to the introduction of a financial transaction tax, agreeing to take a “progressive” approach to implementation, starting with equities and “some derivatives” from 1 January 2016. The commitment leaves open the question of what derivatives might be captured in the first phase of implementation, what the timetable for future phases would look like, whether the tax would be based on issuance or residency of counterparty and whether there would be any intermediary reliefs within the final proposal. Negotiations between participating Member States to try and reach agreement on these and other issues are expected to continue to the end of this year.
Updated UK guidance on FATCA 28
The UK HMRC published updated guidance clarifying that UK investment managers which are foreign financial institutions (FFIs) solely due to their their investment management activities (and who do not act as custodial institutions) will be treated as Certified Deemed Compliant FFIs which do not need to register with the IRS. The next updated guidance from HMRC is due in August.
CFTC issues extension of no-action relief on oral recording requirements for CTAs On 25 April, the CFTC issued a time-limited no-action letter providing relief for asset managers that are members of designated contract markets (DCMs) or swap execution facilities (SEFs), from the requirement to maintain records of all oral communications provided or received in connection with the execution of a swap transaction. The no-action relief will expire on 31 December 2014.
Fed announces extension for Volcker CLO compliance under the Volcker Rule On 7 April, the Federal Reserve Board (Fed) announced that banks will be given a two-year extension to bring their ownership interests in, and sponsorship of, certain collateralised loan obligations (CLOs) into compliance with the Volcker rule, until 21 July 2017. Only CLOs that were in place on 31 December, 2013, and which do not qualify for exclusion under the final rule, are eligible. Banks would not have to include ownership interests in CLOs to determine its investment limits under the final rule, and would not be required to deduct CLO investments from Tier 1 capital until the end of the extended period. The House of Representatives also approved a bill that would exempt from the rules any CLOs issued before 31 January, 2014. The bill also needs to pass through the Senate before becoming law.
ESMA consultation paper on MiFID 2 expected soon 29 The European Commission published the request for advice that it sent to the European Securities and Markets Authority (ESMA) for delegated acts under the updated Markets in Financial Instruments Directive and Regulation (MIFID II / MIFIR). ESMA is expected to begin consulting on its advice, alongside a consultation on the issues it is directly responsible for, in May or June and will deliver it to the Commission soon after. This will cover all aspects of MiFID 2 including pre and post transparency for bonds and derivatives, mandatory venue trading of certain products and automated trading. All of the technical rules developed by either the EU Commission or ESMA will likely be finalised during the course of 2015, ahead of implementation near the end of 2016.
ESMA proposes EMIR rules on margin for non cleared derivatives 30 The European Supervisory Authorities (ESAs) launched a consultation on EU margining requirements for non-cleared derivatives. The draft rules follow the global standards agreed by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO), which left implementation of the rules to local regulators. Under the draft EU rules, counterparties with a gross notional OTC derivatives exposure over a certain size (€8 billion) must mandatorily exchange initial margin for non-cleared derivatives and variation margin will become compulsory for all transactions, including FX swaps and forwards. The draft EU rules set down procedures for calculating and segregating initial margin as well as proposing diversification requirements and concentration limits for collateral exchanged. The requirements will come into force on 1 December, 2015 although the rules on the exchange of initial margin will be phased-in by counterparty size over four years.
26 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.
27 http://www.fca.org.uk/static/documents/hedge-fund-survey.pdf28 AIMA Weekly News, 29 April 201429 http://ec.europa.eu/internal_market/securities/docs/isd/mifid/140423-esma-request_en.pdf30 http://www.esma.europa.eu/system/files/jc_cp_2014_03_cp_on_risk_mitigation_for_otc_derivatives.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
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s@lis
t.d
b.c
om
8M
on
thly
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d T
ren
ds
- D
euts
che
Ban
k R
esea
rch
Hig
hlig
hts
Mar
ketin
g m
ater
ial -
For
inst
itu
tion
al in
vest
ors
on
ly
Sou
rce:
Deu
tsch
e B
ank
Gov
ern
men
t &
Reg
ula
tory
A
ffai
rs a
nd
Hed
ge
Fun
d C
on
sultin
g
This
tim
elin
e is
for
info
rmat
ion
al p
urp
ose
s on
ly. P
leas
e re
fer
to
the
dis
clai
mer
sec
tion
of
this
docu
men
t fo
r fu
rth
er in
form
atio
n.
Ab
bre
viat
ions
AIF
– A
ltern
ativ
e In
vest
men
t Fu
nd
AIF
MD
– A
ltern
ativ
e In
vest
men
t Fu
nd
Man
ager
s D
irec
tive
CB
RC
– C
hin
a B
anki
ng
Reg
ula
tory
Com
mis
sion
CC
P -
Cen
tral
Cle
arin
g C
ounte
rpar
tyC
DS
– C
red
it D
efau
lt S
wap
CFT
C –
Com
mod
ity F
utu
res
Trad
ing
Com
mis
sion
CR
A –
Cre
dit
Rat
ing
Ag
ency
CR
D –
Cap
ital R
equir
emen
ts D
irec
tive
CS
D –
Cen
tral
Sec
uri
ties
Dep
osito
ries
EB
A –
Euro
pea
n B
anki
ng
Auth
ority
EC
– E
uro
pea
n C
omm
issi
onE
CO
N –
Eco
nom
ic &
Mon
etar
y A
ffai
rs C
omm
ittee
EIO
PA –
Euro
pea
n In
sura
nce
and
Occ
up
atio
nal
Pe
nsi
ons
Auth
ority
EP
– E
uro
pea
n P
arlia
men
tE
MIR
– E
uro
pea
n M
arke
t In
fras
truct
ure
Reg
ula
tion
ES
MA
– E
uro
pea
n S
ecuri
ties
Mar
ket
Auth
ority
EU
– E
uro
pea
n U
nio
nFA
TCA
– F
orei
gn A
ccou
nt
Tax
Com
plia
nce
Act
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
FFI –
For
eig
n F
inan
cial
Inst
itutio
nFT
T –
Finan
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
Finan
cial
Ser
vice
s A
gen
cyM
AR
– M
arke
t A
buse
Reg
ula
tion
MiF
ID –
Mar
kets
in F
inan
cial
Inst
rum
ents
Dir
ectiv
eM
SP
– M
ajor
Sw
ap P
artic
ipan
tO
CC
– O
ffice
of
the
Com
ptr
olle
r of
the
Curr
ency
PR
IPs
– Pa
ckag
ed R
etai
l Inv
estm
ent
Pro
duct
s
RR
D –
EU
Rec
over
y an
d R
esol
utio
n D
irec
tive
SFC
– S
ecuri
ties
and
Futu
res
Com
mis
sion
SE
C –
Sec
uri
ties
and
Exc
han
ge
Com
mis
sion
SE
F –
Sw
ap e
xecu
tion f
acili
tyS
EPA
– S
ing
le E
uro
Pay
men
ts A
rea
SIF
I – S
yste
mat
ical
ly Im
por
tant
Finan
cial
Inst
itutio
nS
SM
– S
ing
le S
up
ervi
sory
Mec
han
ism
TD
– T
ransp
aren
cy D
irec
tive
UC
ITS
– U
nd
erta
king
s fo
r C
olle
ctiv
e In
vest
men
t in
Tr
ansf
erab
le S
ecuri
ties
FTT:
EU
Cou
ncil
aim
to a
gree
un
anim
ousl
y (0
5/20
14)
Bas
el II
I: LC
R
intr
oduce
d a
t 60
%
of li
quid
ity n
eed
s (0
1/01
/201
5)
EM
IR: E
U
mar
gin
ing
re
quir
emen
ts
for
non
-cle
ared
d
eriv
ativ
es
com
e in
to f
orce
(0
1/12
/201
5)
SS
M: E
xpec
ted
to
b
e fu
lly o
per
atio
nal
(0
7/20
14)
FATC
A
with
hol
din
g o
n
fore
ign p
asst
hru
p
aym
ents
(0
1/01
/201
7)
FATC
A: I
RS
to
pub
lish li
st
of r
egis
tran
ts
(06/
2014
)FA
TCA
: Nex
t up
dat
e on
g
uid
ance
for
UK
FA
TCA
exp
ecte
d
from
HM
RC
(0
8/20
14)
No-
actio
n r
elie
f ex
pir
es f
or
oral
rec
ord
ing
re
quir
emen
ts
for
CTA
s (3
1/12
/201
4)
FATC
A:
Sp
onso
ring
en
titie
s m
ust
b
e re
gis
tere
d
with
the
IRS
to
ob
tain
thei
r G
IIN
(31/
12/2
014)
FATC
A: I
RS
tak
es
a sn
apsh
ot o
f re
gis
tran
ts t
o d
ate
to b
e p
ub
lished
in
June
(5/5
/201
4)
FATC
A: N
ew
sub
scri
ptio
n
pro
ced
ure
s an
d
doc
um
enta
tion f
or
new
inve
stor
s in
to
fund
s, a
nd
new
cl
ients
at
finan
cial
in
stitu
tions.
W
ithhol
din
g
app
lies
only
to
non
-IG
A c
ountr
ies
(01/
07/2
014)
Up
dat
ed M
arke
t A
buse
Dir
ectiv
e to
b
e im
ple
men
ted
(Q
4 20
15)
AIF
MD
: End
of
tran
sitio
n p
erio
d,
AIF
MD
tak
es e
ffec
t (2
2/07
/14)
MiF
ID 2
: ES
MA
to
d
eliv
er c
onsu
ltatio
n
on d
etai
led
rule
s to
EU
Com
mis
sion
(Q
3/20
14)
AIF
MD
: Dea
dlin
e fo
r non
-EU
AIF
Ms
to fi
le a
pp
licat
ion
w
ith C
zech
R
epub
lic r
egula
tor
(23/
06/1
4)
MiF
ID 2
: P
rop
osed
dat
e th
at M
iFID
2
will
com
e in
to
forc
e (H
2 20
16)
MiF
ID 2
: ES
MA
to
co
nsu
lt on
det
aile
d
rule
s (Q
2/20
14)
Sw
iss
CIS
O
Mar
ketin
g
and
Man
ager
re
gis
trat
ion:
Dea
dlin
e to
reg
iste
r w
ith F
INM
A
(02/
2015
)U
CIT
S V
: Pot
entia
l im
ple
men
tatio
n
dat
e (Q
4 20
15)
AIF
MD
: Mar
ketin
g
pas
spor
t fo
r non
-E
U A
ltern
ativ
e In
vest
men
t Fu
nd
s (a
t ea
rlie
st).
(22/
07/2
015)
Dea
dlin
e fo
r b
anks
to
con
form
to
th
e V
olck
er R
ule
(2
1/07
/201
4)
OC
C: D
ead
line
to
com
ply
with
sw
aps
push
out
rule
(0
7/20
15)
Vol
cker
Rule
: R
epor
ting
of
pos
ition
s b
egin
s (0
6/20
14)
EM
IR: T
+2
sett
lem
ent
for
tran
sact
ions
cond
uct
ed o
n
trad
ing
ven
ues
and
cl
eare
d b
y C
CP
s b
egin
s (0
1/01
/201
5)
2014
2015
2016
2017
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
Marketing material - For institutional investors only
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