Thursday, April 28, 2011
Japna sees launch of first blog-based hedge fund
Ex-Goldman’s banker Hideki Furusho has teamed up with a University of Tokyo professor to launch a hedge fund that trades Nikkei 225 futures using a computer model that analyzes Japanese blog traffic, reported Bloomberg this week. Pluga Capital Co hopes to raise USD61million for the unique Pluga AI Fund by targeting overseas investors from June onwards according to Furusho. The fund uses a web-mining model developed by Yutaka Matsuo, an associate professor at UOT. “Over the next 10 years the web universe is going to grow, which will allow us to become more accurate in making investment decisions,” Furusho was quoted as saying. Matsuo said that the fund aims to generate returns by tracking and analyzing roughly 20 million Japanese blogs with keywords that could potentially influence price moves in Nikkei futures. The fund aims to generate returns of 30 per cent. The strategy is highly liquid, with investment decisions made every day on whether to buy, sell or avoid investing in Nikkei 225 futures. Cashing in at the end of each day to maintain liquidity is likely to be an attractive proposition to investors. “In an environment like this, investors are looking for liquidity as well as redemption requirements,” Furusho said. Since the fund began trading in August it has returned 7.5 per cent.
Friday, March 4, 2011
Chinese investment in US: $2 trln and counting
If most members of Congress were asked how much China has invested in the U.S., they would respond with about $900 billion. This is a notable sum. Yet it’s too low by $1 trillion and possibly more. If many participants in financial markets were asked about Chinese investment in the U.S., they would fret over the possibility of disinvestment. This seems perfectly reasonable. At present, though, it’s essentially impossible.
The Department of the Treasury just issued its preliminary report of foreign holdings of American securities. It puts Chinese investment in the U.S. at $1.61 trillion, including $1.1 trillion in Treasury bonds, as of June 30, 2010. These are not entirely accurate, but are far more accurate figures than given in the unrevised monthly Treasury report of foreign holdings used by Congress and the media alike. To illustrate: the total for Chinese Treasury holdings was previously $844 billion. Upon revision, it is now $1.11 trillion.
There are two obvious problems. First, the large amount of U.S. dollar assets held by the PRC is obscured by poor numbers. Second, there is widespread misunderstanding of why China holds dollars. It does so due to its own balance of payments system. Until the PRC changes its own rules – which it so far has declined under intense foreign pressure – it has no choice but to buy. Disinvestment cannot occur.
Flawed American Numbers
Congress and the public rely on Treasury’s monthly series on major foreign holders of its bonds, which previously put China’s total at $892 billion at the end of 2010. This was misleading in at least four ways:
1) It obscured over $250 billion in Chinese purchases made via Britain, Hong Kong and offshore sources such as the Cayman Islands.
2) It excluded at least $300 billion in agency bonds purchased from Fannie Mae and Freddie Mac held through the end of 2010.
3) It excluded over $125 billion in purchases stocks and short-term debt.
4) It excluded dollars held outside securities, such as in Chinese and other banks.
Treasury’s annual report addresses the first three problems. It includes agency debt. In the annual report, Treasury uses a more complete survey than the monthly report. It traces some of the indirect buying of Treasuries the PRC does, through Britain especially. The annual report also includes estimates of other Chinese holdings, as in the U.S. stock market. The headline figure of $1.61 trillion is a much more accurate number than the $892 billion.
Unfortunately, the annual survey is not frequent enough. It is eight months out of date upon release and 20 months out of date before being revised. Just as with the inaccurate monthly series, the annual report cannot be used to ascertain whether China is currently buying or selling American bonds. Other limitations of the annual survey include failure to attribute all indirect buying – for example, the Caymans were said to invest $732 billion. It does not measure simple bank deposits denominated in dollars, even in American banks. These are not as important as investments but may involve large sums.
Flawed Chinese Numbers
Chinese figures contain additional information. They also shed light on the true nature of the PRC’s purchases: these are not choices to be unraveled at any time, they are the unavoidable outcome of China’s balance of payments regime.
China’s official foreign exchange reserves stood at $2.85 trillion last year. Remarkably, total Chinese foreign currency holdings are even larger than that. The domestic banking system appears to have held almost $400 billion more in foreign exchange at the end of 2010, though no such figure can be confirmed. A low figure for the PRC’s total foreign exchange holdings is therefore better estimated at $3.25 trillion.
A higher estimate, also using official data, puts total foreign exchange in the banking system at over $3.4 trillion. Sovereign wealth fund China Investment Corp. was originally granted $200 billion in foreign exchange, though the present distribution of its assets is unclear. Finally, deposits held overseas by Chinese entities outside the central government are excluded. It is possible total Chinese holdings exceed $3.6 trillion.
There is no official Chinese figure for total holdings, nor for the dollar’s share in those holdings. The lowest estimate of the dollar share is about 58%. The highest is an official figure on the dollar share of the PRC’s debt, 72%. Chinese dollar holdings therefore most likely ranged from $1.9 trillion to $2.6 trillion by the end of 2010. A recent estimate by Federal Reserve Chairman Bernanke of $2 trillion, which seems to have surprised the Congress as high, may in fact be too low.
Beijing’s True Options
This may be apocalyptic for some. In other words, if $900 billion in Chinese purchases was a sign of Chinese influence, $2 trillion is far worse. In fact, the huge figure indicates the opposite: the PRC holds all those dollars because it has no choice.
China cannot spend foreign currency at home. Because the state controls the entire financial system and foreign currency cannot be invested overseas by citizens, any attempt to spend foreign currency at home – for instance to build hospitals — returns the funds to the state. When pushed, senior Chinese officials acknowledge this.
Foreign currency in banks, either to finance commercial activities or simple deposits, accounts for some holdings outside official reserves. However, that leaves perhaps $3 trillion invested overseas. The number is soaring; the balance of payments surplus has averaged almost $400 billion annually the past four years. This is after the PRC buys all its oil, iron, gold, and so on. Outside bonds, China’s outward investment is $55-60 billion annually — sizable but only 15% of the required outlay. This includes all purchases of stocks and other assets foreign countries have allowed.
There is no European bond market and most national euro-denominated bond markets are underdeveloped. The PRC’s holdings of Japanese government bonds are comparatively minor and may be shrinking. Almost all other bond markets are too small. Only one market is large enough to absorb all that money.
If China were running $150 billion annual surpluses, say, it could avoid investing in the U.S. If it changed its balance of payments rules to greatly loosen state control, as Washington wants, it could avoid investing in the U.S. At $400 billion annually and unable to use the money at home, the PRC must allocate huge amounts to American bonds. The amount is so large because there’s nothing else for China to do.
Conclusion: Better Data Make Better Policy
There is far more Chinese money in the U.S. than widely understood. Yet no disaster has occurred. This is because of the depth of American financial markets but also because the PRC cannot disinvest under conditions it clings tightly to – huge external surpluses and rigid balance of payments rules. The actual lesson of $1.6 trillion in June 2010, and counting, is no Chinese financial influence over America.
Mistaken impressions are caused in part by the incomplete picture. Further, when conditions finally change, Chinese funds will need to be monitored better than is done now. Most important, the PRC is not just pegged to the dollar, it is dependent. Addressing that dependence will yield a more open China.
1) The annual Treasury survey is a weighty undertaking but perhaps could be made semi-annual. If not, a more limited quarterly or monthly survey superior to the monthly foreign holders series should be created. Congress needs better information and Treasury should provide it.
2) The U.S. should encourage the PRC to address dollar dependence in mutually beneficial fashion. Led by Treasury and including the Department of State and the White House, the U.S. should offer technical assistance and extensive financial cooperation in the face of any instability. This could be coupled with reciprocal Chinese cooperation in other areas.
Chinese investment is far more extensive than commonly thought, because the PRC has no choice but to pour hundreds of billions in excess foreign exchange into the U.S.
The Department of the Treasury just issued its preliminary report of foreign holdings of American securities. It puts Chinese investment in the U.S. at $1.61 trillion, including $1.1 trillion in Treasury bonds, as of June 30, 2010. These are not entirely accurate, but are far more accurate figures than given in the unrevised monthly Treasury report of foreign holdings used by Congress and the media alike. To illustrate: the total for Chinese Treasury holdings was previously $844 billion. Upon revision, it is now $1.11 trillion.
There are two obvious problems. First, the large amount of U.S. dollar assets held by the PRC is obscured by poor numbers. Second, there is widespread misunderstanding of why China holds dollars. It does so due to its own balance of payments system. Until the PRC changes its own rules – which it so far has declined under intense foreign pressure – it has no choice but to buy. Disinvestment cannot occur.
Flawed American Numbers
Congress and the public rely on Treasury’s monthly series on major foreign holders of its bonds, which previously put China’s total at $892 billion at the end of 2010. This was misleading in at least four ways:
1) It obscured over $250 billion in Chinese purchases made via Britain, Hong Kong and offshore sources such as the Cayman Islands.
2) It excluded at least $300 billion in agency bonds purchased from Fannie Mae and Freddie Mac held through the end of 2010.
3) It excluded over $125 billion in purchases stocks and short-term debt.
4) It excluded dollars held outside securities, such as in Chinese and other banks.
Treasury’s annual report addresses the first three problems. It includes agency debt. In the annual report, Treasury uses a more complete survey than the monthly report. It traces some of the indirect buying of Treasuries the PRC does, through Britain especially. The annual report also includes estimates of other Chinese holdings, as in the U.S. stock market. The headline figure of $1.61 trillion is a much more accurate number than the $892 billion.
Unfortunately, the annual survey is not frequent enough. It is eight months out of date upon release and 20 months out of date before being revised. Just as with the inaccurate monthly series, the annual report cannot be used to ascertain whether China is currently buying or selling American bonds. Other limitations of the annual survey include failure to attribute all indirect buying – for example, the Caymans were said to invest $732 billion. It does not measure simple bank deposits denominated in dollars, even in American banks. These are not as important as investments but may involve large sums.
Flawed Chinese Numbers
Chinese figures contain additional information. They also shed light on the true nature of the PRC’s purchases: these are not choices to be unraveled at any time, they are the unavoidable outcome of China’s balance of payments regime.
China’s official foreign exchange reserves stood at $2.85 trillion last year. Remarkably, total Chinese foreign currency holdings are even larger than that. The domestic banking system appears to have held almost $400 billion more in foreign exchange at the end of 2010, though no such figure can be confirmed. A low figure for the PRC’s total foreign exchange holdings is therefore better estimated at $3.25 trillion.
A higher estimate, also using official data, puts total foreign exchange in the banking system at over $3.4 trillion. Sovereign wealth fund China Investment Corp. was originally granted $200 billion in foreign exchange, though the present distribution of its assets is unclear. Finally, deposits held overseas by Chinese entities outside the central government are excluded. It is possible total Chinese holdings exceed $3.6 trillion.
There is no official Chinese figure for total holdings, nor for the dollar’s share in those holdings. The lowest estimate of the dollar share is about 58%. The highest is an official figure on the dollar share of the PRC’s debt, 72%. Chinese dollar holdings therefore most likely ranged from $1.9 trillion to $2.6 trillion by the end of 2010. A recent estimate by Federal Reserve Chairman Bernanke of $2 trillion, which seems to have surprised the Congress as high, may in fact be too low.
Beijing’s True Options
This may be apocalyptic for some. In other words, if $900 billion in Chinese purchases was a sign of Chinese influence, $2 trillion is far worse. In fact, the huge figure indicates the opposite: the PRC holds all those dollars because it has no choice.
China cannot spend foreign currency at home. Because the state controls the entire financial system and foreign currency cannot be invested overseas by citizens, any attempt to spend foreign currency at home – for instance to build hospitals — returns the funds to the state. When pushed, senior Chinese officials acknowledge this.
Foreign currency in banks, either to finance commercial activities or simple deposits, accounts for some holdings outside official reserves. However, that leaves perhaps $3 trillion invested overseas. The number is soaring; the balance of payments surplus has averaged almost $400 billion annually the past four years. This is after the PRC buys all its oil, iron, gold, and so on. Outside bonds, China’s outward investment is $55-60 billion annually — sizable but only 15% of the required outlay. This includes all purchases of stocks and other assets foreign countries have allowed.
There is no European bond market and most national euro-denominated bond markets are underdeveloped. The PRC’s holdings of Japanese government bonds are comparatively minor and may be shrinking. Almost all other bond markets are too small. Only one market is large enough to absorb all that money.
If China were running $150 billion annual surpluses, say, it could avoid investing in the U.S. If it changed its balance of payments rules to greatly loosen state control, as Washington wants, it could avoid investing in the U.S. At $400 billion annually and unable to use the money at home, the PRC must allocate huge amounts to American bonds. The amount is so large because there’s nothing else for China to do.
Conclusion: Better Data Make Better Policy
There is far more Chinese money in the U.S. than widely understood. Yet no disaster has occurred. This is because of the depth of American financial markets but also because the PRC cannot disinvest under conditions it clings tightly to – huge external surpluses and rigid balance of payments rules. The actual lesson of $1.6 trillion in June 2010, and counting, is no Chinese financial influence over America.
Mistaken impressions are caused in part by the incomplete picture. Further, when conditions finally change, Chinese funds will need to be monitored better than is done now. Most important, the PRC is not just pegged to the dollar, it is dependent. Addressing that dependence will yield a more open China.
1) The annual Treasury survey is a weighty undertaking but perhaps could be made semi-annual. If not, a more limited quarterly or monthly survey superior to the monthly foreign holders series should be created. Congress needs better information and Treasury should provide it.
2) The U.S. should encourage the PRC to address dollar dependence in mutually beneficial fashion. Led by Treasury and including the Department of State and the White House, the U.S. should offer technical assistance and extensive financial cooperation in the face of any instability. This could be coupled with reciprocal Chinese cooperation in other areas.
Chinese investment is far more extensive than commonly thought, because the PRC has no choice but to pour hundreds of billions in excess foreign exchange into the U.S.
Saturday, February 5, 2011
Wednesday, January 19, 2011
V V: Between God and Mammon
Tom Wolfe in his 1980s best-seller, The Bonfire of the Vanities, described investment bankers as “the masters of the universe”. That description was soon outdated in the 1990s because hedge fund managers assumed the mantle. Just consider two simple facts. In 1990, hedge managers managed assets worth $39 billion. At the peak of 2007, the figure had grown to a staggering $3 trillion. Equally staggering is the amount of money successful hedge fund managers earned in 2008, the top 10 more than $10 billion between them. Quite clearly, the returns hedge funds make can be substantial, given the high fees they charge for services rendered. But there was a downside — the losses can be substantial too — as some discovered in the credit crunch market upheaval that started in 2007. But in the swings and roundabouts, hedge funds became the “In” thing if you were looking for a “gravy train” as Sebastian Mallaby tells us in his definitive work drawn from insights into higher mathematics, economics and psychology in More Money than God: Hedge Funds and the Making of a New Elite (Bloomsbury/Penguin India, Special Indian Price, Rs 599).
Begin from the beginning. While most people have heard how much hedge fund managers have made, very few are clear what they are or what they do. To get a hang what the game is about, it is best to start with Philip Goggan’s Guide to Hedge Funds: What they are, what they do, their risks, their advantages (Profile Books, Indian reprint 2011, Rs 295). Coggan, who was the economics editor with The Economist and earlier with the Financial Times, has covered the fundamentals in six easy-to-read chapters: Hedge Fund Taxonomy; The Players; Funds-of-funds; Hedge fund regulation; Hedge funds: For or Against; and The Future of Hedge funds. Of course, More Money than God covers the same ground too, but this is an easier read and once you have grasped the rules of the new game, Mallaby’s big tome becomes that much simpler and enjoyable.
Mallaby has written the book for a wide range of readers, from hedge fund managers and finance professors to the intelligent common reader interested in markets, economics and finance.
The story begins with Alfred Winslow Jones, an eccentric who at different times in his life worked on a tramp steamer, studied at the Marxist Workers School in Berlin, a friend of Ernest Hemingway and other outsiders. Like many top hedge fund managers, Mallaby tells us that Jones didn’t learn the ropes at Goldman Sachs or Morgan Stanley, did not go to business school, nor did he have a PhD in quantitative finance. What he did have, however, was an unerring instinct for money like all successful fund managers possessed.
Jones launched the fist “hedged fund” meant to use leverage to enhance equity exposure along side short sales to protect one’s downside, and he first conceived the concept of “performance fee” whereby his fund would keep for itself 20 per cent of the profits. Mallaby tells us with his fund’s returns at 5,000 per cent, investors didn’t mind parting with 20 per cent of the profits. Many commentators today feel that 20 per cent is too high a fee to be paid but Jones quite rightly believed that the anticipation of substantial returns would concentrate the minds of portfolio managers. Besides, Jones argued that “performance fee” was an expense and could be written off against the profits; others like Mallaby think it is a tax dodge. Jones’ performance-fee innovation still forms the basis for the hefty returns of hedge fund managers.
With Jones as the introduction, Mallaby provides a continuous history of investment vehicles which he calls “loners and contrarians”, the very “individualists whose ambitions are too big to fit into established financial institutions”. These individuals can’t be tied down by regulations and red tape. They defy the conventional wisdom about efficient markets and could be described as “edge funds” for their managers offer investors returns uncorrelated with the markets.
Mallaby explains that markets are efficient only if the liquidity is perfect; and when liquidity is not perfect, markets can be highly dicey or fickle. Mallaby takes the case of Steinhardt who offered liquidity where it didn’t exist, especially when it came to a large block of shares. He was able to negotiate discounts in return for liquidity which eventually returned to his original investors 480 times their initial investment. Fund managers can do this but only if they have a large amount of cash to play around with; if they don’t have a fall-back strategy, it is simply not possible to achieve such high returns.
Mallaby’s story of the Hungarian immigrant George Soros is inspiring, considering that he started off in London as a busboy and once told by the head waiter at a restaurant that if he worked hard he would some day be his assistant. Soros made it to the London School of Economics and although he didn’t do well academically, he learnt that markets were anti-efficient and that it was possible to make money by trading on faulty human reasoning.
Hedge funds have sometimes been described as “casino capitalism”, that success depends on the luck of the draw. But it is also a play on the vagaries of the human mind which Mallaby’s story-telling brings out beautifully.
'India handled the crisis extremely well'
Pulitzer Prize winning author Liaquat Ahamed speaks about the “absurdities” committed by governments throughout history in the wake of financial crises
t may seem ironic to hear a hedge fund manager speak freely about the evils of the financial system, butLiaquat Ahamed speaks with such unerring conviction and precise logic that it’s impossible not to be mesmerised by his arguments. The professional investment manager, who won the 2010 Pulitzer Prize for History for his book Lords of Finance: The Bankers Who Broke The World, has also worked at the World Bank in Washington DC apart from serving as a consultant to several top hedge funds.
t may seem ironic to hear a hedge fund manager speak freely about the evils of the financial system, butLiaquat Ahamed speaks with such unerring conviction and precise logic that it’s impossible not to be mesmerised by his arguments. The professional investment manager, who won the 2010 Pulitzer Prize for History for his book Lords of Finance: The Bankers Who Broke The World, has also worked at the World Bank in Washington DC apart from serving as a consultant to several top hedge funds.
Why do you think the Indian economy – for the most part – has remained immune to the worst of the economic crisis?
India has hardly been affected by the recent financial slowdown. Indian banks weren’t exposed to the kind of mortgages American banks were, they were also reasonably well capitalised. India only got hurt when trade got hit – especially in the case of, say, the IT industry.
What worked for India is that it had built up a nice cushion of foreign exchange reserves which, very smarty, it used at the right time. All said and done, India definitely handled the crisis very well. But, of course, that doesn’t mean India will never have a financial crisis
What can India do to prevent that?
Well, economic crises have two ingredients. The first one is a bubble or a mania. For example, as anyone who comes to Mumbai can vouch for, it’s ludicrous that real estate prices here are higher than they are in New York or London. That is a recipe for disaster. Secondly, at some point, the bubble will burst. That will lead to far too much borrowing which will in turn lead to banks getting heavily exposed.
Basically, to avoid a crisis, banks, which are essentially the plumbing of the economy, need to remain robust. Whether banks or private or state-owned are irrelevant; what matters is if they’re well-run. The answers lie in, quite simply, lots of capital and more stable sources of funding. This, I believe, is something India has gotten right so far.
You’re famously opposed to the gold standard. What are your reasons for that?
You’re famously opposed to the gold standard. What are your reasons for that?
The gold standard system requires you to have gold as the foundation for the financial system. That requires you to have that much gold. Now, if you took all the gold in the world and you piled it up, it would end up forming a two-storey office building the size of a tennis court. That’s not nearly enough to fuel the world economy.
That’s the first problem. The second problem is, if you raised the price of gold so that it could generate that much money, you’d have to raise its price by about 10 times. Furthermore, the biggest problem is that discoveries of gold are growing by say 2% a year, while the world economy is growing by 4% a year and the entire global financial system is growing by 6% a year.
What’s your next book all about?
What’s your next book all about?
I’m writing about economic history. I’m going further back in history to the 19th century to the conflict between the government in Washington and Wall Street. My objective is to show that anti-banker sentiment goes back a long way in the United States.
FIIs include hedge funds, pension funds and MF
The buoyant markets in 2010 owe much to FII influx. FIIs bought equities in the markets to the tune of around 28.6 billion dollars (Rs 1.30 lakh crores). The first week of 2011 began on a grim note as the Sensex and Nifty dropped contrary to expectations of breaking barriers. The banking stocks pulled the indices down, followed by metals sector that faced selling pressure too. The markets are choppy and are bound to remain so for a few more weeks. Since significant market turnover can be attributed to FIIs, it is essential for investors to chalk their strategy after observing FII movements and investment patterns.
Subscribe to:
Posts (Atom)