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Showing posts with label Family Offices. Show all posts
Showing posts with label Family Offices. Show all posts

Tuesday, June 30, 2020

For Investors Looking for Returns of 7-9%, Private Markets Seem Like The Only Game in Town

Why private capital will benefit from the crisis | Financial Times

"Given the exuberant growth, many observers had predicted the private capital industry would be hit hard in a downturn."

"But perhaps this is merely the end of the beginning of a new era of private capital, rather than the beginning of the end."

…

"Before, investors could kid themselves that they could wait until bond yields approached normality, but normality has now been redefined. Most investors still hanker after returns in the 7-9 per cent range. Private markets are pretty much the only areas where this looks feasible. 

"At the same time, companies are tiring of the burdens and relentless daily scrutiny that goes with being publicly listed. The trend towards businesses remaining private is likely to be accentuated by the crisis. While more companies have been raising money in the bond market, it remains a viable option for big businesses only. Smaller ones are likely to turn to private debt funds in even greater numbers to cope with the downturn."

See Robin Wigglesworth's (@robinwigg) piece, Why private capital will benefit from the crisis, on the @FT:  https://www.ft.com/content/b104940f-bf3b-4090-bcb2-50aef67da564?desktop=true&segmentId=7c8f09b9-9b61-4fbb-9430-9208a9e233c8#myft:notification:daily-email:content

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Wednesday, September 25, 2019

#FamilyOffices Stockpiling Cash as Recession Fears Grow

  • About 42% of family offices say they're raising cash reserves


  • Majority surveyed by UBS expect a global recession by 2020

    • Family offices are also increasingly focused on a different kind of potential disruption: succession planning. This year, 54% of those surveyed said they have a succession plan in place, up from 43% last year.

https://www.bloomberg.com/news/articles/2019-09-23/world-s-wealthiest-families-stockpiling-cash-on-recession-fears

Thursday, February 19, 2015

Two Deals Bring Attention to Banking’s Safra Family - NYTimes.com

Two Deals Bring Attention to Banking’s Safra Family

On a single day last fall, two deals were coming together that would draw unusual attention to a banking family that prefers to remain in the shadows.
In London, 30 St. Mary Axe — a pickle-shaped office tower known as the Gherkin that was designed by Norman Foster — was on the brink of changing hands for $1.1 billion. And in New York, shareholders of Chiquita Brands International, the banana producer, were finally leaning toward selling the company, for $1.3 billion.
The buyer for both of these assets was the Safra Group, the investment arm of a storied financial family that strives for secrecy.
Today run by Joseph Safra, the last surviving son of the patriarch who built the family’s initial fortune, the Safra Group manages billions of the family’s personal money. Worth an estimated $14.5 billion according to Forbes, Mr. Safra, 76, is the world’s richest banker.
In addition to the family’s vast and growing real estate holdings, its fortune is bolstered by a network of international banks, including Banco Safra in Brazil, J. Safra Sarasin Holding in Switzerland and Safra National Bank of New York. In total, the family and its banks have more than $200 billion under management, and stockholder equity of more than $15 billion.
With the latest deals, the Gherkin became the face of a Safra real estate portfolio, which includes over 100 properties around the globe, including the 660 Madison Avenue office complex in Midtown Manhattan, and several prime locations in SoHo in Lower Manhattan.
“Their real estate philosophy is very similar to their banking philosophy,” said a person who has worked with the Safra family on property deals and spoke on the condition that he not be named because he did not want to jeopardize his relationship with the family. “It’s really about the preservation of wealth. They look to buy to hold, rather than to sell.”
Indeed, the family has not sold any major real estate assets in decades.
In Chiquita, the Safra Group saw the opportunity to diversify its revenues with a similarly long-term, and public, bet. Demand for bananas, a popular fruit worldwide, is unlikely to subside. And by joining with the Cutrale Group, owned by a Brazilian family with expertise in agriculture that it knew well, Safra was able to branch out without taking on too much risk.
His penchant for privacy aside, Mr. Safra has emerged as a powerful philanthropist in Brazil. Both São Paulo’s Jewish hospital, Albert Einstein, and the hospital founded by the city’s large Arab community, Sírio-Libanês, list Mr. Safra among their largest donors.
Among close associates, Mr. Safra is known to be kind and humble, cooking meals for family and calling on confidants regularly.
“He thinks about his business 24 hours a day, but he found time to call me every day when I was in the hospital after heart surgery,” said Jack Terpins, president of the Latin American Jewish Congress.

Others, who spoke only if they were not identified by name because of Mr. Safra’s power in São Paulo’s financial community, describe an impatient side and a quick temper.

“He likes problems to be solved immediately. You don’t want to disappoint or cross him,” a former employee said.

Yet for his private nature, Mr. Safra has maintained and added to a family fortune that is poised to survive for another 100 years, or more.

“They have a multigenerational time horizon,” said a senior banker who has worked closely with the family. “Not many people have that.”

The Safra family’s standing at the heart of the world’s elite private banking industry is a world away from its roots as traders with the camel caravans that passed through Aleppo, Syria.

It was there, more than 100 years ago, that the Safra family discovered its business acumen, first as merchants and then as amateur bankers. Mr. Safra’s father, Jacob, moved to Beirut and opened a formal bank after World War I, capitalizing on Lebanon’s emergence as a cosmopolitan hub of the Middle East.

After World War II the elder Mr. Safra moved his family to Brazil, and in 1957 established Banco Safra with seven employees. Today, Banco Safra is the eighth-largest bank in the country, with more than $56 billion in assets.

Despite the family’s prominence, Mr. Safra and his relatives are resolutely private. He does not appear in gossip columns and his name has not been associated with politicians or celebrities. In contrast to Brazil’s casual customs, he always wears a suit. Observant of his Sephardic Jewish roots, he keeps a strict kosher diet.

“For most Brazilians, he is a mystery,” said Paulo Feldmann, an economics professor at the University of São Paulo who studies Latin American business culture.

He is largely a mystery to the outside world, too. No member of the Safra family or its companies would comment for this article, following a longstanding policy of not speaking to the news media or making public appearances.

Privacy, however, has not inhibited the family’s ability to expand its reach, or increase its wealth. Several people who work closely with the Safra Group describe a family that measures success by decades and generations, not quarters and fiscal years, and possesses a single-minded focus on maximizing long-term returns for clients and family members.

“They are focused on very, very long-term investing, wherever in the world makes the most sense,” the senior banker said. “They are going to stick to extremely low volatility assets, and proven properties and companies that have meaningful long-term appreciation.”

Behind the philosophy is a maxim espoused by the patriarch, Jacob Safra, and internalized by his sons and grandsons: “If you choose to sail upon the seas of banking, build your bank as you would your boat, with the strength to sail safely through any storm.”

Mr. Safra’s older brother, Edmond, later left Banco Safra and established new banks in Europe and New York. In 1999, he sold Republic National Bank of New York to HSBC for $10 billion. Edmond died in a fire under suspicious circumstances later that year.

Joseph and his younger brother, Moise, ran Banco Safra together until 2006, when Joseph bought out Moise and became the sole owner of Banco Safra. Moise died last year, at 79.

Today, while Joseph remains at the head of the family, his three sons, Jacob, David and Alberto, are assuming more prominent roles. Jacob, the eldest, splits his time between Switzerland and New York, looking after J. Safra Sarasin and Safra National Bank of New York, and nonbank operations outside Brazil. David and Alberto, meanwhile, run Banco Safra in Brazil. Their father is often on the road, shuttling between Brazil, Switzerland and New York.

But success was not always assured. Postwar Brazil suffered first from political instability, then from hyperinflation. The economy lurched from one government plan to another that included capital and currency controls, and even a nationwide freeze of bank accounts.

In that volatile environment, fortunes were made and lost. Mr. Safra focused instead on asset management for wealthy individuals, and on loans to businesses and individuals who could offer solid collateral, such as real estate.

“He always worked on growing slowly and sustainably and keeping the bank very solid,” Mr. Feldmann said. “He looked to hire the most intelligent people, even if they had no experience in banking, trained them himself, and demanded complete loyalty.”

Mr. Feldmann said Mr. Safra was also unusual in wanting to keep his company relatively small so that he could keep a close eye on every aspect of it.

Mr. Safra soon started to buy other, smaller banks and to invest outside the financial sector. He acquired controlling stakes in major Brazilian textile and cellulose companies, and in 1998, in partnership with BellSouth, he founded a cellphone company, BCP, that became Brazil’s second largest.

Despite rapid growth, BCP turned out to be one of Mr. Safra’s few failures. The company racked up huge debts and was finally sold in 2003 at a bargain price to América Móvil, the telecommunications company of the Mexican billionaire Carlos Slim Helú. An earlier co-investment with BellSouth yielded a profit.

Mr. Safra paid $1.1 billion to buy a Swiss private bank, Sarasin, in 2011. The price was high, but Sarasin was a high-quality asset, and it permitted Mr. Safra to expand his asset management business beyond its core client base in Latin America to European and Asian investors.

What is more, it deepened the Safras’ exposure to asset management, traditionally one of the financial world’s most consistently lucrative niches: Year after year, whether markets rise or fall, clients pay a percentage of their assets in fees.

In recent months, however, Mr. Safra has branched out with back-to-back deals for well-known assets that thrust the family back into the headlines.





Mr. Safra believes the price he paid for the Gherkin was a bargain, according to people close to the family. The building was sold out of bankruptcy, and in a subtle change of tack, the Safras believe they have the opportunity to make improvements and raise rents, increasing profits from the building sooner rather than later.



Two Deals Bring Attention to Banking’s Safra Family - NYTimes.com

Friday, June 20, 2014

Chandler is at it again: Singapore Billionaire Bets Big on #Energy in #Africa, #Asia @Businessweek

Here's a piece on the secretive New Zealand investor from BusinessWeek.


Singapore Billionaire Bets Big on Energy in Africa, Asia

In September 2007, almost a year after New Zealand–born billionaire Richard Chandler founded investment firm Orient Global in Singapore, he made a rare appearance at a forum on social responsibility. Abandoning his penchant for privacy, Chandler outlined the link between giving and investing.
“We start to ask the question, where would the incremental dollar achieve the greatest return?” said Chandler. “Charity is good, performance philanthropy is better, and social investment is best.”
Chandler attended the global executive summit in Singapore again the following year -- and then dropped back out of public view, Bloomberg Markets magazine will report in its July/August issue. He doesn’t speak to the press. Current and former employees of his firm, now called Chandler Corp., don’t talk about him, citing nondisclosure agreements. Executives of most companies in which Chandler invests deal only with his staff.
“I never met him and I don’t know him,” says Indian billionaire Malvinder Singh, whose Fortis Healthcare Ltd. sold its entire stake in Vietnamese hospital company Hoan My Medical Corp. to Chandler Corp. for $80 million in August 2013, according to Fortis’s statement.
Behind the silence, Chandler, 55, is amassing a fortune that the Bloomberg Billionaires Index estimated at $3.7 billion on June 18. Energy-related companies account for at least $1.2 billion of his wealth.

Far-flung Locales

Chandler is betting on gas and oil in far-flung locales from Papua New Guinea to Kenya and Ethiopia, banking on demand from Asia’s growing middle class.
The firm invested in InterOil Corp., which has offices in Singapore and Port Moresby, Papua New Guinea. InterOil controls 35.5 percent of the exploration license that contains Papua New Guinea’s Elk and Antelope fields -- the island nation’s biggest undeveloped gas plays, according to InterOil. Chandler Corp.’s 19.6 percent InterOil stake was valued at $639 million on May 30.
Chandler Corp.’s investments in Southeast Asia extend beyond energy to consumer goods and financial services. The firm holds a $366 million stake in Vietnam’s Masan Group Corp. The company makes foods and beverages, offers banking services and mines tungsten and bismuth. In health care, Chandler Corp. owns a minority share of Medical City, a network of three hospitals and 23 outpatient clinics in the Philippines.
Chandler Corp. says its companies deliver health-care services to more than 2.5 million people in Vietnam and the Philippines each year.

‘Social Value’

“We look to invest in businesses that create social value and drive national prosperity,” Chandler Corp.’s website says.
Chandler is building on a fascination with emerging markets that began with Hong Kong in the 1980s and extended to Brazil, Russia and India. He remains famous for his campaign at SK Corp., South Korea’s largest oil refiner, says Seo Jae Hyeong, chief executive officer of Seoul-based Daishin Asset Management Co.
“People still have vivid memories of how an obscure fund waged a war against the SK chairman,” he says.
Chandler and his younger brother, Christopher, bought 14.99 percent of SK from March 26 to April 11, 2003. The shares had plunged 63 percent in five days earlier that March after SK reported it had misstated 2001 earnings at its trading arm by about $1.5 billion.
The Chandlers fought to oust Chairman Chey Tae Won, who’d been convicted of accounting fraud. Investors bought the shares over two years as the battle intensified, and SK boosted outside directors to 70 percent of the board from 50 percent.
By the time Chey defeated the Chandlers’ bid to remove him, in 2005, the stock had soared more than fivefold from the average 9,293 won per share the brothers paid. They walked away with more than $700 million in gains, calculations based on regulatory filings show.

‘Corporate Governance’

“The Chandler brothers contributed greatly to Korea by raising the awareness of corporate governance and provided an impetus for big companies to change,” Seo says.
Christopher Chandler, 54, now owns Dubai-based investment firm Legatum Group. Last year, his Legatum Foundation started the $100 million Freedom Fund with two partners to combat modern-day slavery. Christopher, like his brother, declined to comment for this story.

Sino-Forest

Richard Chandler stumbled in 2012. Chandler Corp. started buying Chinese timber company Sino-Forest Corp. after the company’s shares, which traded on the Toronto Stock Exchange, plunged 84 percent in two days.
Short seller Carson Block’s research firm said in a June 2, 2011, report that Sino-Forest was overstating the value of its assets. Hedge-fund firm Paulson & Co. sold its entire stake after the report and lost C$462 million ($426 million).
Chandler Corp. continued buying until the Ontario Securities Commission halted trading in August 2011. Chandler Corp. amassed a 19.5 percent stake as Sino-Forest’s biggest shareholder.
Sino-Forest filed for bankruptcy protection in March 2012, and the company has since been taken over by bondholders, according to Chandler Corp. David Walker, a forestry expert who’d been hired to lead a turnaround at Sino-Forest, was named Chandler Corp. CEO in January 2013. Chandler Corp. says Walker no longer works there because the firm isn’t involved with Sino-Forest.

Gas Fortune

One of Chandler Corp.’s current emerging-markets bets is liquefied natural gas. Last year, Asia accounted for 75 percent of global LNG demand of 236.9 million tons, according to the Paris-based International Group of LNG Importers.
Africa is growing as a gas supplier. More than 14 trillion cubic meters (500 trillion cubic feet) has been discovered in Angola, Ghana, Mozambique, Nigeria and Tanzania, according to Seah Moon Ming, CEO of Pavilion Energy Pte, the LNG unit of Temasek Holdings Pte, Singapore’s state-owned investment company.
“You can make a fortune in Africa if you can find oil and gas and if it’s economical to get it out of there,” says Jim Rogers, chairman of Singapore-based Rogers Holdings, who correctly predicted a commodities rally in 1999.
Asia’s deep-pocketed investors are expanding globally by acquiring LNG assets. Pavilion Energy said in November it had invested $1.3 billion in Tanzanian gas blocks. In May, Cheung Kong Group, owned by Li Ka-shing, Asia’s richest man, agreed to acquire Envestra Ltd., an Australian natural gas distributor, for A$2.4 billion ($2.2 billion).

‘Seismic Shift’

“LNG is the future,” says Chua Ma Yu, executive chairman of CMY Capital Markets Sdn. in Kuala Lumpur. “Throughout Asia, governments are building LNG terminals and gas pipelines as they respond to this seismic shift.”
Chandler is hunting for further riches in Africa’s petroleum reserves. Chandler Corp. holds a 9.9 percent stake, valued at $220 million, in Africa Oil Corp., a Canadian company that discovered Kenya’s first crude with a partner, Tullow Oil Plc, in 2012.
Africa Oil is a logical choice for bargain hunters such as Chandler, says Stuart Amor, London-based head of oil and gas research at RFC Ambrian Ltd., a natural resources adviser and broker. 
Recent crude discoveries in Kenya may generate about $10 billion in revenue in three decades of production, London-based GlobalData said in May. In Nigeria, the continent’s biggest oil producer, Chandler Corp. owns 13.4 percent of Union Bank of Nigeria Plc. The lender has more than 350 branches that offer credit to a rising middle class.
“This should enable businesses and entrepreneurs to flourish, supporting and accelerating Nigeria’s economic growth,” Richard Chandler said in an Oct. 19, 2012, statement.

Geothermal Energy

Chandler Corp. is also pursuing geothermal energy through Orka Energy, which operates in China, Iceland and the Philippines; coal-bed methane gas in China via Hong Kong–based Green Dragon Gas Ltd.; and natural gas and power in Indonesia and the Philippines with Energy World Corp.
As Chandler cultivates his empire, he has funded artists and activists who aid the disadvantaged. In 2007, he formed Freedom to Create to encourage change in developing countries. In 2011, the foundation honored Sister Fa, a musician from Senegal who raises awareness about female genital mutilation.
“Mr. Chandler is an incredibly talented investor with a deeply embedded moral purpose,” says Priti Devi, who headed the foundation from 2010 to 2012. Devi says she didn’t find Chandler to be secretive. Instead, she says, “he has adopted what he believes is the most effective operating style for him.”

‘Your Investor’

Chandler isn’t shy about revealing his aspirations on his website.
“My passion is my art -- allocating capital to the world’s best investment opportunities,” he writes.
Newcastle University education policy professor James Tooley recalls Chandler’s commitment to scholarship. After the Financial Times published Tooley’s essay titled “Low-Cost Schools in Poor Nations Seek Investors” in September 2006, Tooley received a voice mail from Chandler.
“Professor Tooley, I’ve read your article,” it said. “I’m your investor.”
Tooley joined Chandler’s Orient Global investment firm in April 2007 as president of its $100 million Education Fund. The fund sought to combat global illiteracy by enhancing education for low-income communities in developing countries. Its Hyderabad, India–based Rumi Education collaborated with more than 100 schools. Chandler dismissed Tooley in 2009; Tooley declined to discuss the circumstances. Rumi Education has since been sold to its management team. Chandler’s education initiatives now involve philanthropic grants, according to Chandler Corp.

New Zealand

Chandler draws inspiration from his mother, Marija, employees who have worked at Chandler Corp. say. A native of Croatia, Marija met her New Zealander husband, Robert Chandler, in 1955. Robert and Marija founded New Zealand luxury department store Chandler House in 1972, according to Chandler Corp.’s website.
As she scoured the world to stock the shelves, Marija instilled an appreciation for hard work, entrepreneurship and creativity in her boys: George, the oldest; Richard, the middle; and Christopher, the youngest. The couple sold Chandler House and gave the proceeds to their sons. The family moved to Monaco, where Richard and Christopher started Sovereign Global Investment in 1986. The brothers split amicably in December 2006. Christopher founded Legatum Capital in Dubai, and Richard set up Orient Global in Singapore.

Business, Art

Marija melded business with art. She began painting and adopted her mother’s name, Ana Tzarev. She also traveled. One YouTube video shows her visiting schoolchildren in Africa. In another, she talks about her billionaire sons at her father’s grave in Trogir, Croatia.
“They thank you for your philosophy on commerce,” she says to her father, “for they’re helping the world because of you.”
Chandler described his business approach to philanthropy at the Singapore forum.
“It’s very much a balance of science and art,” he said. “It’s a capital allocation process. It’s based on information. It’s based on common sense. Think strategic and, above all, sustainability.”
RFC Ambrian’s Amor, who has followed Chandler since the 1990s, offers this assessment of the billionaire investor’s current emerging-markets forays: “It would not be wise to bet against him now.”
To contact the reporters on this story: Yoolim Lee in Singapore at yoolim@bloomberg.net; Netty Ismail in Singapore at nismail3@bloomberg.net
To contact the editors responsible for this story: Michael Serrill at mserrill@bloomberg.net Gail Roche, Jonathan Neumann




Singapore Billionaire Bets Big on Energy in Africa, Asia - Businessweek






Monday, February 10, 2014

George Soros picks up $5.5bn as Quantum Endowment fund soars @FT

Since they were set up, the top 20 hedge funds have made 43 per cent of all the money made by investors in more than 7,000 hedge funds.

Top ten hedge fund managers
Name  Fund Aum ($bn) Net gains since inception ($bn)
George Soros Quantum Endowment Fund 28.6 39.6
Ray Dalio Bridgewater Pure Alpha 79 39.2
John Paulson Paulson & Co 20.3 25.4
Seth Klarman Baupost 26.4 21.5
David Tepper Appaloosa 19.3 21.2
Steve Mandel Lone Pine 27.6 20.5
Tom Steyer (founder, formally handed over to a successor) Farallon 20 17.4
Alan Howard Brevan Howard Fund 28 17
Andreas Halvorsen Viking  27.3 16.8
Louis Moore Bacon Moore Capital  14.9 16.5
Source: LCH Investments 


“They did far better than the hedge fund indexes,” said Mr Sopher,
who is also chief executive of Edmond de Rothschild Capital Holdings.
“These funds are still in the mode of being get-rich vehicles rather
than stay-rich vehicles. They carry on seizing whatever opportunities
there are but still exhibit really good risk control.”



Read the whole article online here: George Soros picks up $5.5bn as Quantum Endowment fund soars - FT.com






The Pangea Advisors Blog

Tuesday, November 5, 2013

Rich families hoarding cash: Citi

Wealthy families have about 39 percent of their assets in cash

Rich families hoarding cash: Citi


A new survey of family offices by Citi finds that the wealthy are cash heavy—meaning they may fall short of the investment returns they're expecting.
Wealthy families have about 39 percent of their assets in cash, according to a recent poll of more than 50 large family office representatives from 20 countries conducted by Citi Private Bank.
Stocks represented about 25 percent of portfolios on average. Bonds were about 17 percent of the asset mix and various classes of less liquid and alternative investments amounted to 19 percent.
"Using these weightings, our own return expectation for the portfolio … comes to just 4.4 percent. This matches what we at Citi Private Bank observe generally among high end investors: very high cash holdings, with a current asset allocation unlikely to achieve return targets," Steven Wieting, the bank's global chief investment strategist, wrote in a recent client note.

Read the whole article here:  Rich families hoarding cash: Citi


The Pangea Advisors Blog

Thursday, October 17, 2013

#StanChart #PrivateBank Assets Stagnate in Asian Wealth Hunt @Bloomberg

Standard Chartered Plc (2888)'s Asian private-bank asset growth has stagnated this year as the lender focused on wealthier clients and investment returns were curtailed by volatility in regional financial markets.

New minimum of $2mm and reducing number of accounts managed by each relationship manager to 30 from 50 to better service their clients. 

AUM stands at $50 billion. 

To read the entire article on Bloomberg, go to http://bloom.bg/GROS2C




Thursday, July 11, 2013

Property Crushes Hedge Funds in Alternative Markets - Bloomberg


diversifying into alternatives makes sense even if they don't outperform.

Property Crushes Hedge Funds in Alternative Markets

Mackenzie Stroh/Bloomberg Markets
Hamilton "Tony" James says diversifying into alternatives makes sense even if they don't outperform.
“Why would anyone invest in the stock market?”
Hamilton “Tony” James looked up from his notes and peered out at the audience over the rims of his glasses. The investors seated in the chandelier-adorned meeting room of New York’s Waldorf-Astoria hotel had been in their chairs for hours. Yet James paused to let his point sink in. Someone laughed. James, president since 2005 of Blackstone Group LP (BX), was stone-faced.
The occasion was Blackstone’s third annual investor day, Bloomberg Markets magazine reports in its August issue. The firm is the world’s largest manager of so-called alternative investments, with $218 billion under management. It runs private-equity funds and hedge funds, invests heavily in credit securities and owns vast expanses of real estate. One of its properties is the Waldorf itself.
More from the August issue of Bloomberg Markets:
When James finally answered his own question about stocks, he told the audience they were a fool’s game compared with Blackstone’s investment funds, which have returned at least 15 percent annualized during the past 26 years, according to the firm. A good investment lately is Blackstone. The firm’s shares returned 89.4 percent during the 12 months ended on June 10, while still trading below their initial offering price in 2007.
Alternatives such as those managed by Blackstone have gained in popularity during the past 20 years as investors searched for alpha -- returns uncorrelated with and higher than those offered by the broad stock and bond markets.

Celebrity Investing

The people who run companies specializing in alternatives - - including billionaires such as Steve Cohen, Henry Kravis, John Paulson and Blackstone co-founder Steve Schwarzman -- have become celebrities. Assets overseen by hedge funds alone increased to $1.87 trillion this year from $118 billion in 1997 -- much of it from pension funds, endowments, family offices and sovereign-wealth funds.
Virtually every alternative category crashed in the financial meltdown of 2007 to 2009 -- none more severely than property, with housing and commercial real estate prices falling as much as 40 percent.
Yet as markets have recovered, it’s real estate that has led the way. The sector dominates Bloomberg Markets’ ranking of alternatives, which shows that real estate investment trusts -- which pool investor money to buy property and are sold like stocks -- have gained more than any other alternative category in the past three years. Large-capitalization REITs returned 17.3 percent annualized in the three years from March 31, 2010, to March 28, 2013, besting private equity, which returned 15.2 percent.

Index Search

To find the best-performing unconventional investments, Bloomberg searched its own indexes covering hedge funds, funds of funds, commodities and REITs. Bloomberg’s Rankings team also drew on outside indexes in search for the best-performing private-equity funds and collectibles, such as vintage cars, stamps, contemporary art and wine.
The best bets ranged from corn and silver futures, which returned 33.8 percent and 20.5 percent annualized over three years, to a Chateau Pavie Bordeaux and a 1957 Ferrari 250 Testarossa, which recently sold for $16.4 million.
Among the worst-performing alternatives were hedge funds, which returned 3.3 percent, and funds of hedge funds, which lost money overall. Most alternatives struggled to beat the Standard & Poor’s 500 Index (SPX), which returned 12.7 percent annualized over the three years ended on March 28 and was up more than 15 percent this year as of July 10.
James says that investing in alternatives makes sense even when they underperform.

No Correlation

“If you can put a bunch of money into these idiosyncratic investments, then you get a lot of diversification benefit because the returns are very uncorrelated” to the broader markets, he says, speaking from his office 44 floors above Park Avenue in Manhattan. “So even though you are putting a riskier asset in your portfolio, because it’s not correlated with everything else that you own, the portfolio volatility actually comes down.”
For investors in real estate and REITs, valuations fell further and faster than other assets and have in the past three years jumped higher than the S&P 500.
“If you wind the clock back to 2009, real estate had just been through a tremendous crash that helped bring down the global economy,” says Bob Rice, managing partner at New York-based merchant bank Tangent Capital Partners LLC and author of “The Alternative Answer” (HarperBusiness, 2013). “Things that are way down are going to come back. On top of that, central banks have given people a prevalence of cheap money to borrow and get back into alternatives such as real estate.”

Glimcher on Top

The return of consumer confidence has helped drive up REIT share prices by sending shoppers back to the stores. REITs that invest in shopping malls boasted the best performance for the three years ended on March 28, with an annualized return of 25.3 percent, according to data compiled by Bloomberg. Leading the list of best-performing mall investors was Michael Glimcher, whose Columbus, Ohio-based Glimcher Realty Trust (GRT) gained 38 percent.
Other categories of REITs that produced 20 percent-plus three-year annualized returns included self-storage units, industrial plants, health care, retail and Asian real estate.
Although REITs are still largely a U.S. phenomenon, they’re also a growing asset class in Europe and Asia. REITs globally raised $22.6 billion in the first quarter of the year, on pace to surpass the record $73.3 billion they collected in 2012.

REITs Triumph

“You’ve had tremendous gains in the assets that REITs are investing in, which is driving enthusiasm and performance,” says Brian Hargrave, chief investment officer at ZAIS Financial Corp. (ZFC), a mortgage-focused REIT run by Red Bank, New Jersey-based asset manager ZAIS Group LLC. “It’s a theme among investors to get exposure to the recovering housing economy.”
For U.S. investors, the advantage of REITs is that they’re required by the Internal Revenue Service to distribute at least 90 percent of their taxable earnings to shareholders as dividends, in exchange for paying little or no corporate income tax.
“That’s probably the single biggest benefit to the investor,” Hargrave says.
Yet real estate is a volatile and cyclical investment, with REIT prices rising and falling along with movements in the larger economy. That became clear in May, when U.S. Federal Reserve Chairman Ben Bernanke’s announcement that the Fed might slow its debt-buying program sent bond prices plunging. Shares of mortgage REITs fell 11.2 percent for the month ended July 10.

Leverage Rises

Meanwhile, the real estate moguls whose heavy borrowing helped fuel the 2008 financial crisis are back at it, taking advantage of Federal Reserve-driven low interest rates to amplify their returns through leverage. In an April report, the U.S. Treasury’s Financial Stability Oversight Council cited the borrowing of mortgage REITs as a source of instability in the economy.
“You’re starting to see more and more REITs that are borrowing to pay their dividends,” Tangent Capital’s Rice says. “That’s a bit of a yellow flag in terms of whether you want to be chasing the asset class right now.”
When central banks finally start raising interest rates, that could put a quick end to the new property boom, says David Fann, chief executive officer of TorreyCove Capital Partners LLC, a La Jolla, California-based firm that advises investment managers.
“Real estate has been a huge beneficiary of quantitative easing,” he says, referring to the Federal Reserve program to keep interest rates low by buying mortgage securities and other bonds. “When interest rates begin to rise, that’s going to curtail the longer-term appeal of real estate investing.”

Hedging Losses

Hedge funds, once the quintessential alternative investment, have been disappointing investors for years. The poor performance of macro funds, which make bets on movements in the broad economy, has been a reason for hedge funds’ overall mediocre 3.3 percent return.
Fund-of-funds operators, who try to find the best performers, have done even worse: Those funds lost an annualized 3.8 percent over three years. More than 600 funds of funds, or 25 percent of the total, have gone out of business since 2007. And assets under management in hedge funds have declined 13 percent in that period.
Even as the hedge-fund universe has shrunk, pension funds and other institutional investors have moved their money into the biggest, most successful funds.

‘Index Effect’

“Hedge funds in aggregate are going to look more and more like the broader market as their asset base continues to grow,” says Carl Friedrich, chief investment officer at Woodbury, New York-based investment adviser Piermont Wealth Management Inc. “You get an S&P 500-like index effect.”
Hedge-fund investors smart enough to bet on a rebound in housing via mortgage-backed securities fared well. Those funds gained more than 20 percent annualized during the three-year period. And the best of them, Metacapital Mortgage Opportunities, run by Metacapital Management LP’s Deepak Narula, returned more than 30 percent.
Commodities investors found the best returns in their breakfast cereal bowl: corn. While overall commodities gained a paltry 3.1 percent, corn futures returned 33.8 percent in the three years, as the U.S. government raised the required ethanol content of gasoline. Also, rising incomes in emerging markets increased meat consumption and thus grain purchases to feed the livestock.

Corn Roast

“Corn’s been going up in price over the last few years,” says Paul Ashworth, chief North America economist at London-based research firm Capital Economics Ltd. Ashworth said he believes corn and other agricultural commodities are overpriced and that what he calls a bubble will burst in the next few years. “We’re talking about low interest rates to buy farmland and also higher yields for corn per acre,” he says.
For wealthy individuals, alternative investing isn’t just about hedge funds and commodities. They also sink their money into collectibles such as stamps, coins, art and wine. Among those more-exotic investments, the top performers were classic cars and coins, with indexes that track prices of those collectibles up more than 15 percent annualized over three years.
Art connoisseurs lucky enough to own paintings by the late American artist Adolph Gottlieb (1903 to 1974) saw the value of his works rise by 65.5 percent annualized over three years. One Gottlieb painting, Balance, was sold at a Christie’s auction on May 15 in New York. The auction house’s projected sale price was $800,000 to $1.2 million. It sold for $3.3 million.

Buy Bordeaux

Meanwhile, wine investors who had been holding on to a bottle of 2004 Chateau Pavie Bordeaux saw its value rise 107.3 percent over three years. The wine sold in June for as much as $400 a bottle.
The alternative asset class that has made Blackstone a hot stock, private equity -- aka leveraged buyouts -- has benefited greatly from the post-crisis low-interest-rate environment.
“It’s one of the consequences of the great financial crisis,” TorreyCove’s Fann says. “In many cases, the large deals that were undertaken during the boom period got salvaged because of quantitative easing.”
One beneficiary was Apollo Global Management LLC (APO), the New York-based firm run by Leon Black. Apollo was able to refinance crisis-era debt in companies such as Harrah’s Entertainment Inc. that the firm bought at high prices during the bubble.
Today, private equity is bigger than ever. Global private-equity holdings surpassed $3 trillion of assets under management in 2011 for the first time, according to London-based research company Preqin Ltd., and have continued to grow. KKR & Co. (KKR) -- run by billionaires Kravis and George Roberts, his cousin -- owns companies that employ about 980,000 people. Blackstone’s portfolio of companies boasts more than 730,000 workers, while Apollo companies employ 370,000.

Fundraising Lags

Despite the buyout industry’s benchmark-beating returns, fundraising has lagged in recent years. Private-equity funds in the first quarter had taken an average of 18 months to close, the most in three years, according to Preqin. First-time funds secured just $4 billion globally in the quarter compared with $32 billion in the second quarter of 2008.
Private equity’s solution to the funding problem is to aim lower.
Blackstone, KKR and Carlyle Group LP (CG), the Washington-based buyout firm that manages $176 billion in assets, usually open their doors only to clients willing to commit at least $5 million. In the past year, all three have introduced offerings such as mutual funds and exchange-traded funds to cater directly to individuals.
Chasing 401(k)s
One goal is to penetrate corporate retirement funds, which will hold $5 trillion by 2016, according to Boston-based research firm Cerulli Associates.
“We definitely would like to be part of 401(k) platforms,” says Mike Gaviser, a KKR managing director.
In January, Carlyle started a fund with New York-based investment firm Central Park Group LLC that will accept as little as $50,000 from individual investors. It’s called the CPG Carlyle Private Equity Fund. CPG will allocate money from the pool to Carlyle-managed buyout funds.
“These things are selling like hot cakes right now,” Tangent Capital’s Rice says. “This is the next wave of alternative offerings.”
That’s cause for concern to David John, deputy director of the Retirement Security Project at the Brookings Institution in Washington.
“Should this start to take hold, there needs to be either a licensing, a seal of approval or some level of higher oversight so people don’t find that they are investing in something that really isn’t suitable for their stage of life,” he says.

‘Rational’ Investors

For both institutions and individuals looking for benchmark-beating returns, the world of alternative investing remains alluring.
“We are reaching a point when institutions are basically saying, why shouldn’t we allocate more money to an area with more return?” Blackstone’s Schwarzman told the audience at a Morgan Stanley conference in June. “And the answer is: Any rational person would.”
To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net.
To contact the editors responsible for this story: Michael Serrill at mserrill@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net.


Property Crushes Hedge Funds in Alternative Markets - Bloomberg

Why Hedge Funds' Glory Days May Be Gone for Good - Businessweek


As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years

Hedge fund performance lagged the Standard & Poor’s 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. 

Why Hedge Funds' Glory Days May Be Gone for Good

At the height of the financial crisis in 2008, a group of famous hedge fund managers was made to stand before Congress like thieves in a stockade and defend their existence to an angry public. The gilded five included George Soros, co-founder of the Quantum Fund; James Simons of Renaissance Technologies; John Paulson of Paulson & Co.; Philip Falcone of Harbinger Capital; and Kenneth Griffin of Citadel. Each man had made hundreds of millions, or billions, of dollars in the preceding years through his own form of glorified gambling, and in some cases, the investors who had poured money into their hedge funds had done OK, too. They were brought to Washington to stand up for their industry and their paychecks, and to address the question of whether their business should be more tightly regulated. They all refused to apologize for their success. They appeared untouchable.
What’s happened since then is instructive. Soros, considered by some to be one of the greatest investors in history, announced in 2011 that he was returning most of his investors’ money and converting his fund into a family office. Simons, a former mathematician and code cracker for the National Security Agency, retired from managing his funds in 2010. After several spectacular years, Paulson saw performance at his largest funds plummet, while Falcone reached a tentative settlement in May with the U.S. Securities and Exchange Commission over claims that he’d borrowed money from his fund to pay his taxes, barring him from the industry for two years. Griffin recently scaled back his ambition of turning his firm into the next Goldman Sachs (GS) after his funds struggled to recover from huge losses in 2008.
As a symbol of the state of the hedge fund industry, the humbling of these financial gods couldn’t be more apt. Hedge funds may have gotten too big for their yachts, for their market, and for their own possibilities for success. After a decade as rock stars, hedge fund managers seem to be fading just as quickly as musicians do. Each day brings disappointing headlines about the returns generated by formerly highflying funds, from Paulson, whose Advantage Plus fund is up 3.4 percent this year, after losing 19 percent in 2012 and 51 percent in 2011, to Bridgewater Associates, the largest in the world.
This reversal of fortunes comes at a time when one of the most successful traders of his time, Steven Cohen, founder of the $15 billion hedge fund firm SAC Capital Advisors, is at the center of a government investigation into insider trading. Two SAC portfolio managers, one current and one former, face criminal trials in November, and further charges from the Department of Justice and the SEC could come at any moment. The Federal Bureau of Investigation continues to probe the company, and the government is weighing criminal and civil actions against SAC and Cohen. Cohen has not been charged and denies any wrongdoing, but the industry is on high alert for the possible downfall of one of its towering figures.
Despite all the speculation and the loss of billions in investor capital, Cohen’s flagship hedge fund managed to be the most profitable in the world in 2012, making $789.5 million in the first 10 months of the year, according to Bloomberg Markets. His competitors haven’t fared as well. One thing hedge funds are supposed to do—generate “alpha,” a macho term for risk-adjusted returns that surpass the overall market because of the skill of the investor—is slipping further out of reach.
According to a report by Goldman Sachs released in May, hedge fund performance lagged the Standard & Poor’s 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years, according to data compiled by Bloomberg. This comes as the SEC passed a rule that will allow hedge funds to advertise to the public for the first time in 80 years, prompting a flurry of joke marketing slogans to appear on Twitter, such as “Creating alpha since, well, mostly never” (Barry Ritholtz) and “Leave The Frontrunning To Us!” (@IvanTheK).
Hedge funds are built on the idea that a smarter guy (and they are almost all guys; only 16.8 percent of managers are women) with a better computer can make miracles possible by uncovering inefficiencies in the market or predicting the future. In pure dollar terms, there are more resources, advanced degrees, and computing firepower devoted to chasing this elusive goal than almost any other endeavor, and that may include fighting wars. Yet traders face the immutable fact that every second, each megabyte of information, blog post, one-line rumor, revenue estimate, or new product order from China has already been taken into account by the efficient market and reflected in a security’s price. This means that trying to gain what traders call an “edge,” at least legitimately, is almost impossible. As the financial incentives on Wall Street have become enormous, so have the competition and pressure to gain an advantage at any cost.
Few people will shed tears for an industry that has produced more than its fair share of billionaires—some of whom, like Cohen, are notorious for their displays of wealth. Nevertheless, the decline of hedge funds has implications beyond Wall Street. The financial kingpins who profited most from hedge funds’ golden age gained the ability to make influential political donations and to bend big banks to their will. In the U.S., hedge funds manage a significant portion of pension funds and university endowments. For investors who chased the colossal returns once promised, the downturn may well bring painful losses. But it could also be the beginning of a virtuous cycle. If it’s going to survive, the industry may need to get smaller and a lot more modest.
Hedge funds began as a small, almost sideline, service. They were the alternative investments for the wealthy, intended to perform differently than the overall market. “Any idiot can make a big return by taking a big risk. You just buy the S&P, you lever up—there’s nothing clever about that,” says Sebastian Mallaby, the author of More Money Than God: Hedge Funds and the Making of a New Elite. “What’s clever is to have a return that’s risk-adjusted.”
This is what Alfred Winslow Jones, an Australian-born onetime financial journalist, had in mind in 1949 when he created a private investment partnership that was designed to be “hedged” against gyrations in the market. Jones borrowed shares, sold them short, and hoped to earn an offsetting profit on them if the market dropped and his long positions lost value.
It didn’t come without risks: Shorting exposes an investor to potentially limitless losses if a stock keeps rising, so regulators decided that only the most sophisticated investors should be doing it. Hedge funds would be allowed to try to make money almost any way they wanted, and charge whatever fees they liked, as long as they limited their investors to rich people who, in theory, could afford to lose whatever money they put in. It was a side bet.
For a while, the funds were expected to produce steady, modest returns, in contrast to the wider swings of the market. In a 2011 paper that he updated this year, Roger Ibbotson, a finance professor at the Yale School of Management who runs a hedge fund called Zebra Capital Management, analyzed the performance of 8,400 hedge funds from 1995 to 2012; he concluded that on average they generated 2.5 percent of precious alpha. “They have done a good job, historically,” Ibbotson says. “Now, I think it’s overcapacity. I doubt that the alphas are completely gone, but alphas are going to be harder to get in the future than they have been in the past.”
With each millionaire-minting stock market boom, the number of hedge funds has increased as the rich scour the market for new ways to get even richer. It’s no coincidence that the first decade of the 21st century, when the wealthiest 0.1 percent became exponentially wealthier, marked the high-water mark for hedge funds. Now there are about 10,000 hedge funds managing $2.3 trillion. The pioneers, such as Cohen and Paulson, had learned that working at investment banks with their brutal hours and byzantine corporate cultures—not to mention the fighting over bonuses every January—was for suckers. Hedge funds offered would-be financial hotshots a faster and more glamorous path to obscene wealth.
One of the most alluring aspects of the business vs. other sectors of Wall Street is what people in the tech world call “scalability.” Hedge fund managers could easily expand their annual bonuses from millions a year to tens of millions or more just by bringing in more investor money and making the fund larger, often with little extra work. Most hedge funds charge a management fee of 2 percent of assets, which is intended to cover expenses and salaries, as well as 20 percent of the profit generated by the fund at the end of the year. A fund managing $300 million would take $6 million in fees, plus its 20 percent cut; if the fund grew to $3 billion in assets, the management fee would jump to $60 million. If a fund of that size returned only 6 percent that year, it would generate $180 million in profit, $36 million of which the managers could keep. It quickly starts to look like a smart use of a Harvard degree.
Yet this once hugely lucrative model has proven unsustainable. One chief investment officer at a $5 billion institution breaks down the typical hedge fund life cycle into four evolutionary stages. During the early period, when a fund is starting out, its managers are hungry, motivated, and often humble enough to know what they don’t know. This tends to be the best time to put money in, but also the hardest, as the funds tend to be very small. Stage two occurs once the fund has achieved some success, when those making the decisions have gained some confidence but they aren’t yet so well-known that the fund is too big or impossible to get into.
Then comes stage three—the sort of plateau before the fall—when the fund gets “hot” and suddenly has to beat back investors, who tend to be drawn to flashy success stories like lightning bugs to an electric fence. Stage four occurs when the fund manager’s name is spotted as a bidder for baseball teams or buyer of zillion-dollar Hamptons mansions. Most funds stop generating the returns they once did by this stage, as the manager becomes overconfident in his abilities and the fund too large to make anything that could be described as a nimble investing move. “The bigger a fund gets, the more difficult it gets to maintain strong performance,” says Jim Liew, an adjunct professor of finance at New York University’s Stern School of Business. “That’s just because the number of opportunities is limited in terms of putting that much money to work.”
Hedge funds have also been hurt by their success. Most of the advantages their investors once had—from better information to far fewer people trying to do what they do—have evaporated. In the easy, early days, there was less than $500 billion parked in a couple thousand private investment pools chasing the same inefficiencies in the market. That’s when equities were traded in fractions rather than decimals and before the SEC adopted Regulation FD, which in 2000 tightened the spigot of information flowing between company executives and hungry traders.
After 2000, the supposed “smart” money began paying expert network consultants—company insiders who work as part-time advisers to Wall Street investors—to give them the information they craved. The government has since cracked down on that practice, which in some cases led to illegal insider trading. The rise of supercharged computer trading means speed is one of the few ways left to gain an advantage.
As their returns have fallen, the biggest hedge funds have started to seem more like glorified mutual funds for the wealthy, and those rich folks might start to take a harder look at whether they’re getting their money’s worth. This could be an encouraging development for the world economy, considering that hedge funds provided huge demand for the toxic mortgage derivatives that helped lead to the financial collapse of 2008. At the same time, the tens of billions that pension funds have plowed into funds such as Bridgewater’s All Weather Fund—down 8 percent for the year as of late June, according to Reuters, compared with a 10.3 percent rise in the S&P 500—mean that the financial security of untold numbers of retirees could be threatened by a full-scale hedge fund meltdown.
For the moment, that possibility seems remote. The age of the multibillionaire celebrity hedge fund manager may be drawing to a close, but the funds themselves can still serve a useful purpose for prudent investors looking to manage risk. Let the industry’s recent underperformance serve as a reality check: No matter how many $100 million Picasso paintings they purchase, hedge fund moguls are not magicians. The sooner investors realize that, the better off they will be.



Why Hedge Funds' Glory Days May Be Gone for Good - Businessweek

Wednesday, May 29, 2013

US Trust Report on profiting from A Transforming World

Identifying the main drivers of long-term change is key to investment success in the 21st century. We believe we are at the beginning of a secular growth phase for the U.S. economy driven largely by the rebalancing of global growth from the developed to the developing world. We focus first on the long-term drivers, the macro forces and investment themes at play across industries that are taking us into the next growth cycle.


The report can be downloaded here: http://www.ustrust.com/publish/content/application/pdf/GWMOL/AR975616-UST.pdf

A Transforming World


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