Asset Management Firms Hiring More Aggressively
Although the sell side has virtually halted all of its recruiting efforts due to the subprime crisis, the buy side is aggressively hiring, in anticipation of the oncoming wave of retiring Baby Boomers and the increasing internationalization of markets, according to Russell Reynolds.
"This has been an historic year in the asset and wealth management industry," said Russell Reynolds Managing Director Cornelia L. Kiley, who is with the firm's asset and wealth management practice. "The mid-year market turbulence was not a signal to retrench, but, rather, to set the performance bar even higher. The relentless pursuit of alpha has led to upgrades from the C-suite to portfolio management to the back office."
Russell Reynolds found that turnover in the C-suite this year has been 15% higher than in 2006, due to boards' impatience with underperformance, coupled with a large number of executives reaching retirement age.
There is incredible demand for chief investment officers, leading to generous compensation packages. As firms diversify their investment holdings, they are particularly interested in CIOs with experience in a broad array of asset classes.
Emerging markets has also been a hot topic this year, particularly real estate development. "Investment professionals with a track record of high performance in these markets-who understand the real estate aspects of a deal and can accurately underwrite the risk-are exceptionally scarce," according to Russell Reynolds.
In addition, hiring for technology and operations executives continues to be robust, particularly those who can seamlessly connect the back office to the front office. Thus, "there is an increasing emphasis on candidates with firsthand understanding of investment management business processes, ranging from risk management and financial reporting to specific product strategies and portfolio management," Russell Reynolds said.
Rafferty Fined $400K-Plus For Late-Trading Troubles
The Financial Industry Regulatory Authority has fined brokerage Rafferty Capital Markets more than $400,000 for failing to prevent its hedge fund clients from late trading and market timing mutual funds between January 2001 and August 2003. The fine is $350,000, along with $59,605 in restitution that Rafferty must repay to two mutual fund families. In addition, FINRA said, Rafferty helped the hedge fund clients escape detection by opening multiple customer accounts and different brokerage branch codes.
Besides being prevented from opening new mutual fund brokerage accounts for new or existing clients for 90 days, Rafferty must review its compliance and operations procedure to prevent any other occurrences of late trading or market timing, and retain electronic communications and record the times of receipt and entry of mutual fund orders.
"Funds must implement systems to ensure that mutual fund orders processed after the market close reflect orders received from customers during regular trading hours," said Susan L. Merrill, FINRA executive vice president and chief of enforcement. "Otherwise, they can gain an unfair advantage."
Hedge Funds Brace for Government Lawsuits
With New York regulators investigating 30 hedge funds for potential conflicts of interest and insider trading, California attempting to require them to register and the credit markets threatening to wreak further havoc, hedge fund executives are bracing for a wave of action against them in 2008, The National Law Journal reports.
"Anytime a hedge fund blows up, you are going to see class actions, and a lot of cases are going to end up in [SEC] receivership and bankruptcies," said Ross Intelisano, whose law firm, Rich & Intelisano, is representing investors in the now-defunct Bayou Group. "We see this as a growing area of our practice. Absolutely, in 2008, this will continue as more hedge funds sink."
U.S. District Judge Tosses Lawsuit Against Salomon
Judge Paul A. Crotty of the U.S. District Court for the Southern District of New York ruled that defendant Salomon Brothers sufficiently proved that the fees it charged on nine of its mutual funds were justifiable in light of the funds' superior performance and customer service, Dow Jones reports.
In so doing, he dismissed a lawsuit against the investment advisors and distributors to the funds.
"Plaintiffs allege that the performance of these funds was not up to par with other similar funds in the industry,'" the judge ruled. "According to plaintiffs, this failure belies defendants' argument that their superior quality and performance justifies their high fees. Performance is only one measure, however, and plaintiffs fail to allege anything about the array of services offered to fund customers, such as telephone or web assistance or the ease with which transactions are effected," the judge continued. "Instead, they ask the court to extrapolate deficient services from allegedly substandard investment returns."
The lawsuit, originally filed in 2004, said that the fees charged by the funds' distributors were disproportionate, given that they had not been negotiated at arm's length but granted to a transfer agent subsidiary of then-parent company Citigroup.
In May 2005, Citigroup, then owner of the Salomon Smith Barney funds, settled Securities and Exchange Commission fraud charges against its Citigroup Global Markets and Smith Barney Fund Management units over an alleged windfall of nearly $100 million in transfer agent fees that the units pocketed, by distributing $208 million to investors.
PowerShares Applies to Offer Three Active ETFs
There are rumblings, once again, over the possibility of creating the first actively managed exchange-traded fund.
PowerShares Capital Management has filed with the Securities and Exchange Commission to offer three such funds and has plans to offer an actively managed bond ETF, as well, The Wall Street Journal reports.
"We're hopeful these funds will create a tremendous new market for ETF investors," said PowerShares CEO Bruce Bond. "We're expecting this will open a lot of interest among active managers in ETFs."
Matt Hougan, editor of IndexUniverse.com, agreed: "It's certainly going to create a lot of excitement among investors who haven't up to this point been interested in ETFs."
International Fund Skippers Begin to Cool on China Exposure
A number of managers of international and emerging markets mutual funds who had invested heavily, and successfully, in China are now cutting back on their holdings, the Associated Press reports.
Noting that China's domestic A shares have risen nearly 500% in the past two years, Justin Leverenz, manager of the Oppenheimer Developing Markets Fund, said he expects the bubble to burst soon-and fast. "2008 will be an incredibly difficult year for Chinese equities," Leverenz said. The market is in the "later, waning stages of a bubble," he added.
Although Antoine van Agtmael, chief investment officer of Emerging Markets Management, believes in economic growth in China, he says the stock market there has been clouded by a buying frenzy. Van Agtmael, who is credited with coining the term emerging markets, has been so nervous about the Chinese market for a while now that he cut back on his holdings quite some time ago, which he now regrets as being too hasty.
"I don't trust this phenomenal rise in the A share market and now the H share market [on the Hong Kong exchange] at all," van Agtmael said. "Like all bubbles, it will end in tears. I believe this is going to be sooner rather than later," he said, estimating that the market could fall as much as 70%.
One data point that troubles van Agtmael in particular is China's GDP growth rate. Over the past 20 years, it has averaged between 8% and 10% but recently rose to 11%.
Six of the top 10 best-performing funds so far this year through Nov. 20 have a China focus, the No. 1 fund, AIM China A, up 86.12%, according to Morningstar.
Bill Gross Likens Subprime Crisis to Great Depression
Bill Gross, chief investment officer at PIMCO, said the effects of the subprime crisis have yet to be felt-and they will be devastating, the Financial Times reports.
"We haven't faced a downturn like this since the Depression," he said. "[The] effect on consumption, its effect on future lending attitudes, could bring [America] close to the zero line in terms of economic growth. It does keep me up at night."
And Gross is not alone. Other asset managers are echoing the sentiment that the subprime crisis could dampen the economy for years, and investor confidence is beginning to show its cracks.
The subprime crisis has created three key problems, the first of which is escalating estimates of losses. Originally, Federal Reserve Chairman Ben Bernanke said losses would be $50 billion, but this month, he increased that to $150 billion-but some experts say it could be even double that, or more.
As a result, investors could default on as much as $300 billion in other types of debt. "Investors are now starting to worry that the subprime crisis will broaden out into other forms of consumer and real estate lending," Goldman Sachs, which estimates subprime losses will top $445 billion, said in a recent report.
The second problem is uncertainty about how this will affect the financial services industry as a whole, due to the fact that many types of assets have been securitized. "Grenades keep going off in the system, and nobody quite knows what to think or expect," said a policymaker.
Thirdly, banks are expected to cut back on lending, which will definitely slow economic growth.
"Three months ago, it was reasonable to expect that the subprime credit crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth," said Lawrence Summers, former U.S. Treasury secretary. But now it appears very likely there will be a "U.S. recession that slows growth significantly on a global basis."
41% of Ultra-Wealthy Say They're Assertive Investors
In spite of the belief that very wealthy investors are most interested in preserving their wealth, 41% of those worth $25 million or more describe themselves as "aggressive" or "most aggressive" investors, according to a report from Spectrem Group, "The $25 Million Plus Investor." Two-thirds of their assets are in stocks, alternatives, mutual funds, separately managed accounts, hedge funds, private equity, venture capital or other investable assets.
Only 6% of those worth $25 million or more consider themselves conservative, and only 9% of those worth $5 million or more consider themselves conservative.
"Even in the face of intense financial market turmoil, investors with the most to lose are willing to roll the dice with risky investments," said George H. Walper, Jr., president of Spectrem Group. "This raises eyebrows, given that they have two-thirds of their wealth tied up in investable assets."
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