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Tag: asset managers

Welcome to the Age of Asset Management

Welcome to the Age of Asset Management

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This was a wide-ranging discussion that I was fortunate enough to moderate at the most recent Milken conference.

I’m told that this post on cross-border deleveraging, combined with some previous work on asset managers, was the inspiration for it. In any case it was a pleasure to discuss everything from capital controls to passive investing and, of course, market liquidity with David Hunt, Jim McCaughan, Hilda Ochoa-Brillembourg, Ronald O’Hanley, and Nouriel Roubini.

Related link:
It’s the cross-border deleveraging, stupid! – Bloomberg

The year in credit

The year in credit

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Credit markets, I wrote a lot about them this year. One day some other asset class will grab my attention but for the time being it’s this. Sorry.

Here’s what I wrote about the market in 2015 – or at least, since starting the new gig over at Bloomberg in April. I may have missed a few here and there (and included some fixed income posts that I think are related to over-arching credit themes), but I think this is pretty much covers it.

Happy holidays, and may 2016 be filled with just the right amount of yield.

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Big bond news buried in a little report

Big bond news buried in a little report

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Buried in BlackRock’s recent report into bond market liquidity was a bombshell bit of news.

Here’s the story:

BlackRock Inc. is muscling into trading venues that had long been the exclusive territory of big banks as the world’s biggest asset manager seeks to make up for declining liquidity in the bond market.

BlackRock revealed last week that it’s now trading bonds directly with inter-dealer brokers, following years of warning that liquidity is waning. In September, BlackRock said the corporate bond market is “broken.”

Banks have long facilitated the business, but regulations passed after the 2008 crisis hobbled their ability to do so. By trading with inter-dealer brokers — an industry that includes ICAP Plc and Tullett Prebon Plc — BlackRock is circumventing a middleman.

Money managers are “looking to get liquidity anywhere they can get it, and the other side is the inter-dealer brokers — their business model has been totally turned upside down,” Kevin McPartland, head of research for market structure and technology at Greenwich Associates, said in a phone interview.
Tara McDonnell, a spokeswoman for New York-based BlackRock, declined to comment.

A large investor trading directly with inter-dealer brokers marks a sea change for Wall Street, where big bond trades traditionally are executed between asset managers and large banks like JPMorgan Chase & Co. and Goldman Sachs Group Inc. Trading venues run by ICAP and Tullett Prebon, meanwhile, have historically brokered trades between banks and stayed clear of interacting directly with buy-side investors such as BlackRock …

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What we didn’t learn about the events of Oct. 15

What we didn’t learn about the events of Oct. 15

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This week, the US.government released its report on the events of October 15.

I was disappointed.

The 72-page report has lots of points of interest but doesn’t come up with any definitive reason for the sharp movements in the 10-year U.S. Treasury. More disappointing than that (for me) was the report’s treatment of the events leading up to the day and specifically its very brief mention of volatility selling.

Here’s what the report said:

In addition, market participants reported that some large asset managers had maintained positions structured to profit from a continuation of the low-volatility environment that characterized much of 2014, though data to validate such claims are limited. Some market participants have speculated that a change in the distribution of certain options-specific risk factors among certain firms could have been a contributing factor. In particular, anecdotal commentary suggested that some dealers had absorbed a portion of the sizable “short volatility” position believed to have been previously maintained by large asset managers. As volatility spiked on October 15, those positions would have prompted some dealers to dynamically hedge this exposure, exacerbating the downward move in yields.

Long-time readers of this blog may remember that this is something I’ve written about before, specifically in a piece for the Financial Times entitled: “Caught on the wrong side of the ‘vol’ trade.” Unlike the Oct. 15 report, that article names a specific player who was said to have suddenly stopped selling vol.

“Pimco was a massive seller of volatility and when Gross left they started taking that position back,” says one hedge fund trader. “The Street was still thinking that short was out there. People expected the road to be there and the road wasn’t there.”

Given the debate over whether large asset managers are or are not systemically-important, it’s shame the Oct. 15 report did not dive into this particular theme a bit more.

Why does everyone want corporate bonds? One word: Alpha.

Why does everyone want corporate bonds? One word: Alpha.

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Why the intense scrum for new-issue corporate bonds? It’s not just the yield on offer from buying the new debt. It’s the fact that that yield, for a brief but important moment in time, exceeds the benchmark.

Here’s a little Bloomberg post based on research from Citigroup credit strategist Jason Shoup.

He estimates that investors can add 20 basis points of alpha just by purchasing new-issue bonds.

… Alpha has been scarce in recent years. More than half a decade of ultra-low interest rates and extraordinary monetary stimulus from the world’s central banks means that many assets are moving in tandem, making it more difficult for investment managers to find alpha-generating opportunities. If assets were racing they’d be neck and neck, so to speak.

However, one place where alpha can be generated is in the corporate bond market where big companies sell their debt. The reason is simple. When companies sell a new bond there is typically a lag between the bond being issued and when it’s included in benchmark fixed income indexes …

The simple reason why everyone wants new corporate bonds

One last (FT) look at the corporate bond market

One last (FT) look at the corporate bond market

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This is my last big story for the Financial Times, as I’m heading off to a brand new gig at Bloomberg. The piece seeks to bring together a lot of what I’ve written about bond market liquidity, the rampant search for yield and the growing power of big buyside investors into a single narrative. Do read the full thing if you can.

Dan McCrum at FT Alphaville also has an excellent summary.

I’ve left some key excerpts below:

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New column – The unbearable tightness of benchmarks

New column – The unbearable tightness of benchmarks

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Benchmarks.

Their importance in financial markets cannot be overstated. So here’s a look at how the makeup of one particular benchmark bond index is making life difficult for big investors and in some cases encouraging them to use derivatives to introduce artificial duration to their portfolios.

(Writing about duration is always a huge hassle, but it too is very important in financial markets, so I try)

Here’s an excerpt:

If there were a recipe for creating the Barclays US Aggregate Index — one of the most important benchmark bond indices in the world — it might go something like this: take some US Treasuries, add a smattering of corporate bonds and securitised debt, then fold in a large chunk of mortgage-backed securities. Mix it all together et voilà — you are ready to serve a heaping portion of fixed income exposure to hungry investors around the world.

Fund managers are like chefs, trying to follow this basic recipe and improve on the outcome where possible — baking the basic bond fund cake, but adding their own twist to beat the benchmark. (After all, if you are simply replicating the benchmark’s returns, you had better be chargingvery low fees.)

However, fund managers seeking to outperform the Barclays “Agg” face a unique problem in the market in the shape of a severe lack of ingredients, and there are lurking concerns as to just what exactly fund manager cooks are reaching for in the kitchen.

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Bond index mix creates ingredient shortage

New column – All the young traders who’ve never experienced an interest rate hike

New column – All the young traders who’ve never experienced an interest rate hike

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It’s been ages since the Federal Reserve last raised interest rates. Who remembers how that works? (Certainly not me, I was a baby reporter covering airlines back then) Here are some excerpts:

At least at the junior end, Wall Street is now peppered with traders and investors who possess no first-hand professional experience of an interest rate rise. Even for finance veterans, the habit of measuring one’s profit and loss on a day-to-day basis leads to notoriously goldfish-like memory spans and it has been six years since rates were last above the zero bound.

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Years of ultra-low interest rates have become integrated into the very fabric of markets. Asset managers live and die by their interest rate bets. Hundreds of billions of dollars have poured into riskier asset classes as investors seek out higher returns with borrowed money, or leverage, used to amplify profits.

Markets display total recoil on Fed interest rate rises

New column – Asset managers, repo and derivatives. Oh my!

New column – Asset managers, repo and derivatives. Oh my!

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Chances are, when you think of the repo market you think of banks and broker-dealers and the craziness that went down in 2008. This column, based on an amazing research paper by Zoltan Pozsar, suggests that’s a mistake.

(Bonus: It calls out Pimco on window-dressing its balance sheet)

Here’s an excerpt:

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