Category Archives: Hedge Funds

Deja Vu with Brexit – Standard Life Fund Freeze – Pre Bear Stearns Moment – the Lehman Moment can still come

If you like working through the worst case scenario it would probably be sensible to consider the Brexit Vote the beginning of problems to come.   (Telegraph Group Business Editor James Quinn is doing a great job of reporting effects of Brexit!)

Trading in a £2.9bn commercial property portfolio managed by Standard Life Investments has been halted after a flood of withdrawals exhausted the fund’s cash reserves.

Standard Life said the move followed “an increase in redemption requests as a result of uncertainty following the EU referendum result”.

Details were not provided on the current liquidity position or on whether any buildings would now be sold.

The latest figures for the portfolio, from May 31, show the fund held 13pc in cash. Much of this may have been paid out to departing investors.

In the ten days since Brexit two other commercial property funds – run by rival managers Aberdeen and Henderson – have cut almost £300m from the value of their holdings. Freezing withdrawals is the “next step”, commentators say.

Time line – Bear Stearns Hedge Funds Collapse (we could be at the moment in time: June 2007 – meaning we won’t see the worst to come untill 2017 or early 2018. These things don’t unravel in a few days.)

July 5th update: “Three property trusts, including Standard Life, M&G Investments and Aviva Investors, have suspended trading. The suspensions now account for more than a quarter of the £35bn-sized sector.” “Andrew Bailey, the new head of the Financial Conduct Authority, also attempted to ease concerns around the property sector, saying the actions taken by the property funds was not a “panic measure.” Mr Bailey, until last week the head of the Bank’s Prudential Regulation Authority, said the purpose of suspending redemptions is to allow a funds’ underlying assets to be revalued.” <– not a panic measure. No, just an indication that a haircut of unknown proportion is likely to follow. That is not something that is a calming thought to the owners of properties or property fund holders. — The big question: Will a self-fullfilling prophecy ensue. Worried people, pessimistic people selling because they are told they can’t sell. If a large proportion of your net wealth is in property, wouldn’t it be prudent to now take money of the table with property prices still high? I think so. — Mostly, if a ball gets rolling, it’s velocity doesn’t slow down. — Except the CHF vs EUR, that ball is being held by the SNB. The problem is: That ball is getting larger. — It reminds me of my attemps as a child to dam a little stream in the Swiss Alps. Just a question of time before pressure builds up and flushes away the dam. — But maybe the dam is so strong the SNB is building, that the safety seeking liquidity will go to Gold and other markets…


Marketwatch has it summed up nicely:

“What’s happening?”

“Standard Life Investments on Monday was the first to halt trading in its open-ended property fund. Aviva moved to suspend trading in its fund Tuesday, followed minutes later by M&G. Observers expect other U.K. real-estate funds to follow suit.”  (My view: aka Domino-effect, trickle-down-effect, contagion, you name it, it’s happening. It’s also going to be enough that buyers pause, to leave the sellers quickly swelling in number…)

“Redemptions can put a strain on such open-ended real-estate funds. Unlike stock funds, they can’t move to quickly liquidate holdings to meet redemptions. Most carry significant cash cushions, but those appear to have been sharply eroded. Complicating matters, unlike stocks, properties can be hard to value and liquidate during times of stress.”


(Partially) Hedging a Portfolio with Futures or Options to reduce Volatility and to a lesser extent Return

After having gone short futures for a client portfolio recently, I needed to explain what effect such a tactical decision has on the portfolio in question to the clients beneficiaries.

Below is a graphical representation of what happens when you hedge part of a portfolio (in a very specific example, this would need to be calculated for each portfolio that was being considered for a hedge).

Firstly the expected volatility is reduced (in my example hedging 15% of portfolio with SMI put options would move the volatily down by around 1%).

Secondly the expected return is reduced (in my example from 4.9% to 4.8%).

While the exact numbers give a false send of certainty and detail, it does go a long way to quickly and graphically showing what happens when you hedge a portfolio.

Hedging can be very interesting to complement a long term buy and hold portfolio, in my opinion. using-options-or-futures-to-reduce-volatility-while-keeping-expected-return-nearly-unchanged

Zenit Fund – Brummer & Partners – Long/Short Hedge Fund

Over 10 years ago this Brummer and Partners fund caught my eye, as it had a performance record that was over 300% at the time already. Now, by chance, I checked on it again. It has since trebled. This must be one of the most amazing franchises in the hedge fund sector at the current moment in time. And they are based in Stockholm. This could be an indication that location must have only minor impact, if any, on talent and performance.


2003 Document: Zenit-Fund_Brummer (I was sorting through my papers, after having bought a top Kodak Scanner 3200.)