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Boston HF does away with 2 and 20
Hedge Funds
<p>We all know how hedge fund fees work. We give them an x amount of money, and then they charge us around 2% off that as a management fee. They then try to make a y amount of money using our x, and then charge us a 20% performance fee from the y that they made. What if they lose money? Well, there’s usually a clawback clause for that – but they still get to keep the 2%.</p> <p>It’s been that way for decades, millennia even, given that Alfred Winslow Jones copped the formula off Phoenician sailors. Two ex-Harvard endowment people however, seem to be trying to change that:<br /> “A pair of former Harvard University endowment executives have built the world’s largest stock-focused hedge fund with the opposite approach. Robert Atchinson and Phillip Gross let investors in their $28 billion Adage Capital Management LP keep almost all of their trading gains—and promise refunds if the fund’s performance falters.”<br /> According to the Wall Street Journal, Adage Capital charges just 0.5% annually plus 20% off gains in excess of the S&amp;P 500’s return. While that doesn’t look particularly anomalous at first glance, here’s the kicker: they keep half of their performance fee locked away for the rest of the year, and it gets awarded to them only if they beat the S&amp;P in the following year. What happens if they fall short? Well, it goes back to investors as a refund.</p> <p>The break from “tradition” seems to have brought Adage its fair share of fans; the firm saw its assets under management balloon from nearly $4 billion in 2001 to $28 billion in 2015, and ex-Harvard endowment head Jack Meyer had nothing but good things to say about their fee structure:<br /> “That’s how I think the world should look…I’m surprised it has taken the world so long to get there.”<br /> It has cost them a King’s ransom in fees though. Last year, when the fund was up 18.4%, Adage divvied up just $400 million in fees among its 26-strong staff, a massive sum by any measure, but still much less than an over $1 billion take they would have claimed had they done the usual 2 and 20 structure. No one seems to be complaining however, as the firm’s crew seems to be more interested in winning that getting on the Forbes list.</p> <p>Also impressive is the fact that they’ve only paid refunds on two occasions: in 2002 and in 2008, when the fund trailed the S&amp;P by 0.18% and 0.75% respectively.</p> <p>It also raises the question though; if their fee structure catches on – which I think it will – what does that mean for absolute return? I thought that was the whole point of hedge funds in the first place – to not be tied down by some benchmark and to just focus on making money, bull or bear market.</p> <p>Its different strokes I guess, but still, I'm curious what you have to say.<br /> Photo: GotCredit</p>
KKR snaps up stake in Marshall Wace
Asset Management
<p>Its competitors may be shutting down hedge funds right and left, but for private equity luminary KKR, now seems to be the time to get in, and in a big way.</p> <p>The Wall Street Journal reports that the vaunted private equity firm has taken a 24.9% stake in Marshall Wace (MW), the London-based, $22 billion long-short equity hedge fund run by Paul Marshall and Ian Wace.</p> <p>How much KKR valued its stake is currently unclear, though the acquisition was apparently a stock and cash deal with MW partners receiving 7.4 million shares in KKR worth $20 each.</p> <p>It isn’t just a straight-up purchase though; according to the Independent, the sale comes in two stages. The first involves an injection of cash from KKR which will be locked up until 2020, with the aforementioned KKR stock vesting in 2018, and in the next comes a possible 15% increase in KKR’s stake at the firm by 2019, with half of the additional proceeds reinvested in the fund and the other half used to snap up KKR stock until 2022, the time when Marshall, Wace, and Anthony Clarke get to cash out of the deal.</p> <p>None of them seem to be particularly eager to do so however, as Ian Wace told the WSJ:<br /> “We were never interested in a financial deal…This is all about the next 18 years of our life, not the first 18 years of our life.”<br /> The move effectively returns KKR smack bang on the hedge fund map, a place it was initially hesitant to join in and was ultimately unsuccessful at following the closure of its Goldman Sachs Principal Strategies group-manned hedge fund last year.<br /> Photo: Esther Dyson</p>
Will tech ever be able to disrupt the business card?
Lifestyle, 4:01
<p>In an age of social media, the business card is a surprisingly resilient piece of paper. While we are yet to see the killer app that has sent this humble format the way of the newspaper, plenty have tried to build it.</p> <p>The latest effort is Knock Knock, the Washington Post reports. The premise is that you knock twice on your phone’s screen, and you can quickly share your contact information and social media accounts with those nearby - provided they’ve also installed the app. </p> <p>Knock Knock is not alone, other efforts have included startups like Bump, Hashable and CardFlick. No one has quite cracked it yet. Perhaps in the West it is only a matter of time before there is a solution that finally kills off the card, but it might be a bigger challenge in Asia where the custom of exchanging cards has existed for 400 years.  </p> <p>That said, in Japan - the cultural heartland of the business card - entrepreneur Chika Terada has started Sansan, a cloud-based CRM platform that lets user scan and upload their cards.  The startup offers two services: Sansan and Eight. Sansan is for businesses, while Eight is for individuals. </p> <p>The idea has at least gained traction among venture capitalists. TechInAsia reports that Sansan has already raised a $14 million Series B round in June. </p> <p>At least the business card will stick around for some time. After all, the most successful technology is often the most convenient. What could be more convenient than putting a piece of paper in someone’s hand?<br /> Photo: Geoffrey Franklin<br /> &nbsp;</p> <p>&nbsp;</p>
A multi-billion dollar fight: The insanity of Uber and Didi Kuaidi
Venture Capital
<p>China ride hailing app Didi Kuaidi has just upped the ante in its fight against rival Uber, raising $3 billion from the likes of China Investment Corp, Capital International Private Equity Fund, Ping An Ventures, joining investors Alibaba Group, Tencent Holdings, Temasek and Coatue Management.</p> <p>This is days after Uber China raised $1.2 billion in a round led by Baidu. According to the Financial times, the battle for dominance has already cost both firms over a $1 billion in marketing and incentives for drivers and passengers.</p> <p>Burning obscene amounts of cash can be important for start-ups in a nascent industry for obtaining economies of scale, even more so when you have to beat away competition.</p> <p>But, increasingly it looks like this can only go one way. A recent article in Forbes showed that Didi Kuaidi has a 78.3% market share in China vs Uber's 10%. Its not just in China that Uber is struggling to take market share from local rivals.</p> <p>Will Uber snag enough market share to recoup it losses in China? Looking at Didi Kuaidi dominance - and the fact it has the resources and backers to easily match Uber’s war chest - it is difficult not to feel the US-firm is on a hiding to nothing.<br /> Photo: Gary Paulson</p>
Questions we should be asking about Ackman vs Herbalife
Hedge Funds
<p>Herbalife has launched a second video attacking  short-selling activist investor Bill Ackman. It is the latest salvo in a war that has now rumbled on for three years.</p> <p>Ackman took a massive $1 billion short position on the nutritional supplement firm in 2012 and since then he has been on a crusade to bring down the firm. His firm Pershing Square Capital even launched a website comparing its multilevel marketing (MLM) business model to a giant pyramid scheme.</p> <p>The battle between Ackman and Herbalife is unprecedented in its longevity and scale. It has backfired for Ackman too. Changes brought about by Ackman's activism have ironically helped the company go from strength to strength.</p> <p>It is a case that Fortune predicts will be studied for years to come, and rightly so. It raises a number of questions, not just about Herbalife, but questions like: is the $34.5 billion MLM industry really just a giant pyramind scheme as Ackman suggests? More importantly: do activist investors make for effective regulators?</p> <p>It's clear Ackman is not only shaping the future of Herbalife, but will no doubt - for better or worse - shape how the businesses community will deal with activist investors for years to come.<br /> Photo: UniversityBlogSpot<br /> &nbsp;</p>
Stage set for first mainland ETF liquidation
Asset Management
<p>It’s pretty safe to say that the past few months have not been kind to the U.S. asset management industry. Here’s a story on Carlyle shutting down some of its funds, and here’s another one on hedge funds getting burned on Black Monday. Well, things aren’t so different over in mainland China:<br />  “ChangSheng Fund Management has asked its unitholders for approval to shut down its Shanghai-listed SSE Market Value Top 100 Index ETF. The Beijing-based manager has invited unitholders to attend a meeting in October for them to vote on the ETF liquidation proposal, according to a statement from the manager.”<br /> Apparently, this will be the first ever ETF liquidation in China according to Asia Asset, and it may be the harbinger of more closures to come as several mutual funds – including a QDII status fund – race to close up shop.</p> <p>ChangSheng has yet to receive approval though, and would need at least two-thirds of the fund's holders to vote in favor of liquidation in order to proceed, but given it’s 25% decline in July alone, chances are high that the DBS-backed firm will receive enough votes for it to push through.</p> <p>The fund, which was launched just two years ago, had just $3.2 million in NAV as of the end of June.<br /> Photo: Robert Daly</p>
Robo-advisors: Rise of the machines
Are robo-advisors a threat to their traditional human counterparts? The role of artificial intelligence in portfolio management is still relatively nascent and limited in scope -- by the end of 2014 robo-advisors managed just $19 billion, according a recent Citi study -- but that is changing. Already robo-advisors like Betterment and Wealthfront are proving the space has massive potential. Even the
Betting on Japan, Inc.’s recovery
Capital Markets
<p>Japanese stocks have outperformed their peers the past few years, and we don’t think their run is over. Policies to improve profitability, capital use and productivity should provide a stronger foundation for further gains.</p> <p>The run started when the Liberal Democratic Party, led by Prime Minister Shinzo Abe, returned to power in December 2012. Abenomics brought a weaker yen, providing a tailwind to Japanese-based global corporations. It also boosted import prices, helping break the deflationary trend in Japan. As a result, the profitability of Japanese firms, as measured by return on equity (ROE), has recovered to near historical highs (Display).</p> <p>At this point, there are questions as to how much energy Japanese equities have left: whether it’s mixed macro data, worries about China, or uncertain policy direction. Meanwhile, Japanese equities are trading nearly on par with those of other developed markets based on the price-to-forward-earnings ratio, indicating limited potential for further multiple expansion at current earnings levels.</p> <p>So, is it time to trim our overweight to Japanese equities? We don’t think so.</p> <p>Further Gains Require Structural Economic Changes</p> <p>However, we think the next round of outperformance will come from Japan closing its substantial ROE gap versus its global peers. By closing this gap, our research suggests, Japanese companies could generate more than 30% excess earnings growth over the medium term. But narrowing the gap requires fundamental changes in the way businesses operate.</p> <p>Why should this happen now?</p> <p>The current Japanese ROE gap relative to the US is primarily driven by lower operating margins, but we see signs of improvement that could set the stage for progress.</p> <p>Tightness in labor markets. Over the past three years, overall labor participation has improved from 59.4% to 60.0%, but labor is likely to be in shorter supply as it becomes challenging to further increase participation. As labor markets tighten, businesses will need to find ways to better use their workforces.</p> <p>Potential increases in capital investment. One way to improve productivity would be with greater capital investment, and government policy seems to be encouraging it. Meanwhile, thin manufacturing capital investment has left aging equipment. The yen’s decline has also fostered signs that Japanese firms may be bringing manufacturing capacity back onshore. As a result, increased capital spending could help improve productivity over the long term, and create a source of domestic demand in the short term.</p> <p>Government encouragement of improved earnings power. Government reform efforts include the introduction of the JPX-Nikkei 400 Index, featuring companies with high returns on equity, high operating profits and at least two outside directors. Index companies must adopt international financial reporting standards and report earnings in English.</p> <p>The Government Pension Investment Fund has increased its domestic equity allocation, which will use the JPX-Nikkei 400 for passive investment. And the Bank of Japan will include the index in its quantitative easing purchases.</p> <p>Reform measures also include a stewardship code and a corporate governance code, which asks firms to set return-on-capital targets, appoint at least two independent directors, and explain the economic rationale for cross-shareholding. A reduction in the corporate tax rate could als</p>
Daily Scan: Fears return; Asia takes a dive
Capital Markets
<p>Updated throughout the day</p> <p>September 10</p> <p>So much for yesterday's soaring optimism. Concerns over China, fueled by producer prices falling for the 42nd month straight, and a surprise drop  in Japanese machinery orders, a gauge for capital spending in the country, helped put Asia's markets in reverse today.</p> <p>The Shanghai and Shenzhen Composite indices closed down 1.39% and  1,58%, respectively, while the Hang Seng expand its losses in the morning to close down 2.57%. The Nikkei meanwhile - after gaining nearly 8% yesterday on hope Japan would expand its stimulus program - was down 2.7%.  The other Asian markets:</p> <p> Straits Times: -1.37%<br /> Seoul Composite: +1.44%<br /> Jakarta Comp: -0.09%<br /> KLSE Comp: +0.66%<br /> Taiwan Weighted: -0.22%<br /> AS51:-2.29%</p> <p>Here is what else you need to know:</p> <p>Yen falls on stimulus speculation. The Japanese yen fell as much as 0.7% against the dollar today following Kozo Yamamoto’s – one of Shinzo Abe’s closest political allies – calls for more stimulus. The world has been jonesing for more stimulus from the land of the rising sun lately, seeing it as practically needed at this point. Financial Times (paywall)</p> <p>Aussie unemployment falls to 6.2%. Bumps in full-time male and female employment down under helped the Australian unemployment rate drop to 6.2% from 6.3% in August, in line with the Australian Bureau of Statistics’ expectations and probably the only positive news we've had all morning. The majority of the increase came from full-time employment for males, which punched in at 10,100 of the 17,000 jobs added last month. Sydney Morning Herald</p> <p>Chinese core price inflation hits 13-month high. Chinese CPI came in at 2% for August – its fastest rate since July 2014 – versus a 1.6% climb from the month before. It’s still well below the PBOC’s 3% target though, and pork prices – which surged nearly a fifth from the year before – appeared to be the main driver responsible for the increase. Financial Times (paywall)</p> <p>Bombardier rejects offer for railway unit. Canada’s Bombardier, the makers of Learjets and Global Express planes, rejected an offer from the state-owned Beijing Infrastructure Investment Co to buy 60% to 100% of its prized Bombardier Transport unit, one of the world’s largest suppliers of monorail and high-speed trains. SCMP (paywall)</p> <p>The Donald shows up in a Mexican soccer ad. He may be trying to rally the U.S. behind him, but Donald Trump’s controversial remarks on immigration are being used to rally something completely different; the Mexican soccer team. The Mexican team is set to play against the U.S. next month in Cali, and a local TV station has been splicing Trump’s remarks to make it look like the U.S. team is in for a world of hurt. CNN</p> <p>The new iPad Pro is gigantic. Featuring an enormous 12.9 inch screen and an optional keyboard, the new iPad Pro seems to be quite a pivot from the previous models. Wall Street Journal (paywall)</p> <p>RBNZ cuts rates. The Reserve Bank of New Zealand slashed its official cash rate by 25 basis points to 2.75</p>
Buffett is voting Hillary, but 'admires' Bernie
Lifestyle, 4:01
<p>Bernie Sanders may be reaching out to the middle and lower classes, but he has at least one fan in the 1%.</p> <p>Billionaire Warren Buffet told CNBC that he admires the Sanders campaign, reports Business Insider. "I think Bernie Sanders has been a terrific campaigner. He campaigns exactly as I would campaign if I were a candidate," Buffett says.</p> <p>Buffett has openly supported higher taxation for the rich, but Sanders' tax-reform proposals would increase even beyond what Buffett has suggested. Buffett says he respects Sanders' refusal to attack opponent Hillary Clinton, as well as his advocacy for regulations on political spending by businesses and unions.</p> <p>Alas, Buffett is still backing Clinton. He says Clinton has been too glib about her email controversy, but he supports her policies.</p> <p>Sorry, Bernie. "He's not going to get elected," says Buffett, "but I admire him."<br /> Photo: Marc Nozell </p>