JPM Prime Brokerage Global Hedge Fund Trends November 2013

J.P. Morgan Prime Brokerage Global Hedge Fund Trends
November 13, 2013
Executive Summary
Along with most other risk assets, hedge funds posted broadbased gains in October, rising +1.48% in the aggregate and
+7.19% year-to-date, the best such performance since 2009.
All of the major hedge fund strategies delivered positive
returns in October, with equity long short (+1.80%) and event
driven (+1.50%) strategies leading.

Figure 1: October 2013 performance
HFRI and Market Indices. Monthly Returns
5.0%
4.0%
3.0%
2.0%

Leverage
For all accounts in the Prime Brokerage portfolio, gross
leverage 1 declined from 1.83 to 1.82 (-0.37%) in October. Net
exposure 2 for equity-biased strategies decreased from 0.78 to
0.74 (-4.78%). Net leverage declined from 0.66 to 0.65 (2.12%).
Securities Lending
The U.S Prime Brokerage portfolio experienced the largest
shorting in single names in October of any single month in
2013. The fixed income book was net shorted for a second
consecutive month. In Europe, long/short hedge funds
expressed a net long bias in Financial and Consumer, Noncyclical names while Industrials were net shorted. In Asia,
earnings season resulted in heighted volumes, though activity
trailed off towards month-end as clients closed positions to
avoid liquidity traps. Short balances ended October up +2%.
Institutional Investor Sentiment
The Capital Introduction Group (CIG) traveled to Boston
where consultants, endowments and funds of hedge funds
(FoFs) dominate the hedge fund investor community. Several
consultants have started to consider managers further down
the AUM spectrum. Among European investors, CIG is
observing increased interest in alternative UCITS. CIG has
also observed an uptick in investor interest in Asia Pacific
strategies.

1.0%
0.0%
-1.0%

HF Index Equity
Hedge

Event
Driven

Macro Rel Value S&P 500 Fixed CMDTY
Income

USD

Credit

-2.0%

Source: Bloomberg, Hedge Fund Research

Table 1: Performance of hedge fund strategies and asset classes
HFRI and Market Indices 3

Year-to-Date
7.19%
11.27%
10.03%
-0.90%
5.93%
25.30%
-2.41%
-3.72%
0.53%
-0.49%

Oct-13
1.48%
1.80%
1.50%
1.09%
1.19%
4.60%
0.90%
-1.56%
-0.03%
1.58%

HF Index
Equity Hedge
Event Driven
Macro
Relative Value
S&P 500
Fixed Income
CMDTY
USD
Credit


Figure 2: Hedge fund beta to equities
Rolling 21-day beta of HFRX equal-weighted index returns to the S&P 500 Total Return
Index
0.19
0.17

3,100

0.15

3,000

0.13

2,900

0.11

2,800

0.09

2,700

0.07

2,600

0.05

2,500

0.03

Market Perspectives
There was a considerable degree of uncertainty leading up to
the October FOMC meeting. Coming out of the meeting, the
Federal Reserve opted not to change the pace of its bond
buying program or its interest rate forward guidance. In its
post-meeting statement, the Federal Reserve indicated that the
FOMC remains biased towards reigning in the pace of the
program at coming meetings. Notably, the statement belied
little concern about the recent softening in growth indicators.

3,200

2,400

0.01
Oct-12

Dec-12

Feb-13

Apr-13

Equity Beta (LHS)

Jun-13

Aug-13

Oct-13

2,300

S&P 500 Total Return Index (RHS)

1
Gross leverage is the total market value of long and short positions divided by clients'
equity in J.P. Morgan’s Prime Brokerage portfolio.
2
Calculated for Equity Long Short and Market Neutral funds on J.P. Morgan’s Prime
Brokerage platform only. Net leverage is defined as the market value of long positions
(LMV) minus the market value of short positions (SMV), divided by clients’ equity (Eq).
Net exposure is defined as the ratio of LMV and SMV, minus one.

3

Market indices from Bloomberg are as follows: S&P 500 (SPTR Index), Fixed Income
(JPMGGLBL Index), CMDTY (SPGSCI Index), USD (DXY Index), and Credit (JULIR
Index).
1

This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments.
For Institutional Investors only. For the intended recipient only. The reference period for this publication is October 2013 unless otherwise stated.

Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures
This section presents a summary of the changes that we have observed in leverage and sector exposures across the range of hedge funds that we
work with. The confidentiality of our clients’ positions is important to us and as such this information has been aggregated and displayed in an
anonymous manner in an effort to mitigate the risk of revealing or alluding to any one fund’s exposures. Information may be excluded due to the
perceived risk of revealing sensitive information. The information discussed is specific to activities on J.P. Morgan’s books, and may not represent
total client activity. These numbers should only be viewed as representative observations.

Market Overview 4
Although the U.S. federal government shutdown and debt
ceiling debate commandeered headlines in October, risk
assets rallied broadly on the month, suggesting that markets
have to some extent grown numb to the gyrations of politics
and policy, which seem to have become the rule rather than
the exception.
Fundamentally driven investors benefitted from declining
cross-asset correlation and volatility. From October 7 through
month-end, the Chicago Board Options Exchange S&P 500
Implied Correlation Index fell -28.21% to 41.55 and reached
36.07 on October 18, the lowest level since February 2007.
Similarly, the VIX decreased -17.17% on the month (See
Figure 3).
Figure 3: CBOE S&P 500 Implied Correlation and VIX indices,
October 2013
60

30
28

55

26
24

50

22
45

20
18

40

16

September, as investors are once again seeking yield from
defensive, dividend-paying stocks.
October also ushered in the start of the third quarter earnings
season. As of November 6, 2013, approximately 71% of the
companies that had reported earnings exceeded estimates, the
highest percentage since the first quarter of 2012. 6 Among
such companies, earnings exceeded analysts’ expectations by
an average of +4.88%. Third quarter EPS is tracking J.P.
Morgan’s forecast of $28, with companies in the Materials
sector exceeding analysts’ expectations by the largest margin.
Approximately 76% of companies in the S&P 500 Materials
sector have exceeded third quarter EPS forecasts. Whether
such results are sustainable going forward is an open
question, though. One reason for concern is muted top line
growth. Revenue per share disappointed in both the U.S.,
where it was flat, and in Europe (-1%). 7 Additionally, growth
expectations remain stationary and, although global
manufacturing PMI rose from 51.8 in September to 52.1 in
October, the Markit U.S. PMI fell to a one-year low.
Furthermore, U.S. factory orders declined -0.1% for August.
Estimates had posited growth of +0.3%. Accordingly, global
earnings expectations are continuing to decline (See Figure
4).

14

35

12
30

10

Figure 4: 2013 and 2014 global equity earnings forecasts
32
31

CBOE Implied Correlation Index (LHS)

VIX (RHS)

Source: Bloomberg

30
29

October was an auspicious month for equities, which reached
new highs yet again. Except for Japan, where the Nikkei
Index declined -0.88%, equity markets in major regions
increased between +3% and +5% month-over-month.
European equities again outperformed; the Euro Stoxx 50
Index rallied +6.04% on the month as compared with +4.46%
for the S&P 500 Index. 5 Defensive sectors slightly
outperformed cyclicals. That pattern is to some degree
symptomatic of the Federal Reserve’s no-taper decision in
4

Hedge fund strategy returns are based on data supplied by Hedge Fund Research.
5
Reference is to the SPX Index, not the SPTR Index, as in Table 1.

28
27
26
25
Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13
2013 MSCI AC World EPS

Jul-13 Aug-13 Sep-13 Oct-13

2014 MSCI AC World EPS

Source: Datastream, J.P. Morgan

6
J.P. Morgan Global Asset Allocation, Global Markets Outlook and Strategy,
November 6, 2013, https://jpmm.com/research/content/GPS-1252799-0.
7
Same as Footnote 6.

2

October was also marked by ongoing, across-the-board
tightening of credit spreads. Investment grade bonds returned
+1.6% month-over-month while high-yield bonds (+2.6%)
and loans (+0.8%) also rallied. Leveraged loan spreads fell 0.27% in October and thus are 111 basis points tighter yearto-date. 8
Composite Hedge Fund Performance
Along with most other risk assets, hedge funds posted broadbased gains in October, rising +1.48% in the aggregate and
+7.19% year-to-date, the best such performance since 2009.
All of the major hedge fund strategies delivered positive
returns in October, with equity long short (+1.80%) and event
driven (+1.50%) strategies leading. Global macro gained
+1.09% in the aggregate, the first positive monthly
performance for the strategy since April.
Equity Hedge
October’s gains among equity long short managers were
driven to a strong degree by quantitative directional funds,
which returned +2.70% in the aggregate. Managers benefitted
from exposure to U.S. small cap stocks, large cap U.S.
Consumer Staples names and large cap names in the U.S.
Materials sector. Market neutral funds also delivered positive
returns (+2.08%).

managers
benefitted
from
positioning
in
NYSE/IntercontinentalExchange,
Provident/Sterling
Bancorp, Akorn/Hi-Tech Phamacal, Koch/Molex and
Thermo Fisher/Life Technologies.
Relative Value
Fixed income relative value managers gained +1.19% on the
month, aided yet again by tightening credit spreads and the
continued decline in yields. Year-to-date aggregate returns
now stand at +5.93%. Convertible arbitrage managers were
up, positing aggregate gains of +0.33% on the month.
Global Macro
Global macro strategies were up +1.09% in the aggregate
month-over-month. Managers with emerging markets
exposure (+2.05%), particularly with respect to EM Asia and
Brazil, helped fuel October’s gains. Systematic strategies and
CTAs also contributed to October’s returns, rising +1.41%
month-over-month.

Figure 5: Sector performance (S&P 500 Index), October 2013
8.0%
7.0%
6.0%
5.0%

7.35%
6.13%
5.05%
4.60%

4.0%

4.50%

4.20%

4.11% 4.07%
3.66%

3.15%

3.0%
2.0%
1.0%
0.0%
-1.0%

Source: Bloomberg, Standard & Poor’s

Event Driven
October’s gains by event driven managers mark the fifteenth
consecutive month of positive aggregate gains for the
strategy. Positive performance was fueled largely by activist
and special situations funds, which returned +3.50% and
+1.90%, respectively, month-over-month. Merger arbitrage
8

J.P. Morgan High Yield and Levered Loan Research, Leveraged Loan Market
Monitor, November 1, 2013, https://jpmm.com/research/content/GPS-1248497-0.
3

Figure 8: Z-score of gross leverage and the S&P 500 Index

Leverage and Risk Exposures
Gross Leverage
Gross leverage for all accounts in the Prime Brokerage
portfolio declined slightly from 1.83 to 1.82 (-0.37%) in
October (See Figure 6). Gross leverage of levered accounts in
the Prime Brokerage portfolio fell from 2.53 to 2.48 (-1.97%)
(See Figure 7). The decrease in leverage levels amidst the
continued market rally in October suggests that clients are
hesitant to add risk into the rally at current market levels. To
that point, it should be observed that hedge fund beta to
equities decreased noticeably in October (See Figure 2). The
decline is also attributable partly to an increase in client
equity resulting from mark-to-market activity.
Figure 6: Daily gross leverage and the S&P 500 Index
1,800

1.90
1,600
1.85
1,500
1.80
1,400

1.75
Jan-13

Mar-13

May-13

S&P 500 Index (LHS)

Jul-13

0.5

0.0

-0.5

-1.0

-1.5

-2.0
Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13
Difference between gross leverage and S&P 500 Index Z-scores

Source: Bloomberg, J.P. Morgan Prime Brokerage
1.95

1,700

1,300
Nov-12

The Z-score measures how many standard deviations an observation is above or below
the mean

Gross Leverage by Strategy
High Grade Fixed Income, Equity Long Short and
Convertible Arbitrage experienced increases in gross
leverage month-over-month, rising +24.2%, +3.6% and
+3.3%, respectively. At 2.52, High Grade Fixed Income
ended October at a year-to-date high. The remaining
strategies experienced a decrease in gross leverage in
October. Equity Long Short, Convertible Arbitrage, High
Grade Fixed Income and High Yield Fixed Income are
running gross leverage above their two-year average levels.

Sep-13

Figure 9: Gross leverage by strategy

Gross Leverage (RHS)

4

Figure 7: Gross leverage (levered accounts) 5-day moving
average and the S&P 500 Index
1,800

3
2.7

2
1,700
2.6

1

1,600

0
1,500
2.5

Market Neutral Equity Long Multi-Strategy Convertible
Short
Arbitrage

Aug-13

1,400

Sep-13

High Grade
High Yield
Fixed Income Fixed Income

Oct-13

Source: J.P. Morgan Prime Brokerage
1,300
Nov-12

2.4
Jan-13

Mar-13

S&P 500 Index (LHS)

May-13

Jul-13

Sep-13

Gross Leverage (Levered Accounts - RHS)


4

Table 2: Gross leverage by strategy

Table 3: Long and short exposures by sector

Average and first quartile calculated for the period of October 2011 to October 2013

Long (Short) exposure by sector as a percentage of total client long (short) exposure in
Prime Brokerage portfolio

First
% Change
Q uartile
3.62
-2.5%

Aug-13

Se p-13

O ct-13

Ave rage

Market Neutral

3.89

3.87

3.78

3.85

Equity Long Short

1.96

2.01

2.09

1.84

1.72

3.6%

Multi-Strategy

1.77

1.76

1.74

1.77

1.74

-0.7%

Convertible Arbitrage

3.72

3.77

3.90

3.75

3.62

3.3%

High Grade Fixed Income

2.22

2.03

2.52

2.46

2.22

24.2%

High Yield Fixed Income

1.42

1.45

1.44

1.26

1.16

-0.9%

PB Portfolio (Levered Accounts)

2.47

2.53

2.48

2.51

2.47

-2.0%

Long exposure
Oct-12

Sep-13

Short exposure
Oct-13

Oct-12

Sep-13

Oct-13

Equity Long Short and Market Neutral funds on the Prime Brokerage platform only.
LMV: Market value of long positions. SMV: Market value of short positions.
Eq: Equity in the clients’ accounts
0.9

0.8

4.6%

5.1%

5.0%

4.6%

15.0%

15.2%

7.2%

6.3%

6.2%

Consumer, Cyclical

10.5%

11.6%

11.8%

9.0%

8.2%

7.7%

15.2%

16.5%

15.3%

11.9%

10.6%

10.2%

Diversified

0.3%

0.3%

0.3%

0.1%

0.0%

0.0%

Energy

8.0%

9.0%

9.3%

5.8%

6.5%

7.0%

Non sector-specific
ETF

3.4%

1.7%

2.1%

16.2%

17.6%

16.9%

Financial

20.0%

16.7%

16.8%

11.2%

8.6%

8.2%

5.9%

6.6%

6.4%

5.9%

7.4%

7.3%

Technology

4.7%

5.0%

4.8%

6.6%

7.2%

6.6%

Utilities

1.5%

1.3%

1.4%

1.6%

1.5%

1.6%

Government

6.5%

7.1%

7.2%

8.9%

8.5%

9.6%

Other

Figure 10: Net exposure and net leverage

4.6%

12.7%

Industrial

Net Exposure and Net Leverage
Net exposure for equity-biased funds fell in October,
decreasing from 0.78 to 0.74 (-4.78%). Net leverage also
declined, falling from 0.66 to 0.65 (-2.12%).

5.0%

Communications
Consumer, Noncyclical


Basic Materials

6.3%

4.6%

4.6%

10.6%

12.5%

14.0%


0.7

0.6

0.5

0.4
Oct-11

Jan-12

Apr-12

Jul-12

Net Exposure (LMV/SMV)-1

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Net Leverage (LMV-SMV)/Eq


Sector Exposures
The largest month-over-month increases in the long Prime
Brokerage portfolio were in Non sector-specific ETFs
(+0.4%) and in the Energy sector (+0.3%). The largest
decline was in the Consumer, Non-cyclical sector (-1.2%).
The largest increase in the Prime Brokerage short portfolio
was in the Energy sector (+0.5%). The most substantial
decreases in short exposure occurred in Non sector-specific
ETFs (-0.7%), Technology (-0.6%) and in the Consumer,
Cyclical sector (-0.5%).
The Prime Brokerage portfolio may have become more
bullish on the Communications, Consumer, Cyclical and
Financial sectors, as well as Non sector-specific ETFs, which
experienced month-over-month increases in long exposure
and decreases in short exposure.

5

Prime Brokerage Global Hedge Fund Trends – Securities Lending
North America Securities Lending
Equities
During October, the U.S Prime Brokerage portfolio
experienced the largest shorting in single names of any single
month in 2013. While the move was significant, it
nonetheless failed to offset September’s covering activity.
October’s increase in short exposure was driven by singlenames, with heightened flows driven by the third quarter
earnings season. Correspondingly, there was a 30% increase
in gross trading volume in the Prime Brokerage Portfolio
month-over-month. With the exception of Basic Materials,
all sectors were net shorted with Energy and Consumer,
Cyclical as the primary drivers.
ETFs
The U.S. Prime Brokerage ETF book was net covered in
October. IWM (iShares Russell 2000 Index), MDY (SPDR
S&P MidCap 400 ETF) and SPY (SPDR S&P 500 ETF
Trust) experienced significant covering as the market
continued its rally. Equal-weighted S&P Retail XRT (SPDR
S&P Retail ETF) and XOP (SPDR S&P Oil & Gas
Exploration & Production ETF) saw notable covering as
well. IYR (iShares Dow Jones US Real Estate ETF) and
XLE (Energy Select Sector SPDR ETF) experienced some
shorting on the month in contrast to the overall trend. Large
increases in shares outstanding, stemming from a rise in
creations, improved overnight loan liquidity in SPY, MDY
and MSCI EFA (iShares MSCI EAFE Index Fund).

Fixed Income
The U.S. Prime Brokerage fixed income book was net
shorted for a second consecutive month. Shorting was
significant across all fixed income products, including U.S.
Treasuries in the two and five year parts of the curve. The
largest increases on our corporate book were in the
Consumer, Cyclical, Communications and Industrial
sectors. The following cap structures experienced marked
activity on the month: Wind Acquisition Holding (Windim),
NII Capital (NIHD), Cliff Natural Resources (CLF), BonTon Dept Stores (BONT), Energy Future (TXU) and Essar
Steel Algoma (ALGCN). In the convertible bond space, our
book saw considerable short increases with Intl Game
Technology (IGT 3 ¼ 5/1/14), Lam Research Corp. (LRCX
1.25% 05/15/18), Priceline (PCLN .35 6/15/20) and Prologis
LP (PLD 3 ¼ 3/15/15) being names of interest.

Event Driven
•

Applied Materials, Inc. (AMAT) and Tokyo Electron
Limited (8035 JP) announced an agreement to merge in
an all stock deal. The merger was approved by the
boards of both companies and is expected to close in mid
to late 2014. Holders of Tokyo Electron will receive
3.25 shares of the new company for each Tokyo Electron
share. Applied Materials shareholders will receive only 1
share. Borrow in Applied Materials has been active but
remains GC with considerable supply available.

•

American Realty Capital Properties (ARCP) announced
a merger with Cole Real Estate Investments (COLE)
near the end of October. Cole shareholders will have the
option to receive either 1.0929 shares of American
Realty or $13.82 in cash, subject to a 20% proration. The
merger is expected to close in the first half of
2014. While much of the supply on American Realty
was taken down on the day the merger was announced,
rates have since stabilized.
6

Figure 11: Cumulative net activity

Table 5: U.S. securities lending trends by ETFs

Market value change of activity across equities, ETFs, and fixed income

For the month of October 2013

$6.0

5 Day

$4.0

30 Day

Price
Change

Position
Change
(shares)

SPDR S&P 500 ETF TRUST

0.4%

ISHARES RUSSELL 2000

(1.6%)

$2.0
$0.0
-$2.0

ISHARES US REAL ESTATE
ETF
ENERGY SELECT SECTOR
SPDR
SPDR S&P OIL & GAS EXP
& PRODUCTION

-$4.0
-$6.0
-$8.0

Equity

2-Jan

1-Feb

3-Mar

2-Apr

ETF

2-May

Fixed Income

1-Jun

Net Activity

1-Jul

31-Jul

Price
Change

Price
Change

Position
Change
(shares)

1.7%

3.8%

(3.3%)

4.4%

12.2%

(2.6%)

1.2%

(17.3%)

5.5%

(18.7%)

(2.0%)

1.9%

2.2%

12.2%

(1.9%)

66.1%

0.4%

(7.3%)

3.7%

4.3%

5.4%

0.5%

30-Aug

29-Sep

29-Oct

Source: J.P. Morgan Securities Lending

(2.7%)

(4.3%)

3.6%

(29.2%)

12.9%

(21.6%)

POWERSHARES QQQ
TRUST, SERIES 1 (ETF)

-$10.0
-$12.0

90 Day

Position
Change
(shares)

0.6%

16.6%

3.7%

0.1%

9.4%

(6.5%)

INDUSTRIAL SELECT
SECTOR SPDR

0.3%

19.4%

4.2%

29.6%

8.1%

24.2%

(0.2%)

(15.4%)

2.3%

(5.0%)

1.2%

18.3%

(1.0%)

4.2%

2.6%

12.2%

0.1%

(25.0%)

(0.0%)

39.4%

1.4%

70.3%

8.0%

(64.6%)

ISHARES IBOXX HIGH
YIELD CREDIT ETF
FINANCIAL SELECT
SECTOR SPDR
ISHARES MSCI EMERGING
MARK

Figure 12: Rolling 1-month daily short flow
Daily Activity Relative to 30-Day Average (LHS) and S&P 500 Index (RHS)
250%

1,775

200%

1,750

150%


1,725

100%

1,700

50%
1,675
0%
1,650
-50%
1,625

-100%

1,600

-150%

1,575

-200%
-250%
02-Oct

1,550
09-Oct

16-Oct

Net Cover Activity (LHS)

23-Oct

Net Short Activity (LHS)

30-Oct
S&P 500 Index (RHS)

Source: Bloomberg, J.P. Morgan Securities Lending

Table 4: U.S. securities lending trends by sector
For the month of October 2013
5 Day

30 Day

Consumer, Non-cyclical

Price
Change
(0.9%)

Position
Change
(shares)
1.1%

Financial

(1.0%)

Technology

90 Day

Price
Change
(0.0%)

Position
Change
(shares)
2.9%

Price
Change

Position
Change
(shares)

4.2%

(2.0%)

2.0%

2.9%

(0.2%)

2.0%

(6.9%)

0.1%

3.5%

0.6%

2.4%

6.0%

3.0%

Energy

(0.6%)

5.5%

3.3%

9.6%

8.0%

11.0%

Communications

(0.3%)

0.8%

1.5%

0.6%

9.0%

3.7%

Industrial

(1.3%)

1.8%

1.5%

2.5%

6.0%

1.8%

Consumer, Cyclical

(0.4%)

1.3%

0.0%

4.9%

5.0%

(1.3%)

Basic Materials

(0.4%)

1.1%

5.4%

(0.4%)

9.8%

(10.8%)

Utilities

(0.1%)

2.7%

3.2%

0.1%

(1.9%)

(3.4%)


7

International Securities Lending
EMEA
Fundamental and quantitative directional long/short hedge
funds expressed a net long bias in Financial and Consumer,
Non-cyclical names while Industrials were net shorted.
Clients remained bearish on Outotec OYJ (OTE1V FH),
ThromboGenics NV (THR BB) and Royal Imtech NV (IM
NA). K+S AG-REG (SDF GR) experienced short covering
during most of October. Banca Monte dei Paschi (BMPS
IM) remained a tight borrow with the lending pool nearly
100% utilized. Among the top 20 names in Europe, Peugeot
(UG FP), Telecom Italia (TIT IM), Koninklijke Vopak NV
(VPK NA) and Kone OYJ-B (KNEBV FH) saw the largest
percentage increases in shorting month-over-month. Several
of the most crowded shorts in Europe reported third quarter
earnings that caused volatile price reactions. October also
saw the much anticipated IPO of Royal Mail (RMG LN).
Merger and event arbitrage funds were highly active in
October. Several funds initiated long positions in Celesio
(CLS1 GR) after McKesson offered EU23 per share to
acquire the company.
Rights issues traded in
Schmolz+Bickenbach (STLN SW) and Nexans (NEX FP)
and borrow was tight for both names. October also saw share
offerings in Portugal Telecom (PTC LS), Indra Sistemas
(IDR SM) and Abengoa B (ABG/P MC). Deutsche Wohnen
(DWNI GR) (exchange offer) saw limited interest from our
client base.
Convertible bond issuance slowed in October, although there
were issues from NH Hoteles (NHH SM) and from ACS,
which issued bonds convertible into Iberdrola (IBE SM)
ordinaries. There was also continued interest in Nyrstar
(NYR BEN), Alcatel (ALU), Peugeot (UG FP) and Melia
Hotels (MEL SM).
Asia Pacific Ex-Japan
Earnings season resulted in heightened volumes in October,
though activity trailed off towards month-end as clients
closed positions to avoid liquidity traps. Short balances ended
October +2%.
Taiwan
Taiwan saw significant two-way flow in major tech names
due primarily to new Apple product launches. Activity was
especially pronounced for Mediatek Inc. (2454 TT) as
directional funds took profits on longstanding shorts. HTC
Corp. (2498 TT) also experienced heavy activity.

Hong Kong
The coal sector experienced the largest increase in short
interest after several earnings reports came in below
expectations. Yanzhou Coal Mining Co Ltd. (1171 HK) was
down -4.25% from its three-month high and China Coal
(1898 HK) was down -9.2% from its September highs. The
iShares China A50 tracker (2823 HK), a popular hedge to A
share exposure, saw increased demand and became easier to
borrow as supply also increased throughout the month.
Chinese banks saw short covering as did Chinese automakers
after better than expected earnings from Geely Automobile
Holdings Ltd. (175 HK) and Guangzhou Automobile Group
Co. Ltd. (2238 HK).
Korea
Borrow in Celltrion Inc. (068270 KS) remained tight and
rates spiked on new demand. There was also fresh demand
for certain electronics names including Samsung Electronics
Co. Ltd. (005930 KS) and SK Hynix Inc. (000660 KS) due to
the sudden increase in DRAM prices.
Japan
Deregulation of price-setting rules and large-lot margin
trading took effect in October. The main change was removal
of the uptick rule, subject to certain exceptions. As a result, it
is possible that short volumes may spike in November.
Earnings season dominated Japan in October, with results
that were generally weaker than expected. Interest was acute
in construction, airline, online gaming and China names such
as: Kumagai Gumi Co. Ltd. (1861 JP), IHI Corp. (7013 JP),
Ana Holdings Inc. (9202 JP), GungHo Online Entertainment
Inc. (3765 JP), Dena Co. Ltd. (2432 JP), Gree Inc. (3632 JP),
Komatsu Ltd. (6301 JP), and Hitachi Construction Machinery
Co. Ltd. (6305 JP).
Australia
As the market rallied in October, the Materials sector
experienced the heaviest short covering followed by the
Energy and Consumer Discretionary sectors. Consumer
Staples were the most shorted. There was heavy interest in
Leighton Holdings Limited (LEI AU) and in ResMed Inc.
(RMD AU). Shorts in ear plant manufacture Cochlear Ltd.
(COH AU) reached year-to-date highs after several brokers
downgraded the name. There was new activity in the REIT
space after Dexus Property Group (DXS AU) offered to
acquire Commonwealth Property Office Fund (CPA AU).
There was continued short interest in Monadelphous Group
Ltd. (MND AU) as a result of lower capex within the mining
services sector.

8

Prime Brokerage Global Hedge Fund Trends – Institutional Investor Sentiment
Institutional Investor Sentiment
North America
In October, the Capital Introduction Group (CIG) traveled to
Boston where consultants, endowments and funds of hedge
funds (FoFs) dominate the hedge fund investor community.
Although the consultants are still allocating to the larger
hedge fund managers, they have begun to look at managers
further down the AUM spectrum. As with institutional
investors in other regions, Boston-based allocators are
interested in learning about new launches and emerging
managers albeit primarily for informational purposes. Most
investors in the region require at least a one year track record
before committing capital. Investors generally remain
interested in equity long short (with some sector interest in
healthcare and technology) and event driven strategies,
including activism.
Some investors in North America have recently inquired
about strategies that can serve as a hedge in a rising rate
environment. CIG has also seen searches for niche credit
strategies such as direct lending and aircraft leasing. Several
groups also have inquired about co-investment opportunities.

Table 6: Investor strategies of interest by region 9
North America
Direction of
Interest

Level of
Interest

EMEA
Direction of
Interest

Asia Pacific
Level of
Interest

Direction of
Interest

Convertible
Arbitrage

Neutral

Neutral

Neutral

Corporate
Credit

Neutral

Neutral

Neutral

Equity Long
Short

Neutral

Neutral

Increasing

Event
Driven

Neutral

Increasing

Increasing

Macro

Neutral

Neutral

Neutral

Decreasing

Neutral

Neutral

Neutral

Neutral

Increasing

Decreasing

Neutral

Level of
Interest

Decreasing

CTA
Market
Neutral
Structured
Credit
Legend
Low Interest
Medium Interest
High Interest

Source: J.P. Morgan Capital Introduction Group

EMEA
CIG is observing increased interest in alternative UCITS
from European investors. The investors have different
motivations for the searches, including improved portfolio
liquidity and underlying demand for regulated structures. The
allocators showing interest include asset managers, private
banks and FoFs. Interest is also coming from traditional longonly investors seeking absolute return.
While equity strategies have traditionally formed the bulk of
the UCITS universe, investors are now seeking UCITS funds
that concentrate on other strategies to diversify their
portfolios.
Asia Pacific
There has been a marked uptick in overseas investor interest
in Asia Pacific strategies based on research and due diligence
trips to the region. Inquiries have come from a wide array of
allocators, ranging from smaller FoFs and family offices to
multi-billion dollar institutions. Interest also has been
geographically broad, coming from across the U.S. and
Europe. It should be noted, though, that many of the abovementioned investor trips appear to be more fact-finding in
nature. Commensurate allocation flows have yet to occur.
9
This information comes from CIG conference calls and meetings with global hedge
fund managers and institutional investors. This table represents views of the CIG team
and may not be completely exhaustive.

9

Prime Brokerage Global Hedge Fund Trends – Market Perspectives
October Commentary
There was a considerable degree of uncertainty leading up to
the October FOMC meeting. The federal government
shutdown created something of a wildcard since the outcome
of the October meeting was necessarily contingent on a
resolution of the budget imbroglio. However, the meeting
itself was largely uneventful.
Coming out of the meeting, the Federal Reserve opted not to
change the pace of its bond buying program or its interest
rate forward guidance. In its post-meeting statement, the
Federal Reserve indicated that the FOMC remains biased
towards reigning in the pace of the program at coming
meetings. Notably, the statement belied little concern about
the recent softening in growth indicators. In fact, in contrast
to prior releases, the statement made no mention about rising
mortgage rates or the “tightening of financial conditions” as
being impediments to economic growth. Perhaps the most
noteworthy aspect of the FOMC statement was its mention of
“available data,” which underscores that it was working with
limited information as a result of the backlog of economic
data releases because of the shutdown (which it is believed
may lead to distortions in reports on the economy over the
next few months).
We were therefore left with a placeholder report, which was
not surprising in light of the September meeting surprise.
Many analysts now expect Fed tapering to begin in March
2014. That timeline could become complicated, though, since
the March FOMC meeting coincides with the next “drop
dead” date for the debt ceiling. The Fed taper guessing game
will therefore continue for the time being.
The following sections are excerpts from J.P. Morgan
Research publications. The full publications can be
accessed via the sources provided in the footnotes below.
Japan: can Abenomics achieve fiscal targets?

10

Prime Minister Abe claims that Abenomics has been working
effectively to boost growth and public confidence, but he
seems rather reluctant to focus on fiscal consolidation beyond
his decision to raise the consumption tax (VAT) rate from the
current 5% to 8% in April next year. It appears that boosting
nominal growth is his priority, and that he believes fiscal
concerns can be largely overcome by high growth. Indeed,
10

J.P. Morgan Economic and Policy Research, Japan: can Abenomics achieve fiscal
targets? October 25, 2013 https://jpmm.com/research/content/GPS-1241116-0.

the decision to raise the VAT next year accompanied a
promise of a large, ¥5 trillion (1% of GDP) fiscal stimulus to
ease the drag. Also, although the next tax hike in October
2015 from 8% to 10% is already legislated, Abe mentioned
that the government will reassess Japan’s economic situation
before the final decision, as it did this summer.
However, the government has internationally committed to
fiscal targets that halve deficits in the primary balance (PB)
of central and local government by FY2015 (3.3% of GDP)
from FY2010 (6.6%) and aims to achieve a surplus in
FY2020. There is no doubt that this is a major challenge. We
think there is little danger that the prospect of missing the
targets triggers a collapse in JGB market, because the
ongoing, aggressive purchases by the BoJ—which seem
unlikely to end anytime soon—are a powerful policy tool to
lower JGB yields. Still, it is reasonable to expect that missing
the targets would damage confidence in Japanese fiscal
health, which raises the risk of future turbulence in the
government bond market. Without meaningful reforms in
social security and the tax system, in addition to reforms to
the economic structure that is the current focus of the third
arrow of Abenomics, we believe fiscal concerns will not
fade.
EM have driven recent pop in global IP growth 11
Global manufacturing has strengthened materially in recent
months, with output gains of more than 4% annualized in the
three months through August. This is the fastest pace in about
two and a half years, with the exception of the brief pops that
followed the Tohoku disaster and the Thai flooding. The
recent pace is consistent with global GDP growth that is a bit
above trend, so it poses some upside risk to our forecast,
though the gap is certainly well within the margin of error.
Likewise, the 4% pace of IP growth is aligned with the latest
readings for the global output PMI and the PMI
orders/inventory ratio, which track current and future growth
in manufacturing.
Although IP growth has picked up in most countries, the lift
is concentrated in the emerging market economies, whereas
the improvement in the developed world has been more
modest. This is somewhat surprising since most of the
improvement in GDP growth up until now has occurred in
the DM (notably Western Europe and Japan), whereas the
EM have been hobbled by various domestic factors.

11

J.P. Morgan Economic and Policy Research, EM have driven recent pop in global IP
growth, October 18, 2013, https://jpmm.com/research/content/GPS-1234199-0.

10

Prime Brokerage Global Hedge Fund Trends – Market Perspectives
Our global forecast does incorporate some lift in EM GDP
growth (especially excluding China). However, we expect
less than the normal unit beta response to the acceleration in
DM growth. This expected underperformance owes to
domestic drags including the squeeze on corporate profit
margins and hiring, tighter EM bank credit standards, and a
further deterioration in EM financial conditions as the Fed
moves toward tapering.
The unexpected strength of EM IP growth raises several
questions. The first is whether we are underestimating 3Q
GDP outcomes in the EM. This week, we got an upside
surprise in Chinese GDP growth for 3Q even though the
forecast already had been raised in advance of the report. It
also is worth noting that the growth of EM IP was unusually
weak relative to EM GDP in 2Q, so the recent pickup in IP
growth could merely be reversing this gap.
The second question to consider is what is driving the EM IP
lift, and in particular, whether the impulse has been from
final demand or inventory growth (indeed, we are grappling
with this same question at the global level). A sustained
upside surprise in final demand growth would open the door
to faster EM GDP growth in 4Q and beyond.

11

Important Information and Disclaimers
Contact Us:
Alessandra Tocco
Alessandra.Tocco@jpmorgan.com
212-272-9132
Kenny King, CFA
Kenny.King@jpmorgan.com
212-622-5043
Christopher M. Evans
c.m.evans@jpmorgan.com
212-622-5693
Stacy Bartolomeo
Stacy.Bartolomeo@jpmorgan.com
212-272-3471

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12

JPM Prime Brokerage Global Hedge Fund Trends November 2013

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