Editor’s Letter – June 2013

Issue 86

Originally published in the June 2013 issue

Regulation is a theme running through many of this month’s features and this now takes place in a global arena. The clichéd notion of hedge funds being unregulated has been increasingly inaccurate for a long time, as funds, management companies, and many of their staff are regulated nearly everywhere. The instruments traded are also increasingly overseen by more intrusive regulation, with clearing of some products becoming compulsory. The advent of extra-territorial regulation shows how the regulators are extending their tentacles far beyond their local markets.

Starting with our home town of London, Cordium talks about how the new FCA (Financial Conduct Authority) regime is taking shape, and kicking in earlier than expected. Shifting across the Atlantic, Chicago’s CME (Chicago Mercantile Exchange) talks about clearing of swaps, a key plank of the voluminous Dodd-Frank rule book. Regulators want to create an incentive for funds to clear instead of trading OTC, and it seems likely that margin requirements for OTC swaps could end up being significantly higher than those on cleared ones. The topic of margin requirements is further discussed by Omgeo, focusing on the New York Treasury Markets Practice Group’s recommendations of margin requirements for forward-settling agency mortgage-backed securities. Opalesque’s Singapore round table touches on a jurisdiction that was historically perceived to offer a somewhat lighter regulatory touch than others. In Europe the political backlash against banker pay is gathering force as Morgan, Lewis & Bockius walk us through European Banking Authority guidance on bonus ceilings for those working in the financial sector. It seems that no other industry is subject to statutory restrictions on remuneration.

We also have highlights from two important surveys. AIMA’s institutional investor survey taps the opinions of some of the leading allocators to hedge funds, which are attracting more inflows directly from institutional investors. Citi surveys the rise of liquid alternatives – most of which can easily be accessed via UCITS funds. One of the most liquid strategies is managed futures. CTAs in general had a strong start to 2013, thanks in part to the twin trends of a rising Nikkei and falling yen. Lately some CTAs have given back some of those profits. Seasoned CTA allocator Efficient Capital remind us why they view managed futures as a strong asset class, and OneMarketData talk about quant trading education – a core skill set for CTAs that employ many of the world’s brightest and best quants.

Emerging markets in general have struggled in 2013, often moving in the opposite direction of developed markets. Some equity markets in Latin America, for instance, have touched bear market territory as defined by a 20% peak to trough fall. Copernico give us their outlook on opportunities in surprisingly resilient emerging market corporates in that region. Meanwhile, Eurasia Group argue that economic divergence between politically very different emerging markets could strengthen.