29 Saturday Jun 2019
Posted in Banking, Financial Industry, instruments, UK
Also at the Jewish Chronicle: https://www.thejc.com/blogs/financial-crisis-and-subprime-1.38100?highlight=martynineurope
Oh dear, whatever happened here? After years of over-borrowing and under-saving, the plentiful supply of cheap and easy money, the enthusiastic recklessness of a number of financial managers, and the complaisance of governments, the inevitable happened, and panic ensued.
22 Sunday Nov 2015
Posted in Banking, Uncategorized
Welcome to the new kid on the block, same as the old kid but sharper, tougher and even more relevant to business than before. Who can it be, what do we call her and where does she live?
Well here’s a surprise. The newcomer is none other than the 4th generation of Enterprise Data Warehousing. Ready and prepared to elevate Big Data, Analytics and an accompanying wealth of must-have data accessories to the dizzying heights of value-adding, business-changing and stakeholder-pleasing usefulness, utility and usability.
Read the full article on the IT Circus blog hosted by IT World: http://www.itworld.com/article/3006473/big-data/what-can-data-warehousing-do-for-us-now.html
30 Friday Jan 2015
Posted in Banking, Consider this, Good Strat, Good Strategy, Martyn Jones, Martyn Richard Jones, Strategy
Tags
Banking, finance, funds, Good Strat, Good Strategy, hedge funds, Martyn Jones, Martyn Richard Jones, money
Hedge Funds are evil, right? Go on, you know you want to say yes. Almost everyone has an opinion about them, but very few people can actually tell you what they are.
Indeed, there’s am awful lot of nonsense written about Hedge Funds, and this piece might just end up being a worthy addition to that body of baloney. But, the intention is somewhat different.
The objective behind this piece is to provide a quick look at where the modern hedge fund started; what they are; how they work; the mechanics of participation; and who traditionally has put their money into them.
Of course, this piece is a necessary simplification of what is a fascinating aspect of the alternative investment universe.
In 1966 Carol J. Loomis[i] blew the lid on one of the best kept investment secrets of the 20th century.
In an article penned for Fortune titled “The Jones that nobody keeps up with”, Loomis revealed that over a five year period a fund run by Alfred Winslow Jones had consistently outperformed the Fidelity Fund, the most successful mutual fund of that time, by a remarkable 44%.
Not only that, but between 1956 and 1966 the Jones fund had outperformed the Dreyfus Fund, the best performing mutual fund of that decade, by a massive 87%.
Jones was born in Melbourne, Australia, but from the age of four he lived in the USA. He graduated from Harvard in 1923, and before becoming involved in the finance industry he toured the world working on steamships. He was to serve as a diplomat in Germany, and also worked as a journalist covering the Spanish civil war.
In 1941, with conflict raging in Europe, Jones returned to the USA. He then studied for, and obtained a doctorate in sociology at Columbia University, and became a reporter for Fortune.
His thesis, Life, Liberty and Property, is a reference text in sociology.
In 1949 Jones formed a company, A. W. Jones & Co., arguably the first modern Hedge Fund.
Robert A. Jaeger characterised the fund as “an opportunistic equity hedge fund”, that relied heavily on discerning stock picking abilities, combined with bets on long positions (rising prices) and short positions (falling prices).
In 1952 the fund was converted into a limited partnership, and during the 50s other such partnerships were set up, including the sage of Omaha’s Buffet Partners, and WJS Partners, founded by Walter Schloss.
Hedge funds are loosely regulated, exclusive and limited-membership investment clubs, usually run as partnerships or as corporations. They focus on absolute returns on investments, for themselves and their members, regardless of market conditions.
Direct participation in Hedge Funds is theoretically limited to between 100 or 500 investors, depending on the class of investor. Moreover, because of the unregulated status of most hedge funds, they are not allowed to actively market their products, so they have to use more exclusive means to attract investors, typically word of mouth.
Hedge Funds typically invest in traditional securities, such as stocks, bonds and commodities, but they can also invest in real estate, art, wine or any number of other non-traditional areas of investment. In fact, they are free to use virtually any pick and mix of strategies from the entire range of investment possibilities.
That said, a lot of Hedge Funds will opt for a specific investment strategy and will stick with that strategy for the life-time of the fund.
So what’s in it for the Hedge Fund managers and administrators?
Hedge Fund Managers typically charge a management fee of between 1and 3 percent of the value of the assets under management, regardless of performance. They may also – almost always in the past – charge a performance fee, which can start at around 20 percent of any fund gains above a certain minimum performance hurdle or target value. Managers also generally ‘eat their own dog food’, in that they will also invest in their own Hedge Fund.
Investors in Hedge Funds are informed of the value of their investments via a statement that shows the calculated value of shares in the fund, the Net Asset Value (the NAV). This can be calculated monthly, quarterly or even yearly, depending on the fund. In addition funds are free to choose if they wish to publicly disclose performance figures or not.
Some hedge funds may require additional fees and commissions, and may impose lock up periods, and strict and narrow redemption periods. They may also reject some applications for subscriptions without giving any reasons, and they may also forcibly redeem shares held, and without having to justify their actions.
In addition, some hedge funds use equalization methods – and there are a number of variants – to equitably distribute hedge fund fees amongst its partners, yet other hedge funds do not use equalization methods at all.
The mechanics of participationSo, briefly, how do you get to invest in a Hedge Fund (subscribe), how do you liquidate that participation (redeem), and what happens between ‘subscription’ and ‘redemption’.
Offer: A Hedge Fund details what’s involved in a particular offer in an ‘Offering Memorandum’, also known as a ‘private placement memorandum’. This is typically an ‘enriched’ business plan tied to a specific issuance of shares in a fund. It basically sets out the stall.
Subscription: In order to subscribe to a fund the potential participant in the fund signs up to a subscription agreement, and the conditions laid out in that agreement. Conditions may cover aspects such as minimum subscription amounts; minimum share increments, rules governing the liquidation of participation in the fund; management and performance fees; and, so on and so forth.
Redemption: This is the liquidation of shares in a fund. Typical redemption points can occur from anything from 15 days to up to 180 days, and sometimes more than this, depending on the fund and the rules related to lock-ups, redemption. In addition, redemption options may be linked to other financial charges, penalties and constraints.
So what happens between subscription and redemption?
Custody: A hedge fund subscriber may wish to use the services of a large and reputable financial service provider to act as custodian of their hedge fund shares. In addition to holding securities for safekeeping, most custodians also offer other services such as account administration, transaction settlements, collection of dividends and interest payments, tax support and foreign exchange. (Source: Investopedia).
Dividends: It is very uncommon for hedge funds to pay dividends, as any accruable earnings are realized upon redemption of the shares. However, some fundsdo incentivize the maintenance of subscriptions through the payment of dividends.
Calculating NAV: Periodically – or even on a real-time basis – a hedge fund will recalculate the Net Asset Value of the fund shares. This is done by dividing total value of all securities held by the number of shares. The NAV is more or less subjective in cases where the associated assets are more or less liquid. An extreme example of this may be the calculation of a NAV that has to take into account the theoretical market value of art.
Of course, the mechanics of participation is typically more involved and complex than this.
Who plays, who paysInvestors in Hedge Funds are individuals and institutions (such as foundations, endowments, family offices, pension funds, insurance companies, private banks and funds of funds).
One of the key criteria in the Hedge Fund business is that only people and institutions with money can invest in them. On face value this prerequisite seems a tad bizarre, but there are some very valid reasons for it.
In order to be able to invest in Hedge Funds an investor will need to meet certain legal requirements. They have to be either a credited investor or a qualified purchaser. The qualification is based on net worth and individual income. The qualified purchaser has a higher net worth than a credited investor.
In my opinion the practical rules of Hedge Funds are clear, albeit wrapped up in more indirect language. The biggest rule is: ‘do not put any money into a Hedge Fund that you are not prepared to lose’. The second big rule is: ‘only subscribe to a Hedge Fund with money that you can lose and without the risk of significantly and adversely affecting your lifestyle.’
Of course, this didn’t stop people from jumping on the Hedge Fund bandwagon with little or no clue about what they were getting themselves into.
That’s all folksHedge Funds are subject to a dire circle of misleading, banal and frequently reactionary published and public opinion. Which is unfortunate, because it ignores that almost all of the Hedge Funds reflect a culture and style of their managers and administrators, and that in the business there is a a lot of plurality and diversity.
Some Hedge Funds have been the epitome of sharp investment practice, hubris and good old fashioned albeit legal duplicity.
There are macho funds, and non-macho funds, high risk funds and risk-averse funds, highly leveraged funds and funds that use little or no leverage.
Some funds are discrete, some are ugly, some are charming, and some are boisterous and incredibly aggressive. Some are socially responsible, and others might ask “is social responsibility part of the NAV calculation?”
Some funds delight in planning raids on markets, mounting shark attacks on political systems and find ‘justifiable’ enchantment in destabilizing economies and currencies. Other Hedge Funds – in my opinion the vast majority – would never dream of doing such things.
Furthermore, some funds actively encourage responsible investment in developing countries and in other ethical investment strategies. Moreover, there are plenty of examples of funds that sit somewhere between the extremes, so there is no one size fits all when it comes to characterizing funds.
But whatever the style of the Hedge Fund, at the heart of each individual Hedge Fund culture is the culture of the team leaders and team players.
So, are Hedge Funds intrinsically evil?
No, I don’t think so. But that sort of headline grabs a lot of people’s attention, and frequently for all the wrong reasons.
Thank you so much for reading.
[i] Loomis, Caroll J. The Jones that nobody keeps up with. Fortune, April 1966
File under: Good Strat, Good Strategy, Martyn Richard Jones, Martyn Jones, Cambriano Energy, Iniciativa Consulting, Iniciativa para Data Warehouse, Tiki Taka Pro
16 Tuesday Dec 2014
Tags
Apologies to the late Benny Hill
You could hear the dollar fall, then it crashed upon the ground
And the chatter from the White House as they spun, around and ’round
And he glided into Wall Street, his scam beneath his vest
His name was Bernie, and he sold the slickest secrets in the west
Now Bernie loved his Lipstick, a place where mom’s the word
He worked alone on Third Avenue, at 53rd at Third
They said that he was just da’bom[1]; they were greedy, vain and chic
But Bernie got his kickbacks[2] there, five days in every week
They called him Bernie, Bernieeeeeeeeeee!
And he finessed the slickest Hedge Fund in the west
She said she’d like to work in funds, he said, “All right, braveheart”
And when he’d finished fiddling, he loaded up his chart
He said, “D’you want to leverage? ‘Cause leverage is best”
She says, “Bernie, I’ll be happy if there’s money left to invest”
That tickled old Bernie, Bernieeeeeeeeeee!
As he pimped the slickest Hedge Fund in the west.
Now Bernie had a rival, a governmental man
Called quickstep Chris from Harvard Yard[3], and he drove S.E.C.’s[4] van.
He tempted her with his oversight, regulator’s feet of lead
And when she seen the size of his compliant eyes, Lipstick trader placed a spread[5]
She almost sold on his insider tips and he said, “If you put me right,
You’ll have issues every morning, dividends every night.”
He knew once she sampled his laissez faire, he’d have his hedging way,
And all Bernie had to offer was a NASDAQ loss a day.
Poor Bernie, Bernieeeeeeeeeee…
And he rode the slickest Hedge Fund in the west.
One bell time Chris copped Bernie, doing deals outside her floor,
It drove him mad to find them trading even after half past four.
And as he jumped up from his chair, hot issues through his veins did course,
And he went across to Bernie’s trades and didn’t half kick his Bourse[6].
[Of course, it was his horse]
Whose name was Ponzi, Ponziiii…
And he schlepped the slickest Hedge Fund in the west.
Now Bernie rushed out onto Wall Street, prospectus in his hand,
He said, “you wanna subscribe to Lipstick you’ll pay for her like a man.”
“Oh why don’t we place bets for her?” he derisively replied,
“And just to make it interesting we’ll do some shorting on the side.”
Now Bernie dragged him up from F Street and beneath the Times Square clock,
They stood there face to face, and Chris went for his stock.
But Bernie was too quick, things didn’t go the way Chris planned,
An unexpected corporate-action sent it spinning from his hand.
Then Lipstick rigged a Chinese Wall to keep them both onside
But Bernie, made a haircut deal and subprime caught him underneath his pride.
And as he looked up at BASEL II, an OFAC hardened trust
Of a next day trade, caught him in the PEP, and Bernie got ‘da bust’[7].
Poor Bernie, Bernieeeeeeeeeee…
And he blagged the slickest Hedge Fund in the west.
Bernie was only just 60, he didn’t wanna lie
But now he’s stopped making deliveries to that Hedge Fund in the sky.
Where the investors are quite stupid, and regulation banned,
And the trader’s life is full of dosh, in that alternative land.
Yet Lipstock’s needs are manifold, and soon she collared Chris
Strange things happened on their redemption day, as they talked a ‘loada pish’[8]
A KYC oversight? Or old secrets out the gate?
Ole Bernie’s market making? A rattled exchange rate?
They won’t forget Bernie, Bernieeeeeeeeee…
As he ‘vanished’ the slickest Hedge Fund in the west.
[1] Quite jolly good.
[2] A return of a part of a sum received often because of confidential agreement or coercion.
[3] Harvard Yard, in Cambridge, Massachusetts, is a grassy area of 22.4 acres enclosed by fences with twenty-seven gates. It is the oldest part of the Harvard University campus, its historic centre, and its modern crossroads.
[4] Securities And Exchange Commission
[5] An options position established by purchasing one option and selling another option of the same class but of a different series.
[6] A market organized for the purpose of buying and selling securities, commodities, options and other investments.
[7] Revealed
[8] Not of a superior quality
File under: Good Strat, Good Strategy, Martyn Richard Jones, Martyn Jones, Cambriano Energy, Iniciativa Consulting, Iniciativa para Data Warehouse, Tiki Taka Pro
01 Monday Dec 2014
Posted in awareness, Banking, Consider this, disinformation, Dogma
Consider this: Financial Crisis and Subprime.
Martyn Jones
This is a republication of a piece written in 2009 on the subject of the Financial Crisis and Subprime loans. As the spectre of overreach and unhedged risks raises its ugly head once again, the temptation to republish this piece was just too much to resist.
Oh dear, whatever happened here? After years of over-borrowing and under-saving, the plentiful supply of cheap and easy money, the enthusiastic recklessness of a number of financial managers, and the complaisance of governments, the inevitable happened, and panic ensued.
It has not been edifying to see political leaders – people at one time we might have considered intelligent, cautious and wise human beings, falling over each other, in the courageous rush to identify scapegoats, to nationalise bad debt and to prop up failing companies.
After cursory deliberation, the condemnatory finger pointed at short sellers and Hedge Funds, and this mendacity passed by with little comment. Thankfully, the new blame game does not seek to target a conspicuous group of people, such as Swiss gnomes, which is progress of sorts, but it is still only a marginal improvement.
So, what caused the financial crisis? Superficially, the answer is simple; it has been the collapse of the subprime market and its impact on underwriters of usurious lending.
There was a time when people with bad credit ratings, or no credit ratings at all, would have found it difficult to obtain a high street loan to purchase a second-hand car, and would have had no chance of obtaining a housing mortgage.
Cheap and plentiful money, overvaluation and the property boom, changed all of that.
Subprime allowed people with dodgy credit ratings to acquire mortgages, albeit with inflated interest rates and draconian small print.
For years, things worked quite well, as the number of people keeping up with their repayments well-exceeded analyst’s forecasts, which meant that profits from subprime lending surpassed expectations.
This led to two things. The further downplaying of risk in the subprime market, and a boom in the number of banks offering subprime loans.
Traditionally, banks lent out money that they held in the form of deposits, in exchange for timely repayments. In many countries, banks were constrained by how much exposure to risk they could assume, in order to ensure solvency and liquidity; so, even when money was at its cheapest, they could not legitimately expand their subprime business beyond certain levels, without getting creative and by passing on risk to third parties.
What happened next? Just as some banks had cashed-in on insurance brokerage, some switched to the role of subprime lending matchmakers. This meant that they were able to take the upfront brokerage fees, and then pass on the loan arrangements to another financial house, and in this way, they increased their fees whilst offloading the risks inherent in holding especially risky arrangements.
Of course, the actual underwriters of these loans also wanted to reduce their risk exposure.
It is a simplistic explanation, but what these companies first did was to create a way to allow for betting on the overall performance of collections of mortgages – the fewer defaults the higher the gains, in order to allow trading in bets.
Additionally, because of the perceived low risk of subprime and the continued overvaluation of real estate, these bets came with an irresistible added value-proposition. A triple A (AAA) risk rating. “Look Ma! Just like government bonds”.
Then, these companies sold slices of these composite bets to other punters, charging for the betting slips based on a combination of risk, time duration and return.
There are various forms of betting on subprime performance, the most common products being Collaterised Debt Obligations, Mortgage Backed Securities and Asset Backed Securities, the riskiest bits of which are toxic waste.
Now, the calculation of the value and the risks in these bets are horribly complex, and frequently inaccurate. So, just to push the envelope, some people came up with a way to take a bunch of already complex pooled bets, and to create a mega pool of pooled bets, which they would then sell on to the market, as another investment product.
So, when economies tanked, it was the subprime market, mainly in the USA, that took the hit for the increase in the defaults on loan repayments. Worse still, because the holders of these bets could not honestly state either their riskiness or actual value, they became as desirable as financial crap, which meant that other banks were no longer prepared to lend them money, and for Prime Brokers to be denied loans, is like turning off their life support?
As attractive as schadenfreundin might be, letting Prime Brokers go to the wall is not a sensible option, as the survival of other companies and many jobs are also at stake.
The subprime downturn led to the current predicament, but that is not where it started, preceded as it was by the follies and frauds of the dot com era, the artificial “good times” brought on by government overinvestment in the military industrial complex and the costs of war and occupation.
We are where we are mainly because of one thing, decades of government, corporate and personal imprudence.
Many thanks for reading this piece.
File under: Good Strat, Good Strategy, Martyn Richard Jones, Martyn Jones, Cambriano Energy, Iniciativa Consulting, Iniciativa para Data Warehouse, Tiki Taka Pro
12 Sunday Oct 2014
Posted in Architecture, Ask Martyn, Banking, Best principles, Big Data, Business Intelligence, Creativity, Data Warehouse, Dogma, Knowledge, Peeves
Tags
Banking, Behavioural Economics, Big Data, Bill Inmon, business intelligence, data integration, Data Marts, Demagogism, Dogma, enterprise data warehousing, hadoop, Information and Technology, information management
This weekend I read a piece on the Information Management website by Steve Miller with the title of Big Data vs. the Data Warehouse. It’s an old piece, from March 2014.
It was in response to a piece penned by Bill Inmon, titled Big Data or Data Warehouse? Turbocharge Your Porsche – Buy an Elephant, in which he singled out for criticism the ad campaign of a big-data and Hadoop promoter.
07 Tuesday Oct 2014
Tags
Banking, Behavioural Economics, Big Data, business intelligence, Business Management, Demagogism, Dogma
Much of my consulting work is done in the Financial Industry.
I was there when the crisis was prepared, when it was baked and when it was brought out of the oven.
There are many theories about what went wrong.
Most of them are misleading, misinformed or simply crap.
Mainly to protect the guilty.
