Institutional Investor's Alpha Magazine - April 2009 - (Page 10) our sleeves and analyze the underlying assets, using conservative assumptions, to come up with an appropriate economic value,” explains Gast, who cofounded Dynamic in 2002 with James Finkel to invest in structured credit. They retooled their firm to do investment consulting instead when it seemed there was little to buy after the structured-credit market collapsed last year. Enter the Dutch and ING. The February deal may offer a template for other government/private sector partnerships that hope to revive the banking sector and restore normalcy to the credit markets. Events may help accelerate interest in such arrangements, as thousands of mortgage-backed-bond portfolios that until now have been rated tripleA, or top-tier, but whose market value is clearly not triple-A, are inevitably downgraded this year, given falling values and the lack of liquidity. Gast and his team say that they expect two thirds of such assets, whose face value totals more than $1.2 trillion, to be downgraded soon to junk status, or below investment-grade, pushing the amount of capital banks would be required to hold in reserve, by Dynamic’s estimate, from about $30 billion to more than $700 billion. — M. Corey Goldman Remains of the Day N o one yet knows quite what to make of Nomura Securities Co.’s new high-speed equity trading platform, launched in Hong Kong in late February by the Japanese brokerage house. A quick search of Tokyo-based financial sector ana- lysts found only one — Azuma Ohno of Credit Suisse — up to speed on the Nomura offering, an algorithmic trading platform called ModelEx. The rollout is intended to provide Nomura entrée into a field where it has yet to distinguish itself, and it builds on some of the remains of Lehman Brothers Holdings. The move is an aggressive play against Barclays Capital, which divvied up the overseas Lehman spoils with Nomura after the investment bank CLASSREVIEW Give Them Credit quities were hammered in 2008 — and those in developing countries were not spared. Hedge Fund Research in Chicago reports a 34.9 percent decline in the HRFI emerging markets index for the 12 months ended January 31, 2009. That is more than twice the rate of damage to the overall hedge fund industry, down 16.74 percent for the period, and not much better than the Standard & Poor’s 500 index, which declined 38.61 percent. In January alone emerging markets were down 1.90 percent compared with the minuscule –0.06 percent average return for hedge funds. The S&P lost 8.42 percent. “Equities are going to continue E to suffer,” predicts Paul Crean, an emerging-markets fixed-income por t folio manager at Londonbased Finisterre Capital, whose $78 million Finisterre Sovereign Debt Fund returned 7.69 percent in January. After losing more than half the assets in the fund last fall, mostly because of counterparty losses with Lehman Brothers Holdings in September, the firm “took a brutal ax to any positions that were illiquid,” Crean says. After that it began repositioning its portfolio, first going long on beat-up debt like that attached to Russian-owned V TB Bank , later hedging those positions with credit default swaps. This kind of so-called basis trade was key to the fund’s January performance. January was also a good month for the $130.2 million Cima Aconcagua Fund, based in Buenos Aires, which logged a 7.22 percent return on a combined emerging-markets and global macro strategy. Half of that return came from Argentinean securities. “We know the companies well, so we just buy the bonds,” explains Gerardo Noejovich, one of a team of three managers at Cima Group. — Frances Denmark Emerging Markets Return (%) One year through January –34.90% –16.74 –38.61 Three years through January* –3.36% –0.95 –11.78 Three-year annualized standard deviation 17.59 9.76 21.44 Benchmark HFRI emerging markets index HFRI fund-weighted composite index Standard & Poor’s 500 index * Annualized. January –1.90% –0.06 –8.42 Source: Hedge Fund Research. 10 • INSTITUTIONAL INVESTOR’S ALPHA • APRIL 2009 Illustration by Brian Taylor
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