Money Markets Pose Systemic Risk

Today, James Staley, head of JPMorgan Chase & Co.’s investment unit, said at a lunch discussion hosted today by Credit Suisse Group AG in Davos, Switzerland that the $4 trillion money-market fund industry is the “greatest systemic risk” to the financial system that hasn’t been adequately addressed.

His point actually emphasized the nature of money market fund, that is the funds aren’t allowed to set aside capital to protect for investment losses, leaving no “margin for error” against a potential collapse.

If you’re running a money-fund and all of a sudden you think there may be a slight run or a problem in the credit markets you have to liquefy your portfolio as fast as you possibly can because your margin of error is zero because there’s no shock absorber or capital insurance protecting that.

It partly explained why Lehman could collapse so quickly. Money market funds, which typically hold highly rated, short-term debt instruments, were forced to pull their money from the firms when they saw any signs of trouble.

Against the nature of no insurance behind money market funds, Fed and other policy makers may need pay some attention to back this industry to stabilize the financial market.

Banks in storm

No more words are needed. Pay attention to RBS and Citigroupe.

Financials are overpaid

It is one thing when the best-paid people seem to be the smartest and the most accomplished. Those who make much less may not like it, but the differential seems understandable. It is another thing when those people are shown to have committed huge mistakes that would have driven their companies out of business, and them into the unemployment line, but for government bailouts.

So it is now with Wall Street. In both Europe and the United States, antipathy toward the bailout is rising amid complaints that the money has not helped the economy by encouraging loans, but has kept the bankers in Champagne and caviar.

Wages in finance were excessively high around 1930 and from the mid 1990s until 2006, but according to Thomas Philippon of NYU and Ariell Reshef of the U of Virginia, up to half the wage differential observed in recent years can be expected to disappear.

They won’t disappear overnight, of course. The sad story of how Merrill Lynch bosses handed out bonuses just before the Bank of America takeover was completed — and just before about $15 billion in losses materialized from Merrill’s portfolio — reinforces the suspicion that Wall Streeters see themselves as entitled to outsize paychecks even if their companies are failing.

It may be no accident that New York City, the country’s financial capital, went broke in the 1970s as financial industry wages approached their low point. Nor is it surprising that Manhattan real estate prices soared in the 1990s and early in this decade, as multimillion-dollar Wall Street bonuses pushed up demand for high-end apartments. If relative wages are set to decline, the pain in New York could be greater than in other regions.

There is also the lure of increasing financial innovation, which they say is least likely to occur when there is more regulation. By the peak of the credit boom, rating agencies were essential to financial innovation; they had developed models that somehow proved that there was little risk for investors who put up most of the money for very risky loans. The models turned out to be very wrong. People are convinced that less financial innovation could be good for a time, and that this crisis has shown to all that much more regulation is needed.

And the society as a whole could benefit from a flow to other industries since no people want see a third of our best brains placed in the financial sector.

Failed case in FOF

The future of Duff Capital Advisors, a hedge fund launched by former Morgan Stanley CFO Phil Duff, has been cast in doubt after the firm slashed staff even before it began to raise capital to make investments.

Duff has had hedge-fund success in the past. He co-founded hedge fund FrontPoint Partners, which was sold to Morgan Stanley about three years ago. FrontPoint Partners LLC is not a typical hedge fund, but a platform that recruits and sets up hedge fund managers who run their own portfolios under the FrontPoint umbrella. The firm finds capital for new funds and performs back-office, risk control and other services, leaving the managers to focus on investing. Independent funds affiliated with FrontPoint market themselves under its umbrella and use it for back-office and marketing support. Philip Duff worked as a consultant to MS, he started Duff Capital this March, which has similar model to FrontPoint.

Duff, which at its peak employed 100 people, cut nearly 80 percent of its workforce last month, just nine months after opening its doors with some $500 million in seed funding from asset-management firm Lindsay Goldberg founders Robert Lindsay and Alan Goldberg.
According to insiders, Duff's expenses in building out his hedge fund have raised eyebrows and have caused a rift between Duff and Lindsay Goldberg.

This is the late example of the drawbacks of Fund of hedge funds. It’s believed in the hedge fund industry that FoF will be mostly hard hit amid this financial crisis. The cost of running a FoF is comparably high.

Sources said Duff last spring spent approximately $70 million hiring a posse of hedge-fund management teams as well as constructing new office space at 100 West Putnam Ave. in Greenwich, Conn., spurring insiders to criticize Duff for having spent too much money before his firm made even a single investment. In the future, I doubt if FOF model could have any chance to survive and prosper.

Globalization needs reshape

President Obama, most of his fellow citizens and much of the rest of the world agree that the US broke the world economy and now has the duty to fix it. But the crisis is a product of the global economy. It cannot be cured by the US alone. Fortunately, Mr Obama has the authority needed to lead the world towards a resolution. It is in the interest of his country and the world that the world economy be put on a sounder footing. Should this effort fail, I fear a resurgence of protectionism will be the outcome.

The world has divided into two economic camps: in one are countries with elastic systems of consumer finance and high consumption; in the other are countries with high savings and investment. The US is the most important example of the former. China is the most significant example of the latter. Spain, the UK and Australia were mini versions of the US; Germany and Japan are mature versions of contemporary China.

The biggest point about the world economy today is that the credit-fuelled household borrowing that supported the excess demand in deficit countries has come to a sudden stop. Unless this is reversed, excess supply of surplus countries must also collapse. This statement follows as a matter of logic: at world level, supply must equal demand. The question is only how the adjustment occurs.

Someone have argued that the driving force behind these “imbalances” has been the policies of surplus countries and particularly of China, whose surpluses have grown particularly quickly. A managed exchange rate, huge accumulations of foreign currency reserves and sterilization of their monetary consequences have generated national savings rates of well over 50 per cent of gross domestic product and current account surpluses of more than 10 per cent. Consequently, the excesses of deficit countries were partly a response to the behavior of surplus countries.

On the other hand, the pattern of global deficits and surpluses was solely caused by western policymakers, particularly the Federal Reserve’s lax monetary policies and unregulated expansion of credit.

Whoever is more correct, one point is certain: huge asset price bubbles made possible the excess supply of some countries, particularly China. Since the Asian financial crisis of 1997-98, the developed world – and the US in particular – have experienced, successively, the largest stock market bubble and the biggest credit-fuelled housing bubble in their histories. And now, this era is over. We will struggle with its aftermath for years. So what happens next? The implosion of demand from the private sectors of financially enfeebled deficit countries can end in one of two ways, via offsetting increases in demand or via brutal contractions in supply.

If it is going to be through contractions in supply, the surplus countries are particularly at risk, since they depend on the willingness of deficit countries to keep markets open. That was the lesson learnt by the US in the 1930s. That’s why a lot of people concern the future of China and its export-oriented economy.

Obviously, expansion of demand is much the better solution. The question, though, is where and how? Managing this adjustment is far and away the biggest challenge for the world leaders and economies.At this stake, it is essential to clean up the huge current mess. But it is also evident that an open world economy will be unsustainable if it remains dependent on bubbles. Collapse of globalization is now no small risk. It’s time to not only reshape the US financial industry, but also the world economy system.

McKinsey in, Goldman out

BARACK OBAMA will almost certainly preside over an era of big government, the trillion dollar question is whether it will also be smarter government.

Mr Obama and his transition team certainly seem aware that this almost certainly necessary attempt to boost the recession-battered economy could turn pear-shaped. Last week’s appointment of Nancy Killefer to fill the newly created post of “chief performance officer” for the federal government is the clearest evidence of this. Ms Killefer will be the first alumna of McKinsey & Company to hold such an important post in government. The blue-chip consulting firm has also previously employed Karen Mills, who has been chosen to head the Small Business Administration.

Mr Obama may favour McKinseyites in much the same way as his predecessor seemed addicted to hiring alumni of Goldman Sachs. President Bush turned to Goldman Sachs for Hank Paulson, his treasury secretary; Robert Steel, Mr Paulson’s assistant secretary; Josh Bolton, the White House chief of staff; and many others besides.

Mr Obama’s wish to distance himself from Wall Street’s high profile ethical and business failures, means that he is unlikely to hire Goldman alumni with the same enthusiasm that Mr Bush had—although Goldman’s employees have been enthusiastic donors to Mr Obama’s campaign and now his inauguration expenses.

Yet the national mood has changed. Under Mr Bush, working for Goldman Sachs seemed in itself to be a qualification for high office. This, after all, was an era where what counted was understanding the financial markets and globalization, and having great connections all over the world.

The new era may place a higher value on finding practical ways to improve the workings of vast bureaucracies, and most of McKinsey’s clients are large multinational companies and government departments.

McKinsey has worked with many governments, even helping Tony Blair restructure the British Cabinet Office. As far back as 1952, the firm advised the transition team of the incoming president, Dwight Eisenhower.

Admittedly, McKinsey is by no means perfect—its advice is said to have led to the bankruptcy of Swiss Air, and it gave Enron, and eventually the rest of us, Jeffrey Skilling. But, for now, such faults can be overlooked. Here’s hoping those McKinsey pointy-heads can help turn America’s fiscal mess into one of the firm’s famed “solutions”.

China Trade Puzzle

Revised figures published this week show that in 2007 China overtook Germany to become the world’s third-biggest economy.

At the start of last year China also looked set to become the world’s biggest exporter, but China’s exports tumbled by 13% in the fourth quarter, leaving them 3% lower in December than a year earlier. Yet, despite weak exports, China’s trade surplus rose to a record $457 billion at an annual rate in the fourth quarter—50% bigger than in the same period of 2007.

Here is the explanation: In the first half of 2008 China’s trade surplus did indeed shrink. But since then, although exports stumbled, its imports fell by much more—down by 21% in the 12 months to December, compared with over 30% growth in the first half. The slump in both exports and imports was exacerbated by the global credit freeze, which has made it harder for buyers to get letters of credit to guarantee payment. Imports were also dragged down by cheaper oil and commodity prices and weaker imports of materials and components used to make exports. Inputs for export processing account for over 50% of China’s total imports, and the sharp fall in purchases suggests that producers expect exports to weaken further.

But a more worrying reason why China bought less from the rest of the world is that its domestic demand has weakened. Consumer spending and manufacturing investment have so far held up reasonably well, but construction—a big user of imported raw materials—has collapsed. The impact of this on imports was exaggerated in the fourth quarter by an aggressive run down of stocks of steel and other materials.

With no end in sight for the rich world’s recession, China’s exports will continue to slide this year. Imports, on the other hand, are expected to grow. Imports of components for assembly and re-export will continue to decline, but once the government’s fiscal stimulus package kicks in, the large planned increase in infrastructure investment will boost imports of raw materials and machinery. If so, China’s trade surplus will shrink in 2009 and, for the first time in years, become a drag on GDP growth.

Another hot spot associated with the export plunge is Chinese currency. It has triggered speculation that the government might try to push down the value of the yuan. However, not only would a yuan depreciation risk provoking a protectionist backlash from America’s new government, it would also do little to help Chinese producers. China’s problem is not competitiveness: its exports are holding up much better than those in South Korea or Taiwan, which fell by 17% and 42% respectively in the 12 months to December, despite weaker exchange rates. The best way for China to support its economy—and to help unwind global trade imbalances—is instead to bolster domestic demand.

One piece of good news this week is that following interest-rate cuts and the government’s scrapping of tight restrictions on bank lending, total bank loans jumped by 19% in the 12 months to December, up from growth of 14% last summer. Thanks to the healthier state of its banking system, China is perhaps the only big economy where credit has heated up rather than frozen in recent months. If sustained, this could help to support domestic spending—and hence imports. China’s economy certainly can not depend on exports over the next year.

Yields Tumble as Credit Market thawed

Investors are snapping up new corporate bonds at the fastest pace since May, driving down yields from record highs once they begin to trade.

New issue performance has been exceptional, it reflected a realization of the value in investment-grade credit.

The extra yield investors demand to own Tyco International Ltd. ’s $750 million of 8.5 percent notes due in 2019 has narrowed to 5.3 percentage points, from 6.81 when they were sold Jan. 6. spread on Volkswagen AG’s 1.5 billion euros of 6.875 percent 2014 bonds has shrunk to 4.34 percentage points from 4.53 on Jan. 7.

The rally shows that the freeze in credit markets that led to $1 trillion in writedows and losses at the world’s largest financial institutions is starting to thaw. Rising confidence in corporate bonds may help non-financial companies that need to replace $135 billion of debt this year in the U.S.

Bond yields compared with government debt more than compensate for the risk of rising defaults caused by the global recession. Returns may creep into double digits this year as governments rescue more businesses.

Other measures of risk also point to an easing in credit markets. The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 0.99 percentage point, the tightest spread in five months, after peaking at 4.64 percentage points in October following Lehman’s bankruptcy.

Bonds are rallying even as an increasing number of companies comes to market, with sales excluding banks rising this year to $49.9 billion in the U.S. and Europe from $16.8 billion in the same period in 2008, according to data compiled by Bloomberg. This month is the busiest since May.

Since peaking at a record 656 basis points on Dec. 5, the yield gap on U.S. investment-grade company debt has shrunk to 557 basis points, handing investors a return of 6.78 percent, according to Merrill Lynch index data. At the same time, U.S. government debt is paying near-record low yields.

Bernanke calls for banking clean-up

Ben Bernanke called for fresh efforts to clean up the US banking system, warning that fiscal stimulus measures alone would not be enough to overcome the economic crisis.

The Federal Reserve chairman said he would like the Obama administration to combine capital injections with a plan to cut troubled assets from bank balance sheets – the idea behind the original version of Treasury secretary Hank Paulson’s troubled asset relief program (TARP). More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.

Banks and investors are sitting on many thousand billion dollars’ worth of illiquid assets for which there is little demand and fire-sale prices. There were some $2,794bn worth of US asset-backed bonds alone at the end of last September, including subprime, credit card and commercial mortgage-backed deals, plus more than €1,500bn ($2,010bn) of similar assets in Europe.

Mr Bernanke’s comments came as Obama officials battled to avoid a protest vote in Congress against releasing the second $350bn tranche of the Tarp fund.

The Fed chairman was careful not to tell the Obama team what to do. But raising the possibility that the Obama Treasury might decide to supplement injections of capital by removing troubled assets from institutions’ balance sheets, he gave three options.

One would be public purchases of troubled assets – as proposed by Mr Paulson. A second would be for the government to provide asset guarantees in return for warrants. The third would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank.It seems that we are still on the half way of financial unrest.

Citigroup ditches ‘universal banking’

CitiGroup is to break itself up by separating a large portion of its troubled investment bank and higher-risk US consumer finance businesses from its global commercial banking operations in a dramatic attempt to ensure its survival.

The move would essentially dismantle the 1998 merger between John Reed’s Citicorp and Sandy Weill’s Travelers that created Citigroup. The new-look Citi would be similar to the old-style Citicorp: a global commercial and retail bank. The new structure would no longer include some of the risky investment banking and consumer finance businesses, including subprime mortgages, that were part of the old Travelers.

Vikram Pandit, the chief executive, had reversed his previous backing for Citi’s financial supermarket structure. Bankers said that the unwanted parts could be eventually spun off into a wholly separate entity but, until then, it was likely to operate as an arms-length unit of Citi, in an attempt to isolate badly-performing businesses and assets.

It would also limit its reach in the US, where Citi never had the extensive branch network of rivals such as Bank of America and JPMorgan Chase. Citi has been under pressure from the US government to raise capital and streamline its diverse portfolio after being rescued with a $300bn bail-out by the authorities in November.

US rivals such as JPMorgan, BoA and Wells Fargo could take advantage of Citi’s exit from consumer finance businesses while banks like Goldman Sachs and Morgan Stanley could benefit from its move away from many investment banking operations.

In the draft plan, the core businesses are likely to include Citi’s commercial operations around the world including large retail banks such as Mexico’s Banamex, as well as its profitable transaction services business and the private bank.

On the other hand, the plan will place Citi’s troubled mortgage-related assets, its specialist US consumer finance businesses CitiFinancial and the insurance broker Primerica into the bad bank. Other parts of the investment bank, the former Salomon Brothers, could also be included in the non-core unit.

Smith Barney, Citi’s US brokerage business, is already spun off into a joint venture controlled by Morgan Stanley.

How to market a Hedge Fund after crisis

The right pedigree, strategy and track record is no longer a guaranteed recipe for success in raising or retaining of assets. More so than ever both hedge fund startups and established hedge funds are distinguishing themselves from similar strategies by marketing not only their track record and pedigree but also their operational, portfolio and regulatory infrastructure.

Funds that fail to address the growing concern over fraud, mismanagement, operational and regulatory risk may miss out on the opportunity to attract the billions of dollars of capital that has left the industry and may well be reallocated after 2008 financial crisis. Like it or not the perception of the new world investor is that infrastructure and performance are directly connected.

To be well positioned after the crisis, hedge funds must address an investor’s growing concern over operational and regulatory risk. This new level of scrutiny will increase the importance of effective and documented operational and regulatory risk management. Responding to a potential investor’s increasing desire for full transparency will be paramount.

Even if a fund’s AUM is small it can still improve its marketing position with investors in a cost effective manner by communicating a clear, transparent and customized plan to strategically mitigate risk as assets grow. Noted below are just some of the minimum “high risk” areas a successful hedge fund should focus on no matter its size or strategy:

Portfolio management, investment guidelines, trade allocation, trade errors, best execution;

independent and verifiable valuation policies and procedures, and for illiquid securities, strong consideration to the creation of a valuation committee;

personal trading policies and procedures, processes and controls; contingency planning and business continuity.

Hedge Funds Challenges in a Changing World

Never before in its short history was the hedge funds community confronted with the challenges nor the pressures it is facing today, following a six-year boom with Madoff’s scandal coming as the icing on the cake following the US financial crisis.

With investors already becoming more demanding with regards to fees, transparency and regulation, these and other industry standards are expected to become topics of contention within this once powerful industry globally and in the region.

Hedge Funds managers and providers are expected to share their plans to make the industry more transparent and investor-friendly and to show the steps they are taking as a community to self-regulate the industry after a miserable year that saw the industry face its worst 12 months on record.

In fact, hedge funds are already facing increased competition in addition to all the other challenges that the financial turmoil has brought about. Fee cuts, transparency, revealing the underlying instruments without giving away the ‘secret formula’ to copycats, due diligence, redemptions and selling pressures, less restrictions on investors and getting in new money are all topics that might change the face of the industry as we know it today, which might find itself adopting a new model.

One of the successful hedge fund managers respected by people in this financial crisis is John Paulson, whose Credit Opportunities Fund in 2007 turned a $500m investment into $3.5bn, widely believed to be the largest dollar gain ever generated by a hedge fund manager in a single year. In 2006 he realized that the growing risk of defaults on mortgages made to sub-prime US household borrowers was grossly mispriced, and he executed complex debt trades to benefit from this. John Paulson eventually made $15 billion from predicting the US sub-prime mortgage crisis. He is now one of the largest hedge funds in the world, managing approximately $35bn in merger, event and distressed strategies. Its credit funds were up by 15 per cent to the middle of December and in the past few weeks have been one of the biggest buyers of prime mortgage-backed securities. Paulson & Co’s other funds were up to 38 per cent ahead by mid-December.

Paulson is a living proof that it is not all doom and gloom for the industry. Some good news is coming out for investors, such as reduced fees in some strong performing funds, including quantitative strategy funds. Also, the UK’s Financial Services Authority dropped its ban on short-selling, or betting against, banks and insurers, and introduced a tighter disclosure regime. Also, Hedge funds will be allowed to borrow from the US Federal Reserve for the first time under a landmark $200bn program intended to support consumer credit.

Hedge Fund Administration Outsourcing Trend

The message is clear, those funds which have survived this crisis or are starting up must add more institutional risk controls and best practices. Working with an independent administration firm is nothing new within the industry - many have been using them for years, the change is that now smaller funds are being asked to use administration firms by their investors, boards of advisers and service providers.

Large firms which have been performing the hedge fund administration function in-house are now re-thinking this. Small firms who attempted to perform this in-house to save money are now looking at the same decision.

With the events of last year in the credit markets and the Madoff scandal sounding another alarm bell, hedge funds are turning to independent fund administrators to validate the net asset value of their funds and calm investors.

Yesterday, Millennium Management LLC, a global multi-strategy investment management firm with over $13 billion in assets under management, said it outsourced fund administration to GlobeOp Financial Services. GlobeOp is an independent financial technology specialist that provides integrated middle and back-office, administration and reporting services to hedge funds and asset management firms.

Previously, Millennium did the fund administration itself. But there is pressure from investors to pick independent fund administrators. Given what's happened last year and given the Madoff situation, you can't be careful enough. You want someone else to trust and verify, noting that the fund administrator must verify all the cash positions, trading positions and make sure the fund pricing is correct. Statements go out monthly to investors but the work of reconciliations and pricing goes on daily.

The independent fund administrator trend has been evolving for a while but has been pushed hard now by investors. Investors are asking for an independent fund administrator for every hedge fund they make an investment in.

Foreign Investors Reduced Holdings of Chinese Banks

Bank of America Corp. sold $2.8 billion of China Construction Bank Corp. shares to boost capital and Hong Kong billionaire Li Ka-shing is raising as much as $524 million in Bank of China Ltd. stock sales.

Before that, UBS AG, Switzerland’s biggest bank, sold its entire stake in Bank of China on Dec. 31, the day a three-year “lockup period” ended.

Investors expect more sales to come as the transactions fueled concern other foreign investors will use their holdings to shore up balance sheets battered by the global credit-market contraction. Bank of America and some other foreign strategic investors are just having too many issues on their home turf, and they have to find a quick way to raise cash.

The Bank of America sale represents 13 percent of its stake in China Construction. Bank of America plans to be “a long-term and significant strategic investor in CCB, it’s believed that Bank of America sold the shares because of its financial situation. Bank of America, the largest U.S. bank, is trying to take advantage of almost $14 billion of paper profits from its CCB stake after paying about $33 billion to take over Merrill Lynch & Co.

So far, those transactions have no clues of bearish views on Chinese banks.

Manhattan property market began to feel hurt

Manhattan apartment sales fell for the fourth straight quarter and prices for the most expensive apartments dropped for the first time since the recession began as the national housing slump hit the metropolitan area.

Fourth-quarter transactions dropped 9.4 percent to 2,282 units from a year earlier. While the overall median sales price rose 5.9 percent, luxury prices dropped 3.9 percent and the median for all resale apartments slid 3.6 percent.

In Manhattan, the inventory of apartments listed for sale rose almost 40 percent from a year ago to 9,081 units. Apartments sat on the market for an average 159 days before selling in the fourth quarter, up 21 percent from a year earlier.

On the other side, Manhattan office rents fell the most in at least two decades last quarter as securities firms cut jobs and tenants leased less space. Fourth-quarter rents dropped 4.8 percent to $69.44 a square foot from the third quarter.

Finance jobs drive the Manhattan market. Employment at Wall Street investment banks accounted for almost 15 percent of the city’s total privately paid wages in the first quarter of 2006. So it’s unsurprising that the U.S. recession and the global credit crisis have charged heavy tolls on Manhattan property market.

The end of the year marked the beginning of Manhattan’s entry into a new kind of market. Manhattan has gone from being a seller’s market to a buyer’s market, buyers are being now more cautious and hunting for bargains. Tenants are gaining the upper hand in negotiations with landlords and winning discounts on rents, brokers are seeing normal 15% discount or more.

Many new condominiums there were built to attract wealthy Wall Street bankers and foreign investors. But foreign investors are having a real tough time getting mortgage money, and a lot of those young affluent buyers aren’t so affluent any more.

Wall Street miracle should be found in the history book now.

Asset managers turn to corporate bonds

A couple of days after David Swensen recommended corporate credits, a survey by the FT indicated that high-grade corporate bonds are set to outperform other asset classes in 2009.

More than half those surveyed said high-quality corporate credit was trading at cheap levels and that this was the asset class most likely to see a rally in 2009. High-quality corporate bonds had been oversold after investors had abandoned corporate credit of all grades over the past year in favor of the safest and most liquid assets, such as government bonds.

Credit market prices are consistent with an unprecedented risk of default, even for the highest quality corporate bonds.

US investment-grade corporate bond prices, for example, imply a cumulative default rate of 36 per cent over five years, assuming a typical recovery of 40 cents in the dollar. This is more than 7.5 times higher than the worst default rate in any previous five-year period.

In contrast, government bonds were the least-favored asset class, with many of the 30 leading asset managers and strategists surveyed arguing that yields had plummeted too far in 2008, prompting talk of a possible price bubble.

China eyes developed mine assets

China looks set to expand its mining and metals holdings in developed economies, industry analysts and executives claim, as global mining companies in financial distress search for cash-rich, long-term investors.

China has focused its overseas resources acquisitions in the world’s least-developed countries – such as copper concessions in the Democratic Republic of Congo – but could now be poised to expand its reach into Canada, Australia and mining companies in other countries.

Obviously, just as many deep-pocket Japanese companies are beginning a new wave of global acquisition, the Chinese companies realize there are massive opportunities in the market after this financial bloodbath. As I repeated several times, it’s a good time to buy foreign assets in the sake of expanding industry capacity and upgrading structures.

In addition, Chinese state-backed companies have more access to cash than their rivals in other countries, many state-backed companies can take a long-term view on the country’s demand for metals. Although industrial activity is slowing sharply in China, the government will step up spending on infrastructure as part of a fiscal stimulus package.

Some movements are already made. It’s reported that China began to build oil reserve on the wake of commodity slump. Last month, China’s third largest zinc producer, Zhongjin, bought a 50.1 per cent stake in Australian zinc miner Perilya for US$32m. Meanwhile, Chinese aluminium company Chinalco has indicated it might raise its stake in Rio Tinto to nearly 15 per cent.

The deals highlight Chinese companies’ ability in the current market to access developed assets in relatively developed parts of the world. But the Chinese companies should also be aware things have changed.

Success of managed futures is a mixed bag

While the stock market plunged about 35 percent, managed futures funds posted annual returns of about 16 percent. That makes them one of the few havens for investors at a time when pensions, retirement savings and even prominent local hedge funds such as Citadel Investment Group have recorded big losses.

But the success of managed futures has also left them vulnerable to client withdrawals. Because market turmoil froze the assets in many portfolios, some institutional and individual investors are pulling money from managed futures. Strong returns mean investors withdraw cash.

People are seeing redemptions even with managers who have been highly profitable, simply because they are the most liquid thing in the portfolio and have the most lenient terms for redemption.

Out of the $1.72 trillion controlled by alternative asset managers, $225.5 billion belong to funds that specialize in managed futures. That represents a 22 percent increase over the past year, a strong showing but not enough to indicate a meaningful influx of new investors.

"While the asset class is growing, it's not growing as much as one might suppose," said the head of one Chicago-based managed futures fund, adding that investors are "using managed futures as an ATM."

Still, more investment dollars could flow into managed futures in 2009.

One reason is that the performance of managed futures tends to be independent of what happens in the stock and bond markets. A key problem for many hedge funds was that their performance often mirrored that of those underlying markets.

Secondly, managed futures trade the highly liquid contracts offered by exchanges. Many other alternative asset funds focus on products traded off an exchange that cannot be easily sold during a panic. People have seen that there is structural stability in managed futures that is not present in hedge fund strategies that hold over-the-counter instruments.

One complication for managed futures is the diversity of managers. Most follow patterns within the market, while others trade short-term and hold their positions for less than three days.

That means the investments seldom involve the same kinds of fundamentals used when evaluating stock prices, a potential obstacle to the segment moving beyond its niche status. And just as managed futures returns are not correlated to the stock markets, returns can vary widely among short-term trader funds.

Swensen Sees ‘Extraordinary’ Opportunity In Debt

David Swensen is the pioneer of institutional investment who is in charge of Yale University endowment. Because of the recession, Yale endowment dropped $5.9 billion in six months, and now he is pursuing a recovery by acquiring distressed debt. Everything, from bank loans to investment-grade bonds to less-than-investment grade bonds, is priced at really extraordinarily cheap levels in his eyes.

Swensen increased Yale’s endowment to $22.9 billion on June 30, from $1 billion in 1985 when he assumed the job, making it the second-wealthiest university in the U.S. The school estimated on Dec. 16 that the fund had fallen 25 percent, to $17 billion, because of the global financial crisis. Upon this situation, Swensen insisted that periodic losses are inevitable in a portfolio tilted toward stocks and built to grow over many years.

The core investment principle of Swensen is the importance of diversifying holdings while focusing on equities. But in a recession, the advantages of diversification get overwhelmed by investors’ selling equities in favor of U.S. Treasury bonds in a “flight to quality”. “When you have a market in which any type of equity exposure is being punished, it’s going to hurt long-term investors.” he said in a interview, “In the current environment, distressed corporate securities can produce ‘equity-like’ returns.”