Friday, February 16, 2018

Top Funds' Activity in Q4 2017

Brandon Kochkodin, Hema Parmar and Katia Porzecanski of Bloomberg report, Hedge Funds Are Dumping Facebook and Google:
Billionaire David Tepper’s Appaloosa Management more than tripled its stake in Apple Inc. and almost doubled its holding of Facebook Inc. in the final three months of last year.

Appaloosa reported shares in Apple worth $777 million as of Dec. 31, which represented 7.4 percent of the hedge fund firm’s U.S. stock holdings, according to a regulatory filing Wednesday. Tepper added to his stake in Facebook, his second-biggest position, by more than 2 million shares. That position was valued at $976 million at the end of the fourth quarter.

The FAANG stocks have posted mixed performance this year. Apple is down about 1 percent, while Inc. and Netflix Inc. have soared.

Other big names also expect that the two tech darlings have more room to run. Louis Bacon’s Moore Capital Management added 900,000 shares of Apple, boosting its holding to about $200 million, according to filings. Chase Coleman’s Tiger Global Management pumped up its position in Facebook.

Stephen Mandel’s Lone Pine Capital added a $900 million wager on Amazon snapping up 770,000 shares in the fourth quarter of 2017. The online retailer accounts for nearly 5 percent of the hedge fund’s U.S. stock holdings. The hedge fund firm also started a $625 million stake in Alphabet, buying up about 598,000 shares in the fourth quarter. Meanwhile, it reduced its Facebook position, selling about 632,000 shares of the company.

Some prominent hedge funds retreated from the FAANGs in the fourth quarter.

Philippe Laffont’s Coatue Management, which rode the FAANG wave last year, sold 2.84 million shares of Apple, bringing the value of its holding to $730 million as of Dec. 31. In September, Laffont called the new iPhone X “groundbreaking” but its sales have since disappointed. The firm also reduced its Facebook position by 1.71 million shares, according to regulatory filings Wednesday.

Tiger Global dumped 1.3 million shares of Netflix, leaving it with a stake worth $337 million, and trimmed its Amazon position. Maverick Capital, run by Lee Ainslie, reduced its Facebook and Alphabet Inc. stakes.

It's that time of the year where we get a sneak peek into the holdings of top funds, lagged by 45 days.

From the large, well-known hedge funds, Chase Coleman's Tiger Global just had an astounding year, gaining 50% on its long positions but losing 19% on its shorts:
As Charles “Chase” Coleman looks back on 2017, with his hedge fund Tiger Global up 50% on long exposure but down 19% on the shorts, he has no regrets, sort of.

“TGI’s hit rate on its long positions was the highest ever in our 17-year history and the portfolio generated four times as much profit from its three largest gainers as it lost on its three worst performing positions,” he told investors in  year-end review letter reviewed by ValueWalk ( the letter is dated January 31st, 2018). “On the short side of the portfolio, we felt similarly good about our research process in 2017, but the outcomes were more frustrating. Our short portfolio consists largely of businesses we believe are on the wrong side of change, frauds, and cyclical assets that are over-earning and trading at peak multiples.”
According to Bloomberg, Mr. Coleman's fund also recently amassed a stake of about $1 billion in Barclays Plc, according to a person with knowledge of the hedge fund’s investment:
The New York-based firm’s holding now amounts to about 2.5 percent, the person said, asking not to be identified as the investment hasn’t been publicly disclosed. The purchase makes Tiger Global a top 10 investor in Barclays, the person said. It would be the seventh largest holder, according to data compiled by Bloomberg.

A spokesman for Barclays declined to comment, while officials for Tiger Global in New York could not be reached outside regular business hours on Monday. The Financial Times reported Tiger Global’s investment earlier.

Tiger Global, headed by former Julian Robertson protege Chase Coleman, bought some of its stake in Barclays when the bank’s shares slumped to a 52-week low of less than 180 pence in November, the person said. The investment comes amid Barclays Chief Executive Officer Jes Staley’s strategy to focus on the firm’s U.S.-led investment bank and its U.K.-based consumer banking operation.
Smart money buys shares when opportunities arise. Warren Buffett’s Berkshire Hathaway Inc (BRK-A) on Wednesday disclosed a new stake in generic drugmaker Teva Pharmaceutical Industries Ltd (TEVA) and said it bought more shares of Apple Inc (AAPL), which surpassed Wells Fargo & Co (WFC) as its largest common stock investment.

I've discussed Teva Pharmaceuticals a few times on this blog, noting that David Abrams, Jonathan Jacobson, Ken Griffin and other top managers bought big stakes before and after shares plunged in Q4 (click on image):

You can see a list of Teva's top institutional holders here

Now, full disclosure: After some initital reticence, I listened to my friend in Trois-Rivières, Quebec and bought Teva's shares at $14 after the big plunge. I see more upside and have yet to sell but that can change depending on many factors.

Why was I hesitant? Because I typically don't buy broken charts and huge dips on any stock but when I saw David Abrams and Highfields’ Jonathan Jacobson -- two deep value gurus -- buying a big stake back in Q3 before the big plunge, I inititiated a position after the big dip in Q4 and added to my shares. This week's Berkshire announcement was icing on the cake.

But I'm constantly looking at stocks, hundreds and thousands of stocks and while I'm making great money on Teva shares, I kicked myself for not holding a huge position in Mirati Therapeutics (MRTX) when it was trading at $5 (click on image):

That's the type of chart I like, a big dip, huge consolidation over many months, and then "BAM!", breakout to the upside and making new highs.

And if you look at the top institutional holders of Mirati here, you won't find Warren Buffett and other deep value gurus, but some great biotech funds I track regularly every quarter (see links to all of them below).

Why am I bringing this up? Because when I told you it's time to take a closer look at hedge funds, I wasn't just referring to the large, well-known funds, I was also referring to smaller funds that crushed it in 2017, like Joseph Edelman's Perceptive Life Sciences fund which surged 43 percent last year (that's him at the top of this comment).

Edelman’s Perceptive Advisors and a few other top biotech funds have been generating incredible returns, above and beyond the biotech indexes, and they are part of a new generation of highly specialized sector managers who really know their stuff (still, in biotech, for every home run, you're going to have a few bombs, and even Perceptive has had its share).

I mention this because it's important to look at some of the smaller funds that are delivering alpha. For example, CNBC used data from hedge fund tracking firm to find the top 10 managers and their biggest bets, according to recent filings. Take the time to read this article here.

Whatever you do, stop chasing after Chase Coleman and other large hedge funds coming off great years. You need to really look into their portfolio and think about the positions they're taking given the macro environment.

This is why I spend so much time focusing on macro, because if you don't get your macro calls right, chances are you won't get your hedge funds right and will likely get burned.

Take the time to read some of my macro and market comments form the start of the years:
These comments alone will allow you to gain a much better understanding of my macro concerns and how I view market risks in relation to these concerns.

Why am I sharing this? Because you can be the best stock picker but if the macro winds change abruptly and go against you, it will hurt your portfolio and you will suffer material losses.

This is why I keep telling you to hedge your portfolio risk by putting 50% of your money in US long bonds (TLT) and another 50% in the S&P 500 low vol ETF (SPLV) and "just relax and sleep well at night”. Forget what top funds are buying and selling, if you follow them blindly, you will get crushed.

However, I realize there are traders, portfolio managers and investors who like buying a portfolio of stocks and know how to critically examine what top funds bought and sold last quarter. That's why I put up these quarterly comments.

All I can tell you is analyzing and trading markets and stocks is a passion of mine. I regularly look at the YTD performance of stocks, the 12-month leaders, the 52-week highs and 52-week lows. I also like to track the most shorted stocks and highest yielding stocks in various exchanges and I have a list of stocks I track in over 100 industries/ themes to see what is moving in real time.

When I'm not looking at thousands of stocks and charts and who bought or added to positions, the other thing I love doing is thinking macro. If I were to write a macro comment this week, it would have been titled "Much Ado About US Inflation?", basically ridiculing the inflation scare story because all you need to do is look at the US dollar over the last year to understand this is cyclical (temporary) inflation, not something which is sustainable going forward (lower US dollar, higher import prices, not higher wages!!).

Anyway, have fun looking at the fourth quarter activity of top funds listed below. The links take you straight to their top holdings and then click on the fourth column head, % chg, to see where they decreased (click once on % chg column head) and increased their holdings (click twice on % chg column head).

Top multi-strategy and event driven hedge funds

As the name implies, these hedge funds invest across a wide variety of hedge fund strategies like L/S Equity, L/S credit, global macro, convertible arbitrage, risk arbitrage, volatility arbitrage, merger arbitrage, distressed debt and statistical pair trading.

Unlike fund of hedge funds, the fees are lower because there is a single manager managing the portfolio, allocating across various alpha strategies as opportunities arise. Below are links to the holdings of some top multi-strategy hedge funds I track closely:

1) Citadel Advisors

2) Balyasny Asset Management

3) Farallon Capital Management

4) Peak6 Investments

5) Kingdon Capital Management

6) Millennium Management

7) Eton Park Capital Management

8) HBK Investments

9) Highbridge Capital Management

10) Highland Capital Management

11) Pentwater Capital Management

12) Och-Ziff Capital Management

13) Pine River Capital Capital Management

14) Carlson Capital Management

15) Magnetar Capital

16) Mount Kellett Capital Management 

17) Whitebox Advisors

18) QVT Financial 

19) Paloma Partners

20) Weiss Multi-Strategy Advisors

21) York Capital Management

Top Global Macro Hedge Funds and Family Offices

These hedge funds gained notoriety because of George Soros, arguably the best and most famous hedge fund manager. Global macros typically invest across fixed income, currency, commodity and equity markets.

George Soros, Carl Icahn, Stanley Druckenmiller, Julian Robertson and now Steve Cohen have converted their hedge funds into family offices to manage their own money and basically only answer to themselves (that is my definition of true investment success).

1) Soros Fund Management

2) Icahn Associates

3) Duquesne Family Office (Stanley Druckenmiller)

4) Bridgewater Associates

5) Pointstate Capital Partners 

6) Caxton Associates (Bruce Kovner)

7) Tudor Investment Corporation (Paul Tudor Jones)

8) Tiger Management (Julian Robertson)

9) Moore Capital Management

10) Point72 Asset Management (Steve Cohen)

11) Bill and Melinda Gates Foundation Trust (Michael Larson, the man behind Gates)

12) Joho Capital (Robert Karr, a super succesful Tiger Cub who shut his fund in 2014)

Top Quant and Market Neutral Hedge Funds

These funds use sophisticated mathematical algorithms to make their returns, typically using high-frequency models so they churn their portfolios often. A few of them have outstanding long-term track records and many believe quants are taking over the world. They typically only hire PhDs in mathematics, physics and computer science to develop their algorithms. Market neutral funds will engage in pair trading to remove market beta.

1) Alyeska Investment Group

2) Renaissance Technologies

3) DE Shaw & Co.

4) Two Sigma Investments

5) Numeric Investors

6) Analytic Investors

7) AQR Capital Management

8) SABA Capital Management

9) Quantitative Investment Management

10) Oxford Asset Management

11) PDT Partners

12) Princeton Alpha Management

13) Angelo Gordon 

Top Deep Value,
Activist, Event Driven and Distressed Debt Funds

These are among the top long-only funds that everyone tracks. They include funds run by legendary investors like Warren Buffet, Seth Klarman, Ron Baron and Ken Fisher. Activist investors like to make investments in companies where management lacks the proper incentives to maximize shareholder value. They differ from traditional L/S hedge funds by having a more concentrated portfolio. Distressed debt funds typically invest in debt of a company but sometimes take equity positions.

1) Abrams Capital Management (the one-man wealth machine)

2) Berkshire Hathaway

3) Baron Partners Fund (click here to view other Baron funds)

4) BHR Capital

5) Fisher Asset Management

6) Baupost Group

7) Fairfax Financial Holdings

8) Fairholme Capital

9) Trian Fund Management

10) Gotham Asset Management

11) Fir Tree Partners

12) Elliott Associates

13) Jana Partners

14) Gabelli Funds

15) Highfields Capital Management 

16) Eminence Capital

17) Pershing Square Capital Management

18) New Mountain Vantage  Advisers

19) Atlantic Investment Management

20) Scout Capital Management

21) Third Point

22) Marcato Capital Management

23) Glenview Capital Management

24) Apollo Management

25) Avenue Capital

26) Armistice Capital

27) Blue Harbor Group

28) Brigade Capital Management

29) Caspian Capital

30) Kerrisdale Advisers

31) Knighthead Capital Management

32) Relational Investors

33) Roystone Capital Management

34) Scopia Capital Management

35) Schneider Capital Management

36) ValueAct Capital

37) Vulcan Value Partners

38) Okumus Fund Management

39) Eagle Capital Management

40) Sasco Capital

41) Lyrical Asset Management

42) Gabelli Funds

43) Brave Warrior Advisors

44) Matrix Asset Advisors

45) Jet Capital

46) Conatus Capital Management

47) Starboard Value

48) Pzena Investment Management

Top Long/Short Hedge Funds

These hedge funds go long shares they think will rise in value and short those they think will fall. Along with global macro funds, they command the bulk of hedge fund assets. There are many L/S funds but here is a small sample of some well-known funds.

1) Adage Capital Management

2) Appaloosa LP

3) Greenlight Capital

4) Maverick Capital

5) Pointstate Capital Partners 

6) Marathon Asset Management

7) Tiger Global Management (Chase Coleman)

8) Coatue Management

9) Omega Advisors (Leon Cooperman)

10) Artis Capital Management

11) Fox Point Capital Management

12) Jabre Capital Partners

13) Lone Pine Capital

14) Paulson & Co.

15) Bronson Point Management

16) Hoplite Capital Management

17) LSV Asset Management

18) Hussman Strategic Advisors

19) Cantillon Capital Management

20) Brookside Capital Management

21) Blue Ridge Capital

22) Iridian Asset Management

23) Clough Capital Partners

24) GLG Partners LP

25) Cadence Capital Management

26) Karsh Capital Management

27) New Mountain Vantage

28) Penserra Capital Management 

29) Silver Point Capital

30) Steadfast Capital Management

31) Brookside Capital Management

32) PAR Capital Capital Management

33) Gilder, Gagnon, Howe & Co

34) Brahman Capital

35) Bridger Management 

36) Kensico Capital Management

37) Kynikos Associates

38) Soroban Capital Partners

39) Passport Capital

40) Pennant Capital Management

41) Mason Capital Management

42) Tide Point Capital Management

43) Sirios Capital Management 

44) Hayman Capital Management

45) Highside Capital Management

46) Tremblant Capital Group

47) Decade Capital Management

48) T. Boone Pickens BP Capital 

49) Bloom Tree Partners

50) Cadian Capital Management

51) Matrix Capital Management

52) Senvest Partners

53) Falcon Edge Capital Management

54) Park West Asset Management

55) Melvin Capital Partners

56) Owl Creek Asset Management

57) Portolan Capital Management

58) Proxima Capital Management

59) Tourbillon Capital Partners

60) Impala Asset Management

61) Valinor Management

62) Viking Global Investors

63) Marshall Wace

64) Light Street Capital Management

65) Honeycomb Asset Management

66) Rock Springs Capital Management

67) Whale Rock Capital

68) Suvretta Capital Management

69) York Capital Management

70) Zweig-Dimenna Associates

Top Sector and Specialized Funds

I like tracking activity funds that specialize in real estate, biotech, healthcare, retail and other sectors like mid, small and micro caps. Here are some funds worth tracking closely.

1) Armistice Capital

2) Baker Brothers Advisors

3) Palo Alto Investors

4) Broadfin Capital

5) Healthcor Management

6) Orbimed Advisors

7) Deerfield Management

8) BB Biotech AG

9) Ghost Tree Capital

10) Sectoral Asset Management

11) Oracle Investment Management

12) Perceptive Advisors

13) Consonance Capital Management

14) Camber Capital Management

15) Redmile Group

16) RTW Investments

17) Bridger Capital Management

18) Boxer Capital

19) Bridgeway Capital Management

20) Cohen & Steers

21) Cardinal Capital Management

22) Munder Capital Management

23) Diamondhill Capital Management 

24) Cortina Asset Management

25) Geneva Capital Management

26) Criterion Capital Management

27) Daruma Capital Management

28) 12 West Capital Management

29) RA Capital Management

30) Sarissa Capital Management

31) Rock Springs Capital Management

32) Senzar Asset Management

33) Southeastern Asset Management

34) Sphera Funds

35) Tang Capital Management

36) Thomson Horstmann & Bryant

37) Venbio Select Advisors

38) Ecor1 Capital

39) Opaleye Management

40) NEA Management Company

41) Great Point Partners

42) Tekla Capital Management

Mutual Funds and Asset Managers

Mutual funds and large asset managers are not hedge funds but their sheer size makes them important players. Some asset managers have excellent track records. Below, are a few funds investors track closely.

1) Fidelity

2) Blackrock Fund Advisors

3) Wellington Management

4) AQR Capital Management

5) Sands Capital Management

6) Brookfield Asset Management

7) Dodge & Cox

8) Eaton Vance Management

9) Grantham, Mayo, Van Otterloo & Co.

10) Geode Capital Management

11) Goldman Sachs Group

12) JP Morgan Chase & Co.

13) Morgan Stanley

14) Manulife Asset Management

15) RCM Capital Management

16) UBS Asset Management

17) Barclays Global Investor

18) Epoch Investment Partners

19) Thornburg Investment Management

20) Legg Mason (Bill Miller)

21) Kornitzer Capital Management

22) Batterymarch Financial Management

23) Tocqueville Asset Management

24) Neuberger Berman

25) Winslow Capital Management

26) Herndon Capital Management

27) Artisan Partners

28) Great West Life Insurance Management

29) Lazard Asset Management 

30) Janus Capital Management

31) Franklin Resources

32) Capital Research Global Investors

33) T. Rowe Price

34) First Eagle Investment Management

35) Frontier Capital Management

36) Akre Capital Management

37) Brandywine Global

38) Brown Capital Management

39) Victory Capital Management

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Addenda Capital

2) Letko, Brosseau and Associates

3) Fiera Capital Corporation

4) West Face Capital

5) Hexavest

6) 1832 Asset Management

7) Jarislowsky, Fraser

8) Connor, Clark & Lunn Investment Management

9) TD Asset Management

10) CIBC Asset Management

11) Beutel, Goodman & Co

12) Greystone Managed Investments

13) Mackenzie Financial Corporation

14) Great West Life Assurance Co

15) Guardian Capital

16) Scotia Capital

17) AGF Investments

18) Montrusco Bolton

19) CI Investments

20) Venator Capital Management

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I the track activity of some pension funds, endowment and sovereign wealth funds. I like to focus on funds that invest in top hedge funds and have internal alpha managers. Below, a sample of pension and endowment funds I track closely:

1) Alberta Investment Management Corporation (AIMco)

2) Ontario Teachers' Pension Plan

3) Canada Pension Plan Investment Board

4) Caisse de dépôt et placement du Québec

5) OMERS Administration Corp.

6) British Columbia Investment Management Corporation (bcIMC)

7) Public Sector Pension Investment Board (PSP Investments)

8) PGGM Investments

9) APG All Pensions Group

10) California Public Employees Retirement System (CalPERS)

11) California State Teachers Retirement System (CalSTRS)

12) New York State Common Fund

13) New York State Teachers Retirement System

14) State Board of Administration of Florida Retirement System

15) State of Wisconsin Investment Board

16) State of New Jersey Common Pension Fund

17) Public Employees Retirement System of Ohio

18) STRS Ohio

19) Teacher Retirement System of Texas

20) Virginia Retirement Systems

21) TIAA CREF investment Management

22) Harvard Management Co.

23) Norges Bank

24) Nordea Investment Management

25) Korea Investment Corp.

26) Singapore Temasek Holdings 

27) Yale Endowment Fund

Below, CNBC's Leslie Picker highlights 13F filings which include investments in retailers. She also highlights Berkshire Hathaway's new stock positions from their fourth-quarter 13F filing.

Hope you enjoyed reading this comment. As always, please remember to kindly donate or subscribe to this blog on the top right-hand side, under my picture and show your support for the work that goes into these comments. I thank all of you who value my efforts and support my blog through a monetary contribution, it's greatly appreciated.

Thursday, February 15, 2018

Are US Public Pensions The Next Crisis?

Katherine Chiglinsky of Bloomberg reports, Next Crisis in Finance May Be Public Pensions, $1.2 Trillion Asset Manager Says:
What’s on the list of concerns for a man who runs a $1.2 trillion asset manager? Swelling shortfalls in U.S. public pensions, according to PGIM Chief Executive Officer David Hunt.

“If you were going to look for what’s the possible real crack in the financial architecture for the next crisis, rather than looking in the rearview mirror, pension funds would be on our list,” Hunt said Friday in an interview. Pressure on municipalities and states will intensify in a downturn when local tax revenues decline and unemployment worsens, he said. “So we’re worried about those pension obligations.”

Lawmakers from New Jersey to Illinois to California are struggling to fill shortfalls. U.S. public pensions had 71.8 percent of assets required to meet obligations to retirees as of the fiscal year ended June 2016, according to a report by the Center for Retirement Research at Boston College.

PGIM, owned by Newark, New Jersey-based Prudential Financial Inc., counts 147 of the 300 largest global pension funds among its clients. Hunt said that corporate funds generally do a better job than their public counterparts.

Hunt acknowledged that it’s harder in the public pension space where lawmakers set the benefits and the fund managers are tasked with generating enough return to cover those promises. Still, he said he has advised public-pension clients to stop looking for the highest-return hedge fund and “start doing what the corporate folks have long been doing, which is to find ways to minimize the deficit and to take risk gradually off the table.”

Hunt joined Prudential in 2011 from McKinsey & Co. He’s doubled assets under management, renamed the business PGIM and bought a Deutsche Bank AG unit to expand in India.

In the interview, Hunt also said he’s seeing a shift in equities markets as more firms pursue private funding and initial public offerings “remain remarkably muted.” The number of publicly traded U.S. companies shrank from more than 8,000 in 1996 to about 4,300 in 2016, according to Ernst & Young.

“More than any other period in our history we’re going to have companies that are owned by private equity rather than the public equity markets,” Hunt said. “The dynamism and growth of the economy is now more and more being captured privately and by institutions rather than actually available for you to own in your 401(k) account or for other public markets.”

Hunt said he doesn’t expect a wave of combinations among asset managers, even as some have predicted that fee pressure could provoke more tie-ups such as the merger of Janus Capital Group Inc. and Henderson Group Plc. Even as the equity business suffers, it hasn’t gotten bad enough to spur more mergers and acquisitions, he said.

“If you’re a modestly scaled equity business right now you’re having a hard time, but you’re not losing money yet,” he said. “You’re more likely to have what I’ve kind of called the field of zombies. You have these firms, they don’t disappear. They stop growing and maybe they’re even shrinking, but they carry on.”
I love these Bloomberg articles that discuss pensions and never mention me or my blog. Anyway, it was almost a year ago that I discussed whether collapsing US pensions will fuel the next crisis and followed that comment up with a discussion on the $400 trillion pension time bomb.

There are big problems at US public pensions. Illinois has one of the worst public pension systems but there are plenty of others that aren't far behind.

More worrisome, US public pensions are taking increasingly dumb risks to achieve their unrealistic investment targets based on rosy investment forecasts. Gregory Zuckerman, Gunjan Banerji and Heather Gillers of the Wall Street Journal report, Harvard, Hawaii Gambled on Market Calm—Then Everything Changed:
A decade of low bond yields pushed some of the most stability-minded investors to dabble in risky investments that depended on markets being orderly. Now, those bets are looking problematic.
You can read the entire article here but there's nothing shocking in it except that endowment funds and public pensions were betting the silence of the VIX would continue indifinitely and they basically got their head handed to them like many others picking up pennies in front of a steamroller.

In my market comment last Friday looking at whether it's a correction or something worse, I stated this:
You will notice I avoided discussing the blowup in the XIV and a bunch of nonsense short-volatility ETNs because quite frankly, I'm happy this garbage died as the silence of the VIX came to a screaming halt.

As far as other vol blowups this week, I think AQR's Cliff Asness nailed it in his tweet below:

Karl Gauvin of OpenMind Capital here in Montreal shared similar views with me in an email yesterday:

Amazing how peoples don't know how to manage VIX futures! If you manage a short VIX strategy you need to have a Stop Loss set at 2 points of Vol to avoid going belly up. Using this with Volatility Regime is an additional feature that adds value. And even more important, the short VIX futures position should always be covered by a long deep out of money call option on the VIX...with at least 3-month maturity.

With our vol signal, we would have bought back all our VIX futures last Friday. Too bad I have stop trading this strategy last year.
You can read Karl's volatility regime update on LinkedIn here.

All this to say, stop reading hyper sensational scary stories on Zero Hedge about how the volatility blowups will cause the next market crash. If anything, these blowups are a good thing, got rid of a lot of garbage that needed to be exterminated, and allows the market to resume its long-term uptrend on more solid footing.
There are a lot of US public pensions that have no clue what they're doing shorting volatility and I'm not sure the geniuses at Harvard's mighty endowment fund are any better.

They definitely should talk to Karl Gauvin and Paul Turcotte at OpenMind Capital who have solid quantitative experience in this space and have worked at large pensions and asset management firms.

Another guy they should talk to is Bryan Wisk of Asymmetric Return Capital. Bryan worked at top hedge funds and is an expert in structuring trades to properly hedge against disaster risk without bleeding returns. He sent me this message last night:
The sad irony of the Arc mission is that some pension funds not only didn’t care to hedge, they doubled down on short vol.  The only blessing is that these articles are being written in the context of a minor correction. Imagine an actual bear market.  Hopefully, these funds have time to at least redeem from the frauds who sold the trustees on these strategies as a way to make up for the return shortfall elsewhere in the portfolio.
I'm not shocked that US public pensions are taking increasingly dumber risks. Canada's large public pensions have been piling on the leverage but the difference is they know what they're doing and aren't shorting volatility outright through the XIV (who knows, maybe some did but I doubt it).

What shocks me is that they're right back at it, selling volatility (shorting it), ignoring the danger of irrational complacency. This is what I find quite disturbing, especially given my Outlook 2018: Return to Stability, where Francois Trahan and I warned investors to hunker down, get more defensive and prepare for higher volatility.

Below, Gregory Zuckerman, Wall Street Journal special writer, looks into pension funds and how fund managers are taking more risks with volatility trading. Listen to what he says, very interesting and quite disturbing.

And Quadratic's Nancy Davis, who predicted that the popular low volatility trade would implode, says the market will remain turbulent for some time. "It's created a very large exposure of short volatility, and I think it's created a huge opportunity for actually owning volatility," said Davis, Quadratic's managing partner and chief investment officer. "The market's not settled down, we're not in smooth sailing anymore. People are still in the buy-the-dip mentality."

Mrs. Davis isn't the only guru who thinks the current market calm is an illusion. We'll see, after a rocky week, the VIX has plunged back down below 20 as stocks have taken off again, but it's too early to tell whether volatility will remain low for the remainder of the year (I wouldn’t bet on it).

Wednesday, February 14, 2018

No Love For PSP's Former CEO?

This is a bilingual comment so bear with me. André Dubuc of La Presse reports, Investissements PSP: 50 dirigeants licenciés, des millions en indemnités:
Un important gestionnaire de caisses de retraite publiques situé à Montréal a remercié 50 de ses dirigeants durant le court règne de son PDG, malgré d'excellents résultats financiers. Près de 25 millions en indemnités et primes ont dû être versés aux cadres licenciés.

Le moins que l'on puisse dire est que le mandat d'André Bourbonnais n'a pas été un long fleuve tranquille à la tête du gestionnaire d'actif des caisses de retraite des fonctionnaires fédéraux, des Forces armées canadiennes et des policiers de la Gendarmerie royale du Canada.

M. Bourbonnais vient d'ailleurs de quitter Investissements PSP pour aller diriger un projet dans le secteur des investissements alternatifs chez BlackRock, à New York, un géant mondial de la gestion d'actif.

En moins de trois ans, de son arrivée en poste le 1er avril 2015 à janvier 2018, M. Bourbonnais a vu 87 cadres quitter la boîte, indique PSP dans une réponse à une demande d'accès à l'information formulée par La Presse. Parmi eux, pas moins de 50 employés de niveau supérieur à directeur ou « manager » ont été remerciés. En 2015, PSP comptait 239 cadres de ce niveau.

Des 19 VP que comptait PSP à l'arrivée de M. Bourbonnais, 10 sont partis depuis : 3 de leur propre chef et 7 se sont fait montrer la porte.

Chez PSP, on qualifie ce taux de roulement de « conforme » à ce qu'on voit dans l'industrie financière.

Pareil nettoyage vient avec une facture salée. PSP a dû verser 15 millions en indemnités de départ aux personnes licenciées. À cette somme s'ajoutent près de 9 millions en primes qui ont été déboursées pour les employés qui ont quitté la société ou qui ont été remerciés.

Ces millions se sont ajoutés aux charges de l'entreprise. Les salaires et avantages du personnel ont doublé, passant de 107 millions en 2014-2015 à 210 millions en 2016-2017. Pendant la même période, l'actif sous gestion a crû de 21 %, passant de 112 milliards à 135,6 milliards.


M. Bourbonnais a été engagé en 2015 pour mener l'organisation à un niveau supérieur, disent des sources tant à l'intérieur qu'à l'extérieur de l'organisation. Créé en 1999, Investissements PSP est toujours en phase d'accumulation de capital, une situation qui commandait des ajustements. Son départ subit a déçu le conseil d'administration, qui est satisfait de son travail, a-t-on appris.

Des changements, il y en a eu sous M. Bourbonnais. Le nombre d'employés est passé de 600 à 800, dont 300 cadres. Il a réorganisé le groupe de placements privés, a créé la catégorie des titres de créances privées, et PSP a ouvert ses deux premiers bureaux à l'étranger : New York et Londres.

Le patron a toutefois profité de l'occasion pour faire maison nette, même si PSP connaissait des résultats financiers à faire pâlir d'envie tout gestionnaire d'actif.

Avant avril 2015, PSP avait battu son indice de référence cinq années de suite. Par exemple, son rendement avait de 15,9 % en 2013-2014 et de 14,2 % en 2014-2015. À la décharge de M. Bourbonnais, les bonnes années se sont poursuivies sous son règne. PSP a fini l'exercice financier 2016-2017 avec un rendement de 12,8 %.


Autre constat, PSP a pourvu des postes-clés par des personnes de confiance de M. Bourbonnais, sans faire faire appel à des firmes de recrutement.

Ce fut le cas notamment pour les postes de chef de la direction financière et de premier vice-président et chef mondial des marchés privés, respectivement attribués à Nathalie Bernier et Guthrie Stewart. MM. Stewart et Bourbonnais se connaissent depuis au moins 20 ans, à l'époque de Téléglobe.

Aucune firme de recrutement n'est intervenue non plus dans le processus menant à l'embauche de François Dufresne comme directeur principal, placements privés, et de Simon Marc, directeur général, placements privés, confirme l'organisation dans sa réponse à la demande d'accès à l'information.

PSP soutient suivre un « processus rigoureux » d'embauche.

C'est un vétéran de l'organisation, Neil Cunningham, qui remplace M. Bourbonnais au siège social de l'organisation, au 1250, boulevard René-Lévesque Ouest, au centre-ville de Montréal. M. Cunningham était auparavant PVP, chef mondial des placements immobiliers et ressources naturelles.

- Avec William Leclerc, La Presse



Ancien vice-président directeur, directeur de l'exploitation et chef de la direction financière

Départ : 2015

Ce qu'il est devenu : vice-président directeur et chef de la direction financière globale chez Fiera Capital


Ancien vice-président principal, investissements infrastructures

Départ : décembre 2015

Ce qu'il est devenu : administrateur de la Banque de l'infrastructure du Canada


Ancien premier vice-président, ressources humaines

Départ : 2016

Ce qu'il est devenu : premier vice-président et chef des ressources humaines chez Fiera Capital


Ex-vice-président à la direction et chef des placements

Départ : 30 juin 2017

Ce qu'il est devenu : vice-président principal, marchés publics, chez bcIMC
Boy, I tell you, it's Valentine's Day but there's no love for PSP's former president and CEO, André Bourbonnais, in this hatchet job of an article, one that I would expect to read in Le Journal de Montréal right next to some article entitled "He embezzled funds to feed his cocaine and gambling habit."

"Tabarnak, maudit André Bourbonnais!" The knives came out quickly after he announced he's headed to BlackRock and it's quite evident someone fed Dubuc this information to settle a score (I suspect someone in the article was behind this but it could have been plenty of other people who wanted to settle a score).

So what's all this about? First, let me give you the gist of the article. It's all about how during the short three year tenure of André Bourbonnais, several key senior officers and many directors at PSP were fired despite good results and it ended up costing the organization a grand total of roughly $50 million in settlements, deferred bonuses and legal fees ($25 million for the senior officers that were let go, and another $25 million for senior directors and other employees that were let go over the last three years).

To be sure, there is nothing new here for me but reporters don't bother reading my blog or calling me because if they did, they would have realized this has been going on a long time at PSP and a lot of those multimillion dollar settlements were a direct result of its former president and CEO, Gordon Fyfe, who is now the president and CEO of bcIMC.

Importantly, it was under Gordon Fyfe's watch that compensation at PSP reached extreme levels before the government stepped in to cap total compensation at senior levels, and it was under Gordon's watch that senior officers signed iron clad contracts which granted them big settlements if they were fired for any reason other than performance.

From the people named in this article, John Valentini (PSP's former CFO and interim CEO before Bourbonnais was placed in the top job) and Bruno Guilmette (PSP's former head of infrastructure) made millions in their settlement. Guy Archambault was the former senior VP of Human Resources. I suspect he got a nice package too but nothing compared to other senior officers who were responsible for investments and finances.

Another person who "departed" PSP soon after Bourbonnais took over was Derek Murphy, the former senior VP of Private Equity. He wasn't mentioned in the article but knowing Derek, I guarantee you he extracted a pound of flesh from PSP when it came to his settlement (it may still be tied up in court).

Daniel Garant, PSP's former CIO left the organization and joined Gordon Fyfe at bcIMC. It's unclear why he left as he was routinely being touted as the next in line to take over the top job but if he was let go, it cost PSP millions in a settlement.

Jim Pittman, a former VP in Private Equity, also left PSP to join Gordon at bcIMC where he's now the head of private equity at that organization. It's my understanding that Jim left on his own and in good terms.

There were a lot of other people that left PSP over the last three years after André Bourbonnais took over and it was a messy and stressful process.

What are my thoughts in all this? First, I lived through my own hell when I was abruptly let go from PSP back in October 2006, and trust me, I didn't get a multimillion dollar settlement even though my lawyer at the time was imploring me to go to court to protect my future (lawyers are good at giving advice which feeds their pocket).

I don't take any pleasure watching people get fired, none whatsoever, even people who I couldn't care less about and think they had it coming. When I left PSP in 2006, the turnover rate was 36%, an astounding figure for a large Crown corporation which manages the pensions of federal government employees.

Keep in mind, this is a public pension fund with a very long investment horizon and a Crown corporation managing hundreds of billions, not some rinky-dink money management outfit where some tyrant in charge is firing and hiring people at will.

When I was investing in hedge funds at the Caisse, I would regularly look at the turnover rate because if it was high, it signalled a problem and immediately raised concerns. I don't care if it's in the font office, back office, middle office, if you see a high turnover rate, it's not a good sign and signals a cultural problem at the organization.

So what happened at PSP soon after André Bourbonnais took over? I suspect he took the job on condition that he has free rein to hire and fire people at will, which he did, and place his own people in key positions. His predecessor, Gordon Fyfe, did the exact same thing and in all these big shops, whenever a new CEO comes in, there is a period of disruption.

That's the way it goes at these big shops, the minute a new CEO takes over, they typically fire people and place people they trust in key positions. It's understandable on one level but when it's taken to an extreme, it's demoralizing and can severely impact the morale of employees.

Do I agree with every HR move André Bourbonnais did at the senior level after he took over PSP? Of course not, I think he should have kept Bruno as the head of infrastructure and even though Derek Murphy had his boxes packed once André was named CEO, I'm surprised Guthrie Stewart was named head of Private Markets (not someone who had the requisite experience for this senior job but obviously someone who André trusted and knew well and he did a decent job but wasn't really tested).

As far as John Valentini and Guy Archambault, the writing was on the wall. John was vying to become PSP's next president so there was no way he was going to be kept as the CFO and Guy wasn't André's choice and had a mixed track record at PSP. So I wasn't shocked to see them let go but all it took was one phone call from Gordon Fyfe to his friend and mentor, Jean-Guy Desjardins, and they both landed nicely on their feet at Fiera Capital where they enjoy senior jobs after getting a big settlement from PSP.

Knowing Gordon, he coached them and orchestrated all this from Victoria. In fact, one senior director who was let go from PSP and had conversations with Gordon shortly after he left PSP told me that Gordon asked him "Was everything I did at PSP so wrong?". Goes to show you, there are big egos involved at the top jobs at some of these big shops and Gordon didn't take too kindly to Bourbonnais's management style (I'm sure the feeling is mutual).

Anyway, what really irks me in all this is that while I believe in competitive compensation at Canada's large pensions, I also believe they've taken it to an extreme and these multimillion dollar settlements are a gross abuse of a system which tries to maintain no government interference.

Sure, an argument can be made that senior officers need protection from a new CEO who can fire them at will, and no doubt in some cases they definitely do, but when you see $50 million in settlements over the last three years, you wonder what the hell was going on and why are settlements for senior officers so egregious even by private sector standards.

It's nuts. Not only do they get multimillions in compensation if they deliver on their targets, they can also collect multimillions if they get fired for any reason other than performance.

And remember, they are managing billions from captive clients, not hustling to market themselves to get new clients like most fund managers do.

The people in Ottawa are paying close attention to all this. The civil service union contacted me earlier today telling me they were shocked when they read this article and wanted my thoughts.

Of course, anyone working hard, putting in long hours for an honest day's work is reading this thinking these senior officers at PSP and other shops have it really good. And they're right, they most certainly do.

There is another André not mentioned in this article, André Collin who was Neil Cunningham's predecessor at PSP heading up real estate investments before leaving to join John Grayken's Lone Star where he's now the president of the fund. That André now enjoys hundreds of millions in compensation and has become one of Canada's richest people running this powerhouse real estate fund (not saying he didn't work hard to get the top job at Lone Star but nobody ever asked how he was hired away from PSP after investing billions in Grayken's funds, a small governance issue that was conveniently ignored).

All this to say that André Dubuc's article was a hatchet job that fails to look into the entire history at PSP which led to these millions in settlements. I agree, there are a lot of things André Bourbonnais did wrong and he abused his power to a certain degree but the truth is they all do, it's a free-for-all at the senior levels of these big shops and there is a tremendous amount of backstabbing that takes place.

Still, it's easy for me to be highly critical from the outside, truth is when you're the president and CEO, you have a lot of stress and the pressure to perform is intense. You need to place key people in senior positions, people you trust and and can count on in good and bad times.

And while I don't agree with all his moves, André Bourbonnais did manage to diversify his senior management team and place women in high positions, something Gordon never thought about or didn't take seriously (they both didn't hire any people with disabilities and I'm not holding my breath that this will ever change).

Lastly, let me be clear here, André Bourbonnais isn't my friend and neither is Gordon Fyfe. Nobody is my friend. I write things the way I see them and I'm brutally honest which is why so many people read this blog. I don't have a monopoly of wisdom nor do I pretend to know everything about what's going on at these large pensions, but I have a ton of life experience and a perspective that I think is sorely lacking at these big shops.

There are a lot of people working at PSP and other big pensions who think they're entitled to getting big compensation and big bonuses. Enjoy the ride while you can because one day you will realize what I learned long ago, you're not entitled to anything, you have the privilege of occupying a chair and your focus should be entirely on your pension's mission statement and delivering solid long-term results. That's it, that's all.

Below, an old (2009) conversation on CEO compensation with an assistant professor of finance at the University of Maryland's Robert H. Smith School of Business, Michael Faulkender. It's obvious pensions and settlements figure prominently into compensation of senior executives but we need to examine this more carefully and strike a fair balance, especially at Canada's large public pensions.

Update: A former pension fund manager turned fund manager shared this with me after reading this comment:
It sounds like some top pension executives abuse their privileged position more than others.

Your point about managing captive funds is very important. Large pension plans obviously need to pay to attract top talent, but should C-suite executives compensation be several multiples of that of the front-line asset managers that work under them? Shouldn't top pension executive's pay be more closely geared to the fund's investment performance relative to its target return (rather than internally devised benchmarks)?
His comments got me thinking maybe they should publish average and median compensation at these large pensions and the ratio of CEO's compensation relative to the average and relative to front-line asset managers that work under them.

As far as top pension executive's pay being more closely geared to the fund's investment performance relative to its target return (rather than internally devised benchmarks), I believe most big pensions have implemented a compensation system that is geared to the overall fund's investment performance over a four or five-year period.