deutsche bank markets primefinance monthly hedge fund trends - february 2013

Em

erg

ing

Mar

kets

Eq

uity

Eq

uity

L/S

Dis

tres

sed

All

Fun

ds

CTA

/ M

anag

ed F

utu

res

Eve

nt

Dri

ven

Mu

lti-S

trat

egy

CB

& V

ol A

rb

Cre

dit

Mac

ro

Mar

ket

Neu

tral

Fixe

d In

com

e

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

75th Median Average 25th MSCI World

For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: [email protected]

February 2013 Executive summary*

Deutsche Bank Research Highlights: “US housing recovery: Engine of growth in 2013” and “Investor Positioning and Flows: Underweights and Inflows Supporting Equities”Our Global Markets Research team believes that 2012 marked a turning point in the US housing market recovery and expect housing to be an important engine of growth in 2013. They project that house prices will rise 3.9% y/y, and the resulting wealth effect will add about $85 billion to real personal consumption expenditures.

In the second piece, our team notes that despite $100 billion in equity flows over the last 10 weeks, funds still remain underweight. They believe that continued reallocation out of cash could help sustain the torrid pace of equity inflows.

Investor Sentiment In early 2013 investors are showing a renewed interest in fundamental equity l/s and event-driven equity strategies. They believe hedged equity strategies will benefit from an environment in which macro events and government intervention take a backseat. European investors are inquiring about equity l/s, commodities and macro managers, with a keen interest in emerging markets macro.

PerformanceA strong start to 2013 with the global median up 2.23% and all strategies performing positively. Equity strategies performed the best this month, with emerging markets heading the pack (up 3.80%); China l/s and US l/s strategies were particularly impressive, posting gains of 6.28% and 3.81% respectively. January also witnessed an unusually high dispersion of returns with Emerging markets equity between 1.66%-5.73%, event driven between 0.71%-4.82%, and macro between -0.20%-3.44%.

Leverage MSCI World 30-day volatility increased 20% in January, ending the month at 8.88. Gross fundamental equity exposure and net fundamental equity exposure both increased in January, ending the month at 2.41 (up 1.43%) and 0.61 (up 7.96%) respectively.

Securities Lending The start of the year has seen shorts increase in financials and consumer discretionary stocks in Japan, Chinese autos, and Taiwanese firms that form part of Apple’s supply chain. Our stock loan team also witnessed strong demand for Japanese firms Fanuc and Advantest on the back of downward earnings forecast revisions, steady demand in Asian solar names and short covering in US shipping.

Regulatory In January it was confirmed that 11 EU Member States will move forward with an FTT under the enhanced cooperation procedure that is likely to come into effect on 1st January 2014. ESMA announced a cooperation agreement with Brazil under AIFMD, MEPs discussed the potential phasing out of performance fees under the UCITS regime and the European Parliament debated whether alternative investment managers marketing to retail investors should be required to produce a Packaged Retail Investment Products (PRIPs) key information documents (KID) going forward.

In the US, certain derivatives reporting requirements under Dodd-Frank came into effect at the start of the year, while the CFTC extended the comment period on several aspects of derivatives-related regulation. The Office of the Comptroller of the Currency (OCC) announced a two year transition period to comply with the swaps push-out rule that will begin on July 16th 2013.

January 2013 Cumulative Median Performance by Strategy

Global performance

January 2013 Performance Dispersion

0.65%

0.91%

1.00%

1.56%

1.75%

1.95%

2.10%

2.18%

2.23%

2.83%

3.24%

3.80%

5.00%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00%

Market Neutral

Macro

Emerging Markets Equity

Multi-Strategy

CB & Vol Arb

Equity L/S

Fixed Income

Distressed

Credit

CTA / Managed Futures

Event Driven

MSCI World

All Funds

Source: Hedge Fund Intelligence (HFI), February 2013


5 Time Voted No. 1 Prime BrokerGlobal Custodian Prime Brokerage Survey

2012, 2011, 2010, 2009, 2008

Marketing material - For institutional investors only

Markets Prime Finance Monthly Hedge Fund Trends

Deutsche Bank

Median

Emerging Markets Equity 3.80% Multi-Strategy 1.95%

Equity L/S 3.24% CB & Vol Arb 1.75%

Distressed 2.83% Credit 1.56%

All Funds 2.23% Macro 1.00%

CTA / Managed Futures 2.18% Market Neutral 0.91%

Event Driven 2.10% Fixed Income 0.65%

* This document contains extracts and opinions from various departments and business areas within Deutsche Bank, including extracts from Research Reports, as well as from external reports specifically referenced herein. It is not, however, a research piece and has been produced by a front office function. Also, please refer to the body of the document for a more detailed description of and proper references to the topics covered in the Executive Summary section.

mailto:MPF.Trends%40list.db.com?subject=

2


Monthly Hedge Fund Trends - Deutsche Bank Research Highlights


Global Economic Perspectives – US housing recovery: Engine of growth in 2013 1

The continuing housing recovery is critical for US economic growth in2013. Indeed, in addition to the direct implications for residentialinvestment for GDP, house prices are crucial for household and bankingsector balance sheets and, therefore, for consumer spending and creditconditions in the year ahead. We believe that 2012 marked a turning pointin the housing market recovery and expect housing to be an importantengine of growth in 2013. We project that house prices will rise 3.9% y/y,and the resulting wealth effect will add about $85bn to real personalconsumption expenditures.

This constructive view of the housing market is driven by both demandand supply fundamentals. On the demand side, our model projects thathousehold formations will continue to rise to their longer-term average asthe labor market steadily improves. There remain significant upside risksto this view, as the average number of adults per household hascontinued to climb. In addition, housing affordability remains at recordhigh levels, but continuing tightness in lending conditions has meant thathigh affordability has translated into a lower than anticipated increase inhousing demand.

On the supply side, several years of severely depressed homebuildingactivity and improving housing demand has resulted in low levels of newhomes for sale, and the stock of vacant homes has returned back to trendafter increasing substantially during the housing crash. Moreover, theaverage months of supply has returned to pre-housing crisis levels. Thistight housing market portends well for further price increases in 2013.

To be sure, there remain risks in the housing market. Althoughforeclosures and delinquencies have declined significantly from their2008 levels, they remain well above normal values. And even with therecent increase in home prices, nearly 30% of homes with a mortgagehave negative home equity. However, the fundamentals alreadymentioned and our forecast models suggest that, despite these risks,housing will contribute significantly to economic growth in 2013.

House prices are projected to rise about 4% in 2013

Asset Allocation – Investor Positioning and Flows: Underweights and Inflows Supporting Equities 2

The combination of fund managers covering fiscal cliff underweights and $63b in equity flows helped fuel the 5% equity rally in January. With our composite equity beta up notably but still near 3y lows, funds remain underweight despite trailing to start 2013. Long-short equity funds, macro funds and hybrids are closer to neutral, but mutual funds are very underweight. Only 25% of our equity mutual fund sample underperformed in the two-day dip to end January, implying exposure is low. Sector positioning has also neared extremes in Tech and Energy underweights; Healthcare, Discretionary and Staples overweights.

The current pace of $100b in equity inflows the last 10 weeks has surpassed those prior periods when flows returned to equities. Bond funds are also getting moderate inflows as a normal allocation of savings, mainly going to EM and HY. Money market funds are still sitting on $90b of cumulative inflows since October, after cash holdings stayed flat through most of 2012. Some portion of the $31b in money market outflows likely found their way to equities and bonds the last three weeks. Continued reallocation out of cash could help sustain the torrid pace of equity (and bond) inflows, like it did in early 2012.

Funds remain underweight across risk assets

Equity exposure up modestly but remains very underweight − Mutual fund equity exposure is still 7pp underweight;

− Hybrid funds increased exposure notably but remain 4pp underweight;

− Long-short equity fund beta has been modestly below the historical average;

− Macro hedge funds have moved to a 4pp overweight position;

− MFs and HFs significantly overweight Consumer sectors and Health Care; MF positioning in Energy and Tech near historical lows;

− Across regions, all funds except Asia are underweight; US funds most U/W.

Futures and option positioning for rates, FX and commodities − Rates positioning has remained close to neutral;

− Yen falls even as shorts trimmed; EUR net longs increase; GBP longs pared;

− Oil long nears 3y highs; copper long pared; gold long cut; silver longs added.

Big inflows to equities, moderate bond inflows, money markets outflows

Moderate bond inflows last two weeks; big outflows from money markets − Money market outflows of $31b the last three weeks;

− Government bonds saw 9th straight week of outflows, totaling -$5.1b;

− Outflows from IG corporates last 2 weeks; inflows to EM and HY continue;

− Big inflows to floating rate funds; big outflows from longer maturity bonds.

Equity inflow of $19b last week; 10 straight weeks of inflows totaling $100b − Inflows aided by strong $11.3b flows to US; big inflows to US ETFs ($9.7bn)

− Mutual funds get 4th consecutive week of inflows, after 24w of outflows;

− EM equity inflows continue for 21st straight week ($60b cumulative);

− Modest inflows to Japan and Europe;

− Inflows to Cons Goods, Tech, Healthcare; Telecom outflows;

− Big inflows to large cap funds; inflows to small and mid caps as well.

1 Deutsche Bank – Global Markets Research: “Global Economic Perspectives – US housing recovery: Engine of growth in 2013” 30th January 2013. http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3297-4D7B/9283984/DB_GEP_2013-01-31_0900b8c08652f8ba.pdf

2 Deutsche Bank – Markets Research: “Asset Allocation – Investor Positioning and Flows: Underweights and Inflows Supporting Equities” 1st February 2013. http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3449-3478/17814882/Investor_Positioning_and_Flows.pdf

-20

-15

-10

-5

0

5

10

15

20

25

-20

-15

-10

-5

0

5

10

15

20

25

1984 1989 1994 1999 2004 2009 2014

yoy% SAyoy% SA Corelogic house prices

Actual Model forecastOut of sample forecasts

Source: FRB, Census, BEA, Treasury, CoreLogic, BLS, Haver Analytics, DB Global Markets Research


http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3297-4D7B/9283984/DB_GEP_2013-01-31_0900b8c08652f8ba.pdf

http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3297-4D7B/9283984/DB_GEP_2013-01-31_0900b8c08652f8ba.pdf

http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3449-3478/17814882/Investor_Positioning_and_Flows.pdf

http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3449-3478/17814882/Investor_Positioning_and_Flows.pdf

3


Monthly Hedge Fund Trends - Investor Sentiment 3


Interest in fundamental l/s equity and event-driven equity strategiesIn early 2013 we are hearing renewed interest in fundamental long/short equity from all types of investors. The last couple years fundamental valuation has often taken a back seat to macro events and the risk-on/risk-off government manipulation that has made extracting alpha extremely difficult. With managers stating dispersion in equities is widening, it is likely we will see gross exposures ramp up to take advantage of the reversal in correlations experienced over the last couple years. Many investors, while slow to shift assets early in the year, are picking up on this opportunity; and combined with the low interest rates and spread tightening in most credit opportunities, 2013 could see a shift towards hedged equity strategies. Even with renewed interest in the strategy, the preference isn’t necessarily for high net managers, but rather there is increased attention being paid to managers who can demonstrate alpha in their short book. Capacity is also an issue, as the focus towards uncorrelated strategies puts a premium on managers small enough to play in the small-mid cap space.

Further there is renewed interest in less-liquid event-driven equity strategies that are classified as catalyst or activist. Given the underperforming fundamental l/s equity over the past couple years, patient investors with a tolerance of longer lock-ups are seeking managers that can un-lock alpha over longer periods. Clearly a reversal of sentiment post the 2008 liquidity crisis, however investors point to less levered companies with healthy cash reserves.

Midwest bullish on equity strategiesThis month our Midwest team visited St. Louis and Chicago. While many allocators expressed disappointment in how their hedge fund portfolios performed during 2012, most said they still had a high level of conviction in their current stable of managers and hedge funds as an asset class. Several investors commented that they were interested in sourcing new equity long/short managers because they were on the lower end of their typical range of allocation and believed that because the strategy has been out of favor for several years it may be well positioned to rebound this year.

In Chicago, most fund-of-funds are developing a range of strategies to adapt to the challenges facing their industry. An increasingly important area they are focusing on is developing ’40 Act products to tap into the retail space and the increasingly important Defined Contribution market. They view retail money as very “sticky” and potentially very profitable despite the low margins because of the size of the market and the scalability of the products. Several funds also mentioned they are launching vehicles with a more focused-mandate such as start-ups or commodity focused, and continue to push for lower fees to help add-value to their client base. They also continue to develop more customized solutions on both a discretionary and non-discretionary basis to help diversify their business models.

Broad strategy interest in EuropeMeetings with European investors in January have been encouraging, as investors feel that hedge funds have played their desired role in 2012. As such, they continue to see value in a hedge fund allocation within the overall portfolio and are currently discussing where to allocate this year. Much like the global equity markets year-to-date, investors have entered 2013 ready for another solid year of performance. The large range of strategy searches that we have received indicates that investors feel that 2013 should be a healthy environment for alpha generation from a range of hedge fund managers. We have seen several investors actively looking at fundamental equity long/short, commodities and macro managers, with a noteworthy number having a focus on emerging markets macro. A few have mentioned trimming of credit positions after strong performance in 2012. Some European investors have mentioned a preference for niche strategies with less crowded trades and ideas, whilst others have indicated that they are keeping their eyes open for early stage investing opportunities. The European wealth managers continue seek UCITS strategies, as they prioritize onshore regulated vehicles. Their clients also tend to have a preference for more liquid investment terms.

3 From Deutsche Bank’s Hedge Fund Capital Group


4


Monthly Hedge Fund Trends - Performance


Americas

2013 Year to date median performance

Europe


Asia


Americas

January 2013 Performance dispersion of returns

Europe

January 2013 performance dispersion of returns

Asia

January 2013 performance dispersion of returns

US

L/S

Glo

bal

L/S

Dis

tres

sed

All

Fun

ds

Eve

nt

Dri

ven

Mu

lti-S

trat

egy

Cre

dit

CTA

/ M

anag

ed F

utur

es

Fixe

d In

com

e

Mac

ro

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

75th Median Average 25th S&P 500


Em

erg

ing

Mar

kets

Eq

uity

CTA

/ M

anag

ed F

utur

es

Eu

rop

ean

L/S

Glo

bal

L/S

All

Fun

ds

Eve

nt

Dri

ven

Cre

dit

Mac

ro

Mar

ket

Neu

tral

Mu

lti-S

trat

egy

Fixe

d In

com

e

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

75th Median Average 25th Stoxx 600


Ch

ina

L/S

All

Fun

ds

Pan

-Asi

a L/

S

Jap

an L

/S

Asi

a ex

-Jap

an L

/S

Mu

lti-S

trat

egy

Mac

ro

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

75th Median Average 25th MSCI AsiaPac incl Japan


3.81%

5.04%

2.57%

2.16%

1.92%

2.03%

1.75%

1.72%

0.91%

0.69%

4.00% 5.00% 6.00%3.00%2.00%1.00%0.00%

Distressed

2.59%

Credit

Fixed Income

CTA / ManagedFutures

Global L/S

All Funds

Multi-Strategy

Event Driven

S&P 500

US L/S

Macro


0.38%

0.45%

1.02%

1.23%

1.49%

2.05%

2.07%

2.17%

2.62%

2.70%

2.71%

3.84%

0.00% 1.00%0.50% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00%

CTA / Managed Futures

Market Neutral

Emerging Markets Equity

All Funds

Fixed Income

Event Driven

Stoxx 600

Multi-Strategy

Macro

Credit

Global L/S

European L/S


2.12%

2.55%

2.71%

2.98%

3.56%

3.68%

3.75%

6.28%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%

China L/S

MSCI AsiaPac incl Japan

Pan-Asia L/S

Multi-Strategy

Macro

Japan L/S

All Funds

Asia ex-Japan L/S



5


Monthly Hedge Fund Trends - Leverage 4


Global − MSCI World 30 day volatility increased 20% in January, ending the month at 8.88. Gross fundamental equity exposure and net fundamental equity exposure both increased in January, ending the month at 2.41 (up 1.43%) and 0.61 (up 7.96%) respectively.

− The percentage of funds in most net equity leverage bands (-1 – 1.25) have decreased since the beginning of November. However, the percentage of funds in the higher net equity leverage bands (1.25 – 2) has increased.

Global net & gross equity leverage vs. volatility

Global – January 2013 Quarterly change in net equity leverage distribution across funds

2.42.5

2.32.22.12.01.91.81.71.61.51.41.31.21.11.00.90.80.70.60.5

0.30.4

40

30

35

25

20

10

15

5

28 Jun 12

28 Aug 12

28 Sep 12

28 Oct 12

28 Nov 12

28 Dec 12

28 Jan13

28 Jul 12

28 Jan 12

28 Feb 12

28 Mar 12

28 Apr 12

28 May 12

MSCI World 30d Vol

MC

SI W

orld

30

day

His

tori

cal V

ol

Leve

rag

e

Gross Leverage Net Leverage

Source: Deutsche Bank Global Prime Finance Risk, February 2013

16%

8%

0%

-2%

12%

4%

14%

6%

18%

10%

2%

-1 - -0.75

-0.75 - -0.5

-0.5 - -0.25

-0.25 - 00 - 0

.25

0.25 - 0.5

0.5 - 0.75

0.75 - 11 - 1

.25

1.25 - 1.5

1.5 - 1.75

1.75 - 2

01 Feb 13

% o

f fu

nd

s (D

euts

che

Ban

k)

01 Nov12

Source: Deutsche Bank Global Prime Finance Risk, February 2013

4 Deutsche Bank Global Prime Finance Risk, February 2013


6


Monthly Hedge Fund Trends - Securities Lending


Global 5

US % short interest sector change - January 2013

Shorts unwind positions in US shipping names as prices approach 52 week lowsDespite the positive start to stocks in 2013, structural inefficiencies afflicting shipping companies have resulted in increased short interest in many of these names. The outlook for the shipping sector is less optimistic as companies struggle to secure traditional sources of lending. The sector has been under pressure for failing to adapt fast enough to changing market conditions and continues to suffer from excess supply, which has ultimately put downward pressure on rates. While the industry anticipates an increase in global trade, costs are also expected to rise due to an increase in its overall fuel requirement. The names most targeted by shorts in this space include Genco Shipping, Overseas Shipholding Group, Nordic American, Frontline Ltd, and Kirby Corp. Despite the unfavourable outlook, we have seen most shorts unwinding their positions throughout the month as all of these stocks are currently trading at or near their 52 week lows. That being said, liquidity is available for those funds looking to press on further weakness.

Merger arbitrage funds struggle to profit from the Kinder Morgan / Copano Energy deal due to a lack of borrow availability in Kinder MorganIn US mergers & acquisitions, Kinder Morgan Energy Partners announced it will buy natural gas line operator Copano Energy. The deal is the latest in a trend of multi-billion-dollar acquisitions in the US pipeline industry over the past two years as companies look to take advantage of a shortage of pipelines to move gas and gas liquids. The terms of the deal include a stock payout in shares of Kinder Morgan Energy Parnters to long holders of Copano Energy.6 Merger arbitrage funds will struggle to profit from the deal as there is a shortage of Kinder Morgan Energy Partners supply in lending programs to hedge this deal. Due to Kinder Morgan’s classification as a limited partnership (LP), most custodians will not lend due to potential tax implications to the long holder. The lack of borrow supply in Kinder Morgan has prevented the spread from trading tighter from its closing level on the day the deal was announced.

Rally in solarsThe early half of January saw a rally in regional solar stocks with positive sentiment driven by news of Warren Buffet’s $2.5 billion investment in solar projects, coupled with Chinese plans to add 49 gigawatts of renewable energy capacity in 2013. While the desk saw long term shorts covering into the squeeze, short interest remained steady given new client flow shorting into the strength. Two-way action continued through the month for crowded names such as GCL Poly Energy Holdigs and OCI Co Ltd. There were also onshore recalls for Taiwanese solar plays Neo Solar Power Corp and Gintech Energy Corp due to profit taking.

China Metal Recycling suspends trading in response to “strong sell” ratingChina Metal Recycling came into to focus this month when the company suspended trading in response to Glaucus Research rating the company a “strong sell”.7 China Metal Recycling has been a mainstay on our top ten crowded shorts list with 23 days volume short. A new wave of borrow demand resulted from the suspension with borrow fees rising above 20%. A high 68% utilization rate of the borrow pool leaves China Metal Recycling as one of our top squeeze candidates.

5 This material has been produced by the Deutsche Bank Securities Lending Group and must not be regarded as research or investment advice.

6 http://www.reuters.com/article/2013/01/30/us-copanoenergy-kindermorgan-idUSBRE90T04K201301307 http://www.forbes.com/sites/simonmontlake/2013/01/29/chinese-scrap-metal-tycoons-shares-

suspended-for-second-day/8 http://www.bloomberg.com/news/2013-01-28/japanese-stocks-advance-to-2-1-2-year-high-as-yen-

weakens.html9 http://www.bloomberg.com/news/2013-01-28/japanese-stocks-advance-to-2-1-2-year-high-as-yen-

weakens.html10 http://www.bloomberg.com/news/2013-01-28/japanese-stocks-advance-to-2-1-2-year-high-as-yen-

weakens.html11 http://www.bloomberg.com/news/2013-01-23/apple-s-holiday-sales-miss-predictions.html

European % short interest sector change - January 2013

Financials and consumer discretionary sectors in Japan face heightened short interestThe average percentage of shares out on loan across the 225 Nikkei constituents has increased 6% year to date to 726 million shares out on loan. Financials (+27%) and consumer discretionary (+2%) are amongst the sectors seeing the most significant increase in shorts in January. Energy (-33%), healthcare (-14%) and utilities (-9%) have seen the sharpest decrease in shorts this month.

Sharp Corp, Gree Inc, Panasonic Corp and Ricoh remain amongst the top crowded names in Japan for the month of January.

Japanese firms revise earnings forecasts downwardsJapanese firms have been revising down earnings forecasts for March in an environment plagued by slowing demand in China (exacerbated by a diplomatic spat that chilled interest in Japanese products) as well as an ongoing EU debt crisis that has severely crimped consumption in the region. Fanuc fell 17% this month, citing both of the above reasons when it cut its operating profit by 13% to JPY 178 billion ($2 billion).8 Advantest Corp shed 10% year to date, after the chipmaker’s operating profit for the year ending March was expected to miss expectations due to fewer orders from Apple and weaker PC demand.9

US regulators’ probe into batteries manufactured by GS Yuasa drives short interest in its stockGS Yuasa stock is down 27% year to date after US regulators ordered airlines to prove the company’s lithium-ion batteries deployed in Boeing 787 planes are safe, following the emergency landing of Boeing Dreamliner fleets by both All Nippon Air and Japan Airlines earlier this month on reports of problem with the battery.10 The percentage of GS Yuasa out on loan increased 12% year to date, with current levels at 8.3 million shares as reported by Bloomberg.

Chinese autos on the rise on bullish sales forecastsBullish forecasts on Chinese auto sales for 2013 contributed to the rally in Chinese auto stocks in early January. There were spikes in shorting activity into the strength with Guanzhou Automobile Group a constant feature on the daily top shorted stocks list as as a percentage of volume. New borrow demand for Dongfeng Group, Great Wall Motor Co and BYD Co Ltd has emerged.

Disappointing profit and sales growth in Apple drives short interest in its supply chainNews that Apple had its slowest profit growth since 2003 and weakest sales increase in 14 quarters amid rising costs and accelerating competition from Samsung Electronics sparked renewed interest in the Apple supply chain names, Hon Hai Precision Industry Co Ltd, TPK Holding Co and Quanta Computer Inc were stand outs.11

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Healthcare

Cons Disc.

Materials

Info Tech

Industrials

Utilities

Cons. Stap

Financials

Telecom

Energy

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Materials

Energy

Utilities

Telecom

Industrials

Cons Disc.

Healthcare

Cons. Stap

Info Tech

Financials

Source: Data Explorers & Deutsche Bank, February 2013 Source: Data Explorers & Deutsche Bank, February 2013


http://www.reuters.com/article/2013/01/30/us-copanoenergy-kindermorgan-idUSBRE90T04K20130130

http://www.forbes.com/sites/simonmontlake/2013/01/29/chinese-scrap-metal-tycoons-shares-suspended-for-second-day/

http://www.forbes.com/sites/simonmontlake/2013/01/29/chinese-scrap-metal-tycoons-shares-suspended-for-second-day/

http://www.bloomberg.com/news/2013-01-28/japanese-stocks-advance-to-2-1-2-year-high-as-yen-weakens.html






http://www.bloomberg.com/news/2013-01-23/apple-s-holiday-sales-miss-predictions.html

7


Monthly Hedge Fund Trends - Regulatory 12


AIFMD – ESMA announces cooperation arrangement with BrazilIn January, the European Securities and Markets Authority (ESMA) announced a cooperation arrangement with Brazil under the Alternative Investment Fund Managers Directive (AIFMD). The AIFMD enters into force on 22 July 2013, with a one year transition period, in advance of which ESMA must negotiate cooperation agreements on cross-border supervision with relevant non-EU authorities. Under AIFMD, alternative investment funds from third countries will only be allowed access to the EU market if their home country regulators have cooperation agreements with their EU counterparts. The announced agreement, with the Brazilian Comissão de Valores Mobiliários (CVM) covers Brazilian investment funds that manage or market alternative investment funds (AIFs) in the EU and EU alternative investment fund managers (AIFMs) that manage or market AIFs in Brazil.

UK Treasury publishes a consultation paper on the transposition of AIFMDIndividual Member States must also transpose the AIFMD in national law by the July deadline. In January, the UK Treasury published a consultation paper on the transposition of the AIFMD in the UK, indicating that it will take a “copy-out” approach wherever possible in order to minimise the regulatory burden. The UK Treasury consultation paper is open for comment until 27th February 2013. ESMA clarifies certain aspects of the Regulation on Short Selling and Certain Aspects of CDS (SSR)On 30th January, the European Securities and Markets Authority (ESMA) published a revised Questions & Answers (Q&A) document clarifying a number of aspects of the Short Selling Regulation. The Q&A complements the sections relating to the scope of the SSR, such as the treatment of ETFs and ADRs/GDRs, the calculation of net short positions, the treatment of derivatives on sovereign debt with respect to duration adjustment and a new section dedicated to the application of the restriction on uncovered CDS positions. ESMA Guidelines on the market making exemption were published on 1st February and are expected to apply in Q2 2013.

The technical standards relating to the European Market Infrastructure Regulation (EMIR) are expected to enter into force in MarchThe regulatory and implementing technical standards were adopted by the European Commission on 19th December and passed to the European Parliament (EP) and Council for approval. The EP considered rejecting two of the standards, but the motion did not get sufficient support. As a compromise, the European Commission have committed to issuing a set of “FAQs” to clarify the issues in relation to timely confirmations and setting the clearing thresholds for non financial counterparties. The Commission will also issue a Memorandum of Understanding to improve its interaction with the Parliament on the rulemaking process going forward. The technical standards related to clearing, reporting and CCPs are likely to come into force in March 2013.

The margin requirements for non centrally cleared derivatives were due to be finalised by the end of 2012 are now expected to be subject to further consultation. BCBS- IOSCO, who initially issued proposals last July for universal two way exchange of initial and variation margin by all financial firms and systemically important non financial entities are now expected to consult again on a revised set of proposals within the coming weeks.

MEPs discuss the phasing out of performance fees under the Undertakings for Collective Investment in Transferable Securities (UCITS) regimeNegotiations are continuing in the European Parliament around the review of the UCITS directive which introduces new policies and practices for remuneration, a sanctions regime and increased depository liability. A debate was held on 22nd January in which MEPs discussed performance fees and depository liability. Some MEPs expressed a desire to see performance fees phased out, whilst others are in favour of retaining them. Some MEPs also want stricter liability for UCITS depositories when compared to the AIFMD. A compromise will now be prepared and the relevant committee is due to vote to adopt a position on 25th February. A final text will have to be negotiated with the European Council, who do not currently have any meetings planned. It is uncertain when a final agreement will be reached.

Alternative Investment Managers marketing or selling to retail investors might be required to produce a PRIPS KID going forwardThe European Parliament are currently debating the European Commission’s proposal to update the PRIPS regulation which sets the regulatory framework for key information documents (KID) for a variety of investment products. MEPs held a debate in January to discuss potential amendments to the legislation. Whilst the Commission’s proposal was limited to “packaged” retail investment products only, MEPs from all the political groups were in favour of extending the scope of the regulation – but with disagreement on how far. Pervenche Berès MEP, the rapporteur for the legislation, has expressed a desire for the KID to apply to all savings or investment products, including shares, life insurance and bonds, but as in the European Commission (EC) proposal, certain insurance and pension products are excluded. Alternative Investment Managers marketing or selling to retail investors would also potentially be required to produce a PRIPS KID under the Commission’s proposal.

MEPs will submit their amendments in early February and then the ECON Committee will vote on the Parliament’s final position at the end of March. The final PRIPS text will then have to be agreed in negotiation with the EU Council and EC later in the year.

Capital Requirements Directive (CRD IV) still in the final stages of trilogue discussionThe implementation of the Basel III standards in Europe (CRD IV), which cover among other things increased quality and quantity of capital, short- and long-term liquidity ratios and the possibility of an introduction of a 3% leverage ratio, is still in the final stages of trilogue discussion between the European Commission, Parliament and Council. Agreement is expected to be reached in March, with implementation expected to take place from 1 January 2014.

European Council votes in favour of the EU FTT under Enhanced Cooperation Procedure, while Italy and Portugal plan to unilaterally introduce a FTTThe European Council voted in favour of an Enhanced Cooperation Procedure (ECP) for the EU FTT on 22nd January. This opens the way for the eleven participating Member States (France, Germany, Austria, Belgium, Spain, Portugal, Italy, Slovakia, Slovenia, Greece and Estonia) to commence discussions, but first the EU Commission must formally bring forward a proposal. This is not expected before mid-February. It is likely to apply the FTT to a wide range of cash and derivative transactions, where a counterparty is “resident” in a participating Member State.

Separately, a number of Member States including Italy and Portugal have announced plans to unilaterally introduce FTTs as part of their 2013 budgets. The Italian FTT will apply from 1st March 2013 to purchases of shares and similar securities, including ADRs and conversions to existing shares, from Italian issuers. This will be set at 0.1% for transactions on regulated markets or multi-lateral facilities and at 0.2% for OTC transactions. There are exemptions for share issuance, securities lending and repos, market-making, supporting underwriting, intra-group transactions, listed firms under a EUR 500 million market cap and “subjects merely interposed in the execution of a transaction.”

The law also includes a tax on derivatives related to the securities covered by the FTT, to apply from 1st July 2013. The rate at which they would be taxed is to be determined but will be a fixed amount which varies by the nature and notional value of the contract. The law also includes a 0.2% duty on significant modification and cancellation of electronic orders in a short time frame for instruments covered by the FTT.

The Portuguese tax will apply to the purchase and sale of financial instruments, such as equity shares, bonds, money market instruments, units in investment funds, structured products and derivatives, and conclusion or modification of derivatives. It also makes provision for a special regime to target high frequency trading. The maximum tax rate is 0.3% for most cash and derivative products, but 0.1% for HFT. The tax will become effective during 2013, although the exact date is not currently known.

12 Deutsche Bank Government & Regulatory Affairs Group This is a summary of some of the themes underlying recent regulatory developments affecting hedge funds and their managers. It does not purport to be legal or regulatory advice and must not be relied on for that purpose. Deutsche Bank is not acting and does not purport to act in any way as your advisor. We therefore strongly suggest that you seek your own independent advice in relation to any legal, tax, accounting and regulatory issues relating to the merits or otherwise of the products and services discussed.


8


Monthly Hedge Fund Trends - Regulatory


CFTC extends comment period on several aspects of derivatives-related regulationThe US Commodity Futures Trading Commission (CFTC) extended the comment period for their proposed rule on enhancing protections for customers and customer funds held by futures commission merchants(FCMs) and derivatives clearing organizations (DCOs) from January 14th to February 15th. Market participants continue to await further developments with respect to requirements for swap execution facilities and block trades, as well as margin requirements for uncleared swaps. Developments on the latter are likely to be influenced by international developments, with BCBS-IOSCO expected to issue another set of proposals for public comment in the coming weeks. The US Securities and Exchange Commission (SEC) extended the comment period for their proposed rule on capital, margin and segregation requirements from January 22nd to February 22nd.

Swaps push-out provision transition period to begin on July 16th, 2013In early January, the Office of the Comptroller of the Currency (OCC) published guidance on the transition period for the swaps push-out provision of the Dodd-Frank Act, which prohibits banks that are designated as swap entities from using the federal assistance they receive -- such as federal deposit insurance or access to the discount window -- to support certain swaps activities. The OCC’s guidance states that insured Federal depository institutions can request up to a two-year transition period, which would begin on July 16th 2013, to comply with the swaps push-out rule.

Derivatives reporting obligations under Dodd-Frank take effectThe Dodd-Frank derivatives reporting requirements for interest rate and credit asset classes took effect at the beginning of the year and reporting will begin for equity, foreign exchange and other commodities swaps on February 28th, 2013 for swap dealers and major swap participants. Central clearing requirements will be phased-in beginning March 11th for swaps between swap dealers and major swap participants in asset classes deemed subject to the central clearing requirement by the CFTC.

SEC intends to publish money market funds reforms by the end of MarchOutside of derivatives, the US Financial Stability Oversight Council (FSOC) on January 15th extended the comment deadline from January 18th until February 15th for their proposed rules on money market fund (MMF) reform. The FSOC proposed in November three recommendations for structural reform of MMFs, including a floating net asset value (NAV), a stable NAV combined with a NAV buffer and “minimum balance at risk,” and a stable NAV combined with a NAV buffer and other measures. The FSOC released these recommendations after disagreement within the SEC prevented the SEC from advancing proposed rules. On January 16th, SEC Commissioner Daniel Gallagher suggested a consensus is forming within the SEC and indicated his intention to publish rules on MMFs by the end of March.


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d

2013

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lear

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ob

ligat

ion

sta

rts

(Q2

2013

)

2014

2013

2015


10


Monthly Hedge Fund Trends


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