Brief: The economic shock of Covid-19 has left the world's largest economies grappling with rising inflation on the one hand and lower-for-longer interest rates on the other, as governments strive to control high levels of debt. At the same time, monetary and fiscal support during the pandemic has left many traditional income-generating assets with high valuations, making it harder for investors to find reliable income sources at a reasonable price. According to Alfred Murata, managing director and portfolio manager at PIMCO, fixed income investors today find themselves in a more difficult position than during the spring of 2020, when credit valuations were at attractive levels. In contrast, the current environment requires a delicate balancing act between achieving an attractive level of yield and going too far up the risk spectrum. "The more generic, plain vanilla assets have seen a lot of support from central banks over the past year, so the valuations of these assets are not as compelling today," explains Murata. "You have to work harder to generate attractive returns in this environment."
Brief: Australia's unemployment rate has dropped sharply after lockdowns, with employers scrambling to hire staff. Official ABS data shows the unemployment rate dived from 5.2 in October to 4.6 per cent in November, after lockdowns had ended in New South Wales, Victoria and the ACT. The drop came despite a massive increase in the percentage of people in work or looking for it, with a whopping 366,100 extra people estimated to have been in work last month. AMP Capital chief economist Shane Oliver said the participation rate of 66.1 per cent marked a big difference between the post-COVID recovery in Australia and the US. "The near-record participation rate contrasts with that in the US where it is running well below pre-COVID levels," he noted. Other labour market indicators were also positive, with underemployment dropping from 9.5 to 7.5 per cent and hours worked up 4.5 per cent. Dr Oliver said all the indications were that the current jobs recovery would continue, with "businesses having to scramble for workers in some industries and not wanting to let them go". "Strong levels for job postings and hiring intentions point to a continuing tightening in the labour market," he added.
Brief: As the COVID-19 pandemic continued to sow uncertainty and volatility in the financial markets over the last year, participants in the hedge fund industry took refuge in familiar deal terms and experienced managers, but also hedged their bets and allocated to newer managers, according to a study by the law firm Seward & Kissel LLP that examines the industry’s use of side letters. The Seward & Kissel 2020/2021 Hedge Fund Side Letter Study, released today, revealed strong side letter activity in the midst of the pandemic, with investors continuing to allocate funds to mature managers, whose average regulatory assets under management in the study increased from $5.1 billion last year to $6.3 billion this year—while still engaging with newer managers (those with less than two years of experience), as it appears investors have become comfortable with the "new" fundraising environment and leveraged virtual manager and diligence meetings. The study also indicates that in a return to past form, funds of funds once again became the most common type of side letter investor, reversing a downward trend of recent years. Additionally, the consistently popular fee discount clauses continued to be a common term used in side letters, tied this year with most-favored-nation clauses.
Brief: Most hedge funds are now moving to a permanent hybrid working environment as a result of the Covid-19 pandemic, but concerns over team-building, collaboration and decision-making remain, as more managers look to expand their product offering into new areas and strategies, a wide-ranging new study published by the Alternative Investment Management Association and KPMG has found. AIMA, the global industry trade association for hedge funds, and KPMG quizzed 162 hedge fund managers collectively representing USD1 trillion in assets under management – roughly quarter of the total global industry assets – on how their businesses are pivoting to the new working environment that has resulted from the coronavirus pandemic. The report, titled ‘Accelerating out of the Pandemic’, follows last year’s survey, ‘Agile and Resilient’, which gauged how managers of all sizes were grappling with the range of challenges thrown up by the crisis. For this year’s report, respondents were questioned on how they are now optimising collaboration within the challenging hybrid work environment, the ways in which they are navigating the virtual capital raising process, and what new investment opportunities are emerging from the events of the past two years, among other things.
Brief: The Securities and Exchange Commission today voted to propose amendments to certain rules that govern money market funds under the Investment Company Act of 1940. In March 2020, growing economic concerns about the impact of the COVID-19 pandemic led investors to reallocate their assets into cash and short-term government securities. Prime and tax-exempt money market funds, particularly institutional funds, experienced large outflows, which contributed to stress on short-term funding markets. The Commission’s proposed amendments are designed, in part, to address concerns about prime and tax-exempt money market funds highlighted by these events. “Together, these amendments are designed to reduce the likelihood of runs on money market funds during periods of stress,” said SEC Chair Gary Gensler. “They also would equip funds to better meet large redemptions, addressing concerns about redemption costs and liquidity. Given the broad reach of short-term funding markets, these proposals speak to our remit to maintain fair, orderly, and efficient markets.”