The Alternative Investment Management Association (AIMA), an international trade body for the hedge fund industry, is reporting that an absolute majority of all assets under management by hedge funds and funds-of-funds are held by institutional investors. In addition, a third of those assets from institutional investors now come from pension funds. While the AIMA has some interest in promoting hedge funds and other alternative investments, the breakdown does highlight how a growing number of institutional investors, including pension funds, university endowments, and foundations that are invested in alternative investments, with the numbers growing each year. While there is certainly reason for individual investors and those on "main street" to be upset with some of what has been happening on Wall Street, using a blanket approach of penalizing all of Wall Street could have unintended consequences for individual pensions and those charitable and cultural activities often sponsored by endowments. Saying that "what is good for wall street is no longer good for main street," to paraphrase some in Washington, could be bad for the average citizen if actions begin to match the rhetoric.
Harvard University, buffered by its huge endowment, has long enjoyed AAA credit. But now, as a result of some past interest rate swaps positions that have went against them, Harvard is now finding itself paying a higher interest rate on recently floated bonds (see Bloomberg article). In fact, Harvard's main rival, Princeton University, was able to obtain better terms recently, as much as 50 bps or more on some debt going out 10 to 30 years. As a result, if Harvard's recent December sale of $1.5 billion in debt had yielded rates similar to what Princeton would have received, the savings for Harvard would have been on the order of $150 million.
It appears that the problem stemmed from the purchase of interest-rate swaps that were being used to protect the school against rates increasing in the future. Unfortunately for Harvard, rates fell, causing Harvard to look for more cash in the bond markets just as credit dried up. At one point the value of the swaps had fallen enough that they were worth a negative $570 million to the endowment. To add insult to injury, the losses required Harvard to post additional collateral, just as the market was falling and its portfolio was losing additional value. The $1.5 billion sale of debt was believed to have been done in part to allow Harvard to get out of the interest rate swap position. Unfortunately, the sale had to be made right at the time when the credit markets were freezing up, resulting in the higher cost for floating the debt. As they say, when markets are crashing, correlations have a tendency to go to one. This is surly something they will no doubt be teaching at Harvard. Liquidity risk is probably another.
Approximately two-thirds of fund managers recently polled by HSBC are overweight in Chinese equities, higher than the 50 percent that were long Chinese equities in Q4 of 2008 (see Asian Investor article). The companies polled were 12 funds with some of the largest assets under management, including (in alphabetical order) AllianceBernstein, Allianz Global Investors, Baring Asset Management, Deutsche Asset Management, Fidelity Investment Management, Franklin Templeton Investments, HSBC Global Asset Management, INVESCO Asset Management, Investec Asset Management, JF Asset Management, Schroders Investment Management, and Societe Generale. Of the funds increasing exposure in Asia, some mention their belief that the stimulus plans of China and Singapore will help support demand and growth in each country. One fund manager also mentioned that the construction and basic materials sectors will serve as a guide for the impact of the Asian fiscal packages, since each will benefit early from planned spending in infrastructure, and should lead to trickle-down effects to consumers. Others are not so sure about the trickle-down effects to Chinese consumers, and also mentioned that while having China rebound will be necessary to help spur global growth, such a rebound may be a few quarters away, at best. Still, most agree that the stage is set given that China appears to have put in place an actual stimulus plan - something the markets in the United States are still questioning domestically.
According to a recent WSJ article, in the wake of the recent Madoff and Stanford scandals, hedge fund investors have been requesting their money back at an increased pace over the last few months. Morgan Stanley analysts are forecasting that assets under management could fall by another 30 percent before the year is over. This follows an already 20 percent decrease at the end of 2008, reducing total hedge fund AUM to below $1 trillion. The withdraws are getting large enough that some funds are now left with only illiquid assets, most of which have to be sold at depressed prices. Increased selling has certainly help pressure the market recently, and will likely continue to do so if the hedge fund redemption forecasts from Morgan Stanley are correct. Having the DJIA fall to 6,000 and the S&P 500 fall to 700 would certainly seem more likely under such intense and systematic selling.