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Commodity Traders: The trillion dollar club

2011-11-01T23:31:00.001-07:00

Fri, Oct 28 2011
By Joshua Schneyer

NEW YORK (Reuters)- For the small club of companies who trade the food, fuels and metals that keep the world running, the last decade has been sensational. Driven by the rise of Brazil, China, India and other fast-growing economies, the global commodities boom has turbocharged profits at the world's biggest trading houses.

They form an exclusive group, whose loosely regulated members are often based in such tax havens as Switzerland. Together, they are worth over a trillion dollars in annual revenue and control more than half the world's freely traded commodities. The top five piled up $629 billion in revenues last year, just below the global top five financial companies and more than the combined sales of leading players in tech or telecoms. Many amass speculative positions worth billions in raw goods, or hoard commodities in warehouses and super-tankers during periods of tight supply.

U.S. and European regulators are cracking down on big banks and hedge funds that speculate in raw goods, but trading firms remain largely untouched. Many are unlisted or family run, and because they trade physical goods are largely impervious to financial regulators. Outside the commodities business, many of these quiet giants who broker the world's basic goods are little known.

Their reach is expanding. Big trading firms now own a growing number of the mines that produce many of our commodities, the ships and pipelines that carry them, and the warehouses, silos and ports where they are stored. With their connections and inside knowledge -- commodities markets are mostly free of insider-trading restrictions -- trading houses have become power brokers, especially in fast-developing Asia, Latin America and Africa. They are part of the food chain, yet help shape it, and the personal rewards can be huge. "The payout percentage of profits at the commodities houses can be double what Wall Street banks pay," says George Stein of New York headhunting firm Commodity Talent.

Switzerland-based Glencore, whose initial public offering (IPO) in May put trading houses in the spotlight, pays some traders yearly bonuses in the tens of millions. On paper, the partial float made boss Ivan Glasenberg $10 billion richer overnight.

SIZE MATTERS

How big are the biggest trading houses? Put it this way: two of them, Vitol and Trafigura, sold a combined 8.1 million barrels a day of oil last year. That's equal to the combined oil exports of Saudi Arabia and Venezuela.

Or this: Glencore in 2010 controlled 55 percent of the world's traded zinc market, and 36 percent of that for copper.

Or this: publicity-shy Vitol's sales of $195 billion in 2010 were twice those at Apple Inc. As well as the 200 tankers it has at sea, Vitol owns storage tanks on five continents.

U.S. regulations are now pending to limit banks' proprietary trading -- speculating with their own cash. The new rules don't apply to trading firms. "Trading houses have huge volumes of proprietary trading. In some cases it makes up 60-80 percent of what they do," said Carl Holland, a former price risk manager at oil major Chevron Texaco, who now runs energy consultancy Trading Solutions LLC in Connecticut. "They have the most talent, the deepest pockets, and the best risk management."

In addition to proprietary trading curbs, the U.S. regulator voted on October 19 to impose position limits in oil and metals markets. That gives banks who trade futures cause for concern, but since physical players usually receive exemptions to limits -- because they are categorized as bona fide hedgers -- trading firms should go unscathed.

The trading houses' talent and deep pockets translate into incredible power. "Most commodity buyers in the world are price takers. The top trading firms are price makers," said Chris Hinde, editor of London-based Mining Journal. "It puts them in a tremendous position."

The sort of position that has allowed Vitol to do a brisk oil business with the U.S. government, the besieged Syrian regime, and Libya's newly empowered rebels simultaneously over the past few months. In April the company dodged NATO bombs and a naval blockade and sent an oil tanker into the battered Mediterranean port of Tobruk to extract the first cargo of premium crude sold by rebels at the helm of a breakaway Libyan oil company defying Muammar Gaddafi.

Vitol also discreetly supplied Libya's rebels with $1 billion in fuel, Reuters has learned -- supplies they desperately needed to advance on Tripoli. Vitol's early running gave the firm an edge with the country's new political stewards. As it turns the pumps back on, Libyan oil firm Agoco has allocated Vitol half of its crude production to repay debts.

While its savvy traders were doing deals in eastern Libya, Vitol, along with rival Trafigura, kept refined product supplies flowing to the besieged government of Bashar al-Assad in Syria as his troops attacked civilians. Trading houses were able to do this because international sanctions on Syria do not ban the sale of fuel into the country, but they did not have to fight off much competition for that business.

PAST SCRUTINY

Despite a relative lack of regulatory oversight, such reach does attract scrutiny. "There has always been some concern about the trading firms' influence," said Craig Pirrong, a finance professor and commodities specialist at the University of Houston, who points out that some firms "have been associated with allegations of market manipulation".

Public and regulatory attention usually rises with prices. A spike in world food prices in 2007 stirred an outcry against the largest grain trading firms; when oil prices surged to a record $147 a barrel in 2008, U.S. Congress probed the role of oil trading firms, but found no smoking gun. But in May the U.S. Commodity Futures Trading Commission sued Arcadia and Parnon, both owned by a Norwegian shipping billionaire, for allegedly manipulating U.S. oil prices three years ago, amassing millions of barrels they had no intention of using. The companies dispute the charges.

Some transgressions make headlines. A Trafigura-chartered tanker was intercepted in the Caribbean in 2001 on suspicion of carrying illegal volumes of Iraqi crude. In a settlement, Trafigura agreed to pay a $5 million fine, but wasn't charged with smuggling and denied wrongdoing. In 2006 a tanker it chartered dumped toxic waste in Ivory Coast, allegedly making thousands ill and killing up to 16. Courts did not find any connection between its waste and sick people. Trafigura took legal action to keep a report about the Ivory Coast incident out of newspapers, but details were eventually made public.

And it's not just the Europeans. Executives of Illinois-based ADM, formerly Archer Daniels Midland, were jailed for an early 1990s international price-fixing conspiracy for animal feed additive lysine. After Minnesota-based Cargill built a huge soybean terminal on the banks of the Amazon River in 2003, it was targeted by Greenpeace and subjected to Brazilian government injunctions for allegedly encouraging more farming in fragile rainforest. Cargill has since placed a moratorium on buying soybeans from newly deforested land.

THE SQUEEZE AND THE ARB

For many commodities traders, the most profitable ploy has been the squeeze, which involves driving prices up or down by accumulating a dominant position. In the early 2000s, the Brent crude oil stream -- used as a global price benchmark -- fell to 400,000 barrels per day from more than 1 million in the late 1980s. A few traders seized the chance to buy what amounted to almost all the available supply. Price premiums for immediate supply spiked, sapping margins for refiners worldwide. U.S. refiner Tosco sued Arcadia and Glencore for market manipulation; the case was settled out of court.

In metals, stock in warehouses can be tied up for years as loan collateral, allowing the same traders who dominate the metals market to control a huge chunk of world supply -- an apparent conflict of interest that has drawn criticism from the UK parliament.

"The warehouses seem to have an infinite capacity to absorb metal, but a very small capacity to release it," said Nick Madden of Novelis, the world's top rolled aluminum producer.

Trading houses saw the opportunity to leverage metals warehousing after the 2008 financial crisis. Of the six major metals warehousers only one, Dutch-based C.Steinweg, remains independent. Trading houses competed with banks for the spoils -- Glencore, Trafigura and Noble took one warehousing company each, Goldman and JP Morgan the others.

And unlike commodities producers, such as U.S. oil giant Exxon Mobil, trading firms don't just make money when prices go up. Most rely on arbitrage -- playing the divergence in prices at different locations, between different future delivery dates, or between a commodity's quality in different places.

That's what Koch, Vitol and others did in 2009 when they parked 100 million barrels of oil in seaborne tankers. Thanks to a market condition known as contango -- a period when buyers pay more for future delivery than to receive their cargoes promptly -- they could sell futures and lock in profits of $10 a barrel or more.

RICH HISTORY

Many of the biggest players in oil and metals trading trace their roots back to notorious trader Marc Rich, whose triumph in the 1960s and 70s was to create a spot market for oil, wresting business away from the majors.

Belgium-born Rich joined Philipp Brothers, subsequently Phibro, aged 20, leaving in 1974 with a fellow graduate of the Phibro mailroom, Pincus "Pinky" Green, to set up Marc Rich and Co AG in Switzerland.

Rich, now 76, would later end up on the FBI's most-wanted list for alleged tax evasion and trading oil from Iran after the revolution in 1979. He was later pardoned. His partners seized control of the firm in 1994, renaming it Glencore.

Several big trading houses are still family-held -- firms like agricultural giant Cargill, the top private U.S. company, or Kansas-based Koch Industries, a close No. 2. Koch's chief executive Charles Koch, a libertarian activist with a $22 billion personal fortune according to Forbes, has said his company would go public "over my dead body". "The thinking is, why open the books to the world?" said a former lobbyist for Koch who requested anonymity. "Koch benefits from privacy, and it's astonishingly agile and profitable as is."

The old guard now faces a challenge from a new breed of Asian competitors. Companies like Hong Kong-based Noble and Singapore's Olam and Hin Leong are not new, but they are spreading their wings as China's influence in commodities markets increases. Chinese state funds have flowed into Noble and private Asian traders. As China's clout grows, it's very likely that Chinese firms will build trading dynasties of their own. In a move borrowed from the playbooks of western rivals, state-run oil firm PetroChina has set up a Houston oil trading desk and leased massive oil storage tanks in the Caribbean. "China is becoming more like a Glencore," said Hinde. "The Chinese state is funding nimble trading firms to do its bidding. We don't hear much about them yet, but in time we will."

Here's a look at the 16 companies, with aggregate revenues of $1.1 trillion, that trade energy, metals and agriculture.

SAILING CLOSE TO THE WIND

WHO: Vitol, founded 1966 in Rotterdam by Henk Vietor and Jacques Detiger

WHERE: Geneva and Rotterdam WHAT: Oil, gas, power, coal, industrial metals, sugar

TURNOVER: $195 billion (2010) CEO: Ian Taylor STAFF: 2,700

By Richard Mably

On the world oil markets the name Vitol is as familiar as Exxon is at the petrol pump.

In public, for a company that turned over almost $200 billion last year trading 5.5 million barrels a day, its profile is nigh on subterranean.

But earlier this year the world's wealthiest oil trader raised that profile, and did its reputation no harm, by becoming the first to deal with Libya's rebels, long before the overthrow of Muammar Gaddafi.

That helped balance the reputational damage of being fined -- along with many other companies -- for paying surcharges a decade ago to Saddam Hussein's Iraqi oil ministry during the U.N. oil-for-food program.

Vitol's Saddam connection does not seem to have hurt it in Iraq. It became the first company to supply gasoline to the energy ministry after the war in 2003, and now is both a buyer of Iraqi crude and supplier of refined products.

An array of storage tanks on five continents oils the wheels of its vast trading operation and it has stepped into the gap left by the oil majors as they reduce their downstream presence to focus on upstream exploration and production.

With African investors Helios Investment it recently paid a billion dollars to buy Shell's fuel marketing operation across 14 West African countries, keeping the Shell branding.

It has also dipped a toe in the upstream business. Together with Glencore, it pre-qualified to bid for exploration rights in Iraq in a licensing round next year that that could add the Iraqi upstream to its offshore West Africa operations.

Its early dealings with the Libyan rebels may offer the chance of a foothold in Libya's oil and gas territory.

"Vitol's goal was to supply the refined products and then try to pick up upstream assets in Libya," said a western diplomatic source.

Glencore's flotation has sparked speculation about a possible Vitol initial public offering and what it would be worth. Vitol says it is happy with its private status and has no IPO plans.

By annual revenue Vitol is richer than Glencore but the numbers aren't directly comparable -- Glencore owns more hard assets which, typically, are far more profitable than trade turnover.

Vitol's wealth is spread across only 330 share-holding employees, fewer than Glencore's 500. While Vitol would not comment, industry talk has it that none of its senior employees, including CEO Ian Taylor who joined from Shell in 1985 or long-timer Bob Finch who heads Vitol's coal business, holds more than 5 percent of the company. That would put them well below the 16 percent stake Glencore CEO Ivan Glasenberg owns in his firm.

The company's deal with Libya's rebels was a gamble. Sanctions targeted Gaddafi. The firms now controlled by the western-backed rebels might still legally be linked to Libya's national oil corporation. Was Vitol in violation? Lawyers said doing business with the rebels still required great care. But by the end of April, a U.S. Treasury directive authorized the Vitol transactions.

"They sail as close to the wind as they possibly can legally," said an oil analyst who requested anonymity. "That's the nature of their business."

(additional reporting Barbara Lewis)

PRIVATE TO PUBLIC

WHO: Glencore, founded 1974 as Marc Rich and Co. renamed Glencore in 1994

WHERE: Baar, Switzerland WHAT: Metals, minerals, energy, agricultural products

REVENUE: $145 billion in 2010 CEO: Ivan Glasenberg

STAFF: 2,800 people directly; 55,000 at Glencore's industrial assets

By Clara Ferreira Marques

Switzerland-based Glencore cast aside its famed secrecy earlier this year with a record market debut that turned its executives into paper millionaires and propelled the firm into the headlines.

Founded in 1974 by Marc Rich, who fell foul of U.S. authorities but was later pardoned by President Bill Clinton, Glencore has assets spanning the globe and an oil division with more ships than Britain's Royal Navy. Top officials in many other large trading companies began their careers at Glencore.

The company handles 3 percent of the world's daily oil consumption. It's one of the largest physical suppliers of metals including zinc, lead and nickel, and a leading grain exporter from Europe, the former Soviet Union and Australia.

Though it began as a pure metals and oil trader, Glencore has bought a wealth of industrial assets since the late 1980s which now stretches from South American farmland to copper mines in Zambia.

Belgium-born Rich sold his stake in 1994.

The company's largest shareholder is now former coal trader and Chief Executive Ivan Glasenberg, an intense and charismatic South African who holds a stake of just under 16 percent, worth around 4.5 billion pounds at current prices.

Still not entirely comfortable with his public profile, Glasenberg has described his shift into the glare of publicity as "crossing the Rubicon". He is flanked in the top investor table by the youthful heads of Glencore's major divisions. Together, Glencore employees, including many of its top traders, own just under 80 percent of the company.

Glencore has long made its fortune by working on the fringes and in areas where few others dared. That strategy has often succeeded, though last month it found itself at the center of a dispute in the newly minted nation of South Sudan. A row over oil export control could jeopardize its role in selling the nation's crude.

Glencore's initial public offering was the largest globally this year, attracting huge publicity as well as arguments that it marked the top of the commodities cycle. The shares listed at 530 pence in May but have since traded below that, dropping almost a quarter in three months.

A large part of Glencore's market value comes from its listed stakes in other companies, most notably a 34.5 percent holding in Swiss miner Xstrata. Glencore has said publicly it would see "good value" in a merger with Xstrata, but that has so far been rejected by other, smaller, shareholders.

BACK-HAUL MASTERS

WHO: Cargill, founded 1865 by William Wallace Cargill at the end of the U.S. Civil War

WHERE: Minneapolis, Minnesota WHAT: Grains, oilseeds, salt, fertilizers, metals, energy

TURNOVER: $108 billion (2010) CEO: Greg Page STAFF: 130,000

By Christine Stebbins

Tucked away in a private forest an hour's drive from the downtown high rises of mid-western Minnesota stands a brick mansion that strikes most visitors the same way: isolated, solid, regal, powerful.

Inside the "lake office," as it is known, sits the chairman of Cargill Inc., one of the largest privately held companies in the world.

Over the last 145 years, Cargill has grown from a single grain storage warehouse by an Iowa railroad to a behemoth of world commodities trade, straddling dozens of markets for food and other essential materials -- salt, fertilizer, metals.

With global sales of $108 billion in 2010, Cargill would have ranked No. 13 in the Fortune 500 list of publicly held companies, just behind Wall Street banking giant Citigroup.

But Cargill is anything but public. Despite a concerted campaign in recent years to put forth a friendlier face and personality through advertising and more appearances by its executives in public forums, Cargill is bound together by a culture of confidentiality, aggressiveness -- and winning.

"By and large they move as a team," says one retired wheat trader who did business with Cargill for decades. "They have some superstars but mostly a lot of team players -- what I would describe as well grounded, fundamental traders."

One of their secrets: filling the empty barges headed home.

"You've always had grain going down the river and going through the Gulf and being exported. One of the great things that Cargill did was develop the salt business to transport back up, eliminate the snow during the wintertime, and fill barges back up with back hauls," the wheat trader said.

"It was done a long time ago. People forget about it. But it was absolutely one of the greatest moves in the business."

Cargill hopes to dominate new markets as well. Two examples: it makes biodegradable and recyclable plastics out of corn at its $1 billion complex at Blair, Nebraska, and is creating new low-calorie food ingredients for such multinationals as Kraft, Nestle and Coca Cola.

TROUBLED PAST

At times Cargill's power has got it into trouble. In 1937 the Chicago Board of Trade forced the company to sell its corn contracts and Secretary of Agriculture Henry Wallace accused it of trying to "corner" the U.S. corn market. In 1972 Cargill came under attack as it secretly sold millions of tonnes of wheat to Russia, using a U.S. export subsidy program to boot -- and boosting food inflation.

It helps that the firm usually has the backing of Washington. In early 2007, when world grain prices were surging toward all-time highs, it faced a problem in Ukraine. Citing concerns over potential shortages and rising bread prices, Kiev had placed export quotas on cash crops and temporarily stopped granting export licenses for corn, wheat, barley and other grains.

Cargill, as well as fellow U.S. commodity trading firms Bunge and ADM, "agreed to undertake a public relations effort with the goal of creating a political problem for the Government of Ukraine", according to a 2007 diplomatic cable by the U.S. ambassador to Ukraine that was obtained by WikiLeaks and made available to Reuters by a third party.

To achieve this, "it would be necessary to recruit the (Ukrainian) farmers to take an active role. This would be a challenge, since small farmers were unorganized, and most had already cashed in their crops by selling to the traders early... Grain traders welcomed our offer to lend a diplomatic hand," the ambassador wrote.

Asked to comment, Cargill said the company actively backs free trade to boost agriculture in all countries and "is in dialogue with many important audiences, including governments... Additionally, we don't believe export bans are the solution to either high grain prices or price volatility." ADM declined to comment and a spokesman for Bunge could not be reached.

THE 'KOCHTOPUS'

WHO: Koch Industries, founded 1920s by Fred Koch

WHERE: Wichita, Kansas

WHAT: Oil TURNOVER: $100 billion (2010)

CEO: Charles Koch STAFF: 70,000

By Joshua Schneyer

Founded in the 1920s by patriarch Fred Koch, a U.S. engineer who developed a new method of converting oil into gasoline, Koch helped to build a refining network in the Soviet Union in the 1930s. Fred Koch returned to the United States with a visceral hatred for Joseph Stalin and communism. A fiercely libertarian ideology and ultra-competitive engineering prowess live on at Koch Industries' spartan headquarters in Wichita, Kansas, a former Koch executive told Reuters.

With around $100 billion in sales, Koch Industries is a heavyweight among U.S. oil trading firms, and one of the most secretive U.S. corporations. Investors can forget about buying shares in the wildly profitable, family-run firm any time soon.

In oil markets, Koch is a brutally efficient middleman. A master of physical markets, it owns a 4,000-mile U.S. pipeline network and three of the country's most profitable refineries. Many small producers rely almost entirely on Koch to buy, sell and ship their crude. The company now operates in 60 countries.

The Koch brothers, Chairman and CEO Charles and co-owner David Koch, are high-profile supporters of libertarian and anti-regulation U.S. politics. Among their campaigns is one to end the U.S. Environmental Protection Agency's mandate for regulating greenhouse gas emissions. A profile in the New Yorker magazine last year identified the brothers as behind-the-scenes operators who bankroll the U.S. Tea Party movement. The Kochs have denied funding the Tea Party, but their empire's far-reaching tentacles in the political arena have spawned a nickname: the 'Kochtopus'.

The firm's traders, according to two industry sources, made a fortune for Koch in 2009-10 during a contango in U.S. oil markets -- a period when oil for future delivery was higher priced than immediate cargoes. Koch moved quietly to lead a boom in U.S. offshore crude storage, buying millions of barrels at cheap spot prices, parking them in supertankers near its Gulf Coast pipelines, and simultaneously selling into futures markets.

With Koch's easy access to tankers and pipelines, the strategy locked in profits of up to $10 a barrel with virtually no risk, traders said. When spot and futures prices began to converge, Koch would quietly slip crude from the ships into its onshore pipelines. Koch declined to discuss its trading with Reuters.

Former Koch employees were implicated in improper payments to secure contracts in six foreign countries between 2002 and 2008, and the company's officers admitted in a letter made public by a French court last year that "those activities constitute violations of criminal law", according to a report in Bloomberg Markets Magazine this month. The report also details sales by a foreign Koch subsidiary of petrochemical equipment to Iran, which is subject to U.S. sanctions, and a history of criminal or civil penalties for oil spills, a deadly 1996 U.S. pipeline blast, and under-reporting of emissions of benzene, a carcinogen, from a Texas refinery in 1995.

On its website Koch said it dismissed several employees of a French subsidiary upon learning of the improper and unauthorized payments. It also said its foreign units had ended sales to Iran "years ago", and did not violate U.S. law by conducting business with Iran earlier. Koch said its 90s-era pipeline blast was "the only event of its kind" in the company's history, and that a report to Texas regulators was voluntarily submitted by the company in 1995 to reflect higher emissions than it had originally reported. Koch eventually pleaded guilty in 2001 to a felony charge related to its reporting of the benzene emissions.

The firm's far-ranging industrial interests also include chemicals, forestry, ethanol, carbon trading and ranching. Its huge lobbying budget in Washington -- estimated at $10.3 million a year in a recent investigation by the Center for Public Integrity -- stands in contrast to Charles Koch's frugal demeanor within the firm.

The CEO sometimes flies to speaking engagements with no entourage. When in Wichita, he often dines in the Koch cafeteria. When out-of-town employees visit, he has taken them to dinner at seafood chain Red Lobster, a former Koch employee said. "But make no mistake, if you perform well at Koch, you are richly rewarded in salary terms," the person added. "And if you don't, you're out of there fast."

CORN BELT KINGS

WHO: ADM, formerly Archer Daniels Midland, founded 1902 by John Daniels and George Archer

BASED: Decatur, Illinois

TADES: Grains, oilseeds, cocoa

TURNOVER: $81 billion (2010)

CEO: Patricia Woertz STAFF: 30,000

By Karl Plume

"Corn goes in one end and profit comes out the other."

That comment, by Matt Damon's character Marc Whitacre in the 2009 corporate scandal film "The Informant", described how U.S. agricultural firm Archer Daniels Midland Co. turned grain into gold. The line may be simplistic but it's not too far from the truth.

Decatur, Illinois-based ADM is one of the world's biggest commodities traders. It buys and sells multiple crops, mills and grinds and processes them into scores of products, both edible and not, and ships them to markets around the world.

A small Minnesota linseed crushing business more than a century ago, the firm is now is so big its financial performance is often viewed as a barometer of agribusiness as a whole. It owns processing plants, railcars, trucks, river barges and ships. It has trading offices in China, palm plantations and chemical plants across Asia, and silos in Brazil.

"We have a system that monitors the supply and demand needs, because often times they are working independently. For us in the middle, we have the ability then to manage the commodity risk that can be created by the timing differences between those buys and sells," said Steve Mills, ADM's senior executive vice president for performance and growth.

"You'll hear things through the marketplace or the wire services that it's raining someplace or not raining someplace and we'll have people on the ground saying 'I don't know what you're talking about' ... The futures market may take some of that information and run with it. One of the things that gives us an advantage is that we're working in the physical markets as well so (we can) absorb all that information and make the calls."

But ADM's reputation has endured a black eye or two over the years.

A lysine price-fixing scandal in 1993 tarred its name after three top executives were indicted and imprisoned. ADM was fined $100 million by the U.S. government for antitrust violations. The incident was the subject of "The Informant", filmed on site in Decatur.

ADM's environmental record has also been questioned by the Environmental Protection Agency, resulting in fines and forced installation of pollution control measures.

PUTIN, JUDO, CONSPIRACIES

WHO: Gunvor, founded 1997 by Swedish oil trader Torbjorn Tornqvist and Russian/Finnish businessman Gennady Timchenko

WHERE: Geneva

WHAT: Oil, coal, LNG, emissions

TURNOVER: $80 billion 2011, company estimate ($65 billion 2010)

CHAIRMAN: Torbjorn Tornqvist

STAFF: Fewer than 500

By Dmitry Zhdannikov

When it comes to his critics, Vladimir Putin is a heavyweight puncher. Yet it took Russia's most influential politician almost a decade to publicly address one of the most serious allegations against him.

Critics, including the Russian opposition, put it simply -- Russia's paramount leader helped businessman Gennady Timchenko create the Gunvor oil trading empire, which saw a spectacular rise in the past decade when Putin was president and then prime minister.

Putin finally broke his silence last month: "I assure you, I know that a lot is being written about it, without any participation on my part.

"I have known the citizen Timchenko for a very long time, since my work in St Petersburg," Putin told a group of Russian writers. Putin worked in the mayor's office in the early 1990s when Timchenko and his friends, Putin said, spun off an oil trading unit of the Kirishi oil refinery.

"I never interfered with anything related to his business interests, I hope he will not stick his nose into my business either," Putin said.

Timchenko doesn't need to be told to keep a low profile. He is one of Russia's most private tycoons. And his silence helped feed rumors about Gunvor's remarkable growth.

In 2011 the company will turn over $80 billion, up from just $5 billion in 2004. In his first public interview to Reuters in 2007, Gunvor's Swedish co-founder Tornbjorn Tornqvist was keen to stress that the firm's success was built on its traders' experience and excellent contacts.

"But ... to involve Mr Putin and any of his staff in this dialogue is speculation," he added. That comment didn't help calm rumors and then Timchenko spoke too.

After a newspaper interview he wrote an open letter in 2008 headlined "Gunvor, Putin and me: the truth about a Russian oil trader".

"It is true that I, together with three other businessmen, sponsored a judo club where Mr Putin became honorary president," he wrote. "That is as far as it goes -- yet time and again, the media wrongly jump to the conclusion that the judo club connection means that Mr Putin and I are 'close', then leap into conspiracy-theory mode."

Tornqvist, a former BP trader and keen yachtsman, says he doesn't share the vision of Mark Rich, the father of contemporary trading, that political links are the most prized asset in trading.

"If you don't offer competitive terms, no one will work with you," he told a Russian daily this month. For Gunvor's rivals, too, favoritism is also an overly simple explanation of the company's success. They point to very competitive pricing offered by Gunvor when it comes to Russian oil tenders.

Gunvor's oil dominance has waned in the past two years -- it is handling around a fifth of Russian seaborne oil exports, down from a third three years ago. Perhaps to make up for that, it has moved into new sectors such as natural gas, coal and emissions.

Tornqvist says Gunvor's goal is to become a truly global company. "We know how to close the gap (with Vitol and Glencore) and we are actively catching up," Tornqvist said. Like Vitol, he says, Gunvor has no plans to follow Glencore into an IPO.

THE RICH LINK

WHO: Trafigura, founded 1993 by former Marc Rich traders Claude Dauphin, Eric de Turkheim and Graham Sharp

WHERE: Geneva, Switzerland

WHAT: Oil, metals

TURNOVER: $79 billion (2010)

CHAIRMAN: Claude Dauphin

STAFF: 6,000

By Dmitry Zhdannikov and Ikuko Kurahone

The godfather of oil trading, Marc Rich, taught one of his most talented apprentices Claude Dauphin almost every trick in the business. Like Rich, Dauphin created a leading commodities trading house by applying a knife-edge approach to business. He has made a fortune.

But there was one lesson that Rich must have cut short: how to avoid jail. While Rich himself fled to Europe in the 1980s to escape possible imprisonment for tax evasion in the United States, Dauphin spent almost six months behind bars in Ivory Coast in 2006-7 in pre-trial detention involving a dispute over toxic waste dumping.

Shortly after the material was dumped, thousands of residents of the city of Abidjan complained of illnesses, including breathing problems, skin irritation and related ailments. The government of Ivory Coast said 16 people died. The material was dumped in open-air sites around Abidjan in August 2006 after being unloaded from a Trafigura-chartered tanker.

Trafigura said it entrusted the waste to a state-registered Ivorian company, Tommy, which dumped the material illegally at sites around Abidjan.

"We went to the Ivory Coast on a mission to help the people of Abidjan, and to find ourselves arrested and in jail as a result has been a terrible ordeal for ourselves and our families," said Dauphin.

Trafigura paid a $200 million settlement and the country's prosecutor declared that there was no evidence of any illegality or misconduct by any Trafigura company or staff.

In London, Trafigura reached a pre-trial settlement to put an end to a class-action suit from some 31,000 residents. The judge said there was no evidence the waste had caused anything more than "flu-like symptoms" and said some media had been irresponsible in their reporting.

The scandal has hardly hampered the firm's stellar growth.

It has grown into the world's third-largest independent oil trader and second-largest industrial metals trader in less than 20 years, since it was set up in the early 1990s by Dauphin and fellow traders Eric de Turckheim and Graham Sharp.

Like rival Vitol, Trafigura has seized the opportunity to get into oil storage as oil majors focus on production. It announced in early October that it may float its storage subsidiary Puma Energy within 18 months.

Trafigura was also quick to recognize the potential of storage in the industrial metals markets. It bought UK-based metals warehouser and logistics firm NEMS in March 2010, a month after Goldman Sachs had acquired rival Metro and several months before Glencore and JP Morgan moved into the business.

SEVEN-YEAR-OLD IN BIG LEAGUE

WHO: Mercuria, founded in 2004

WHERE: Geneva

ENERGY TURNOVER: $75 billion 2011 company estimate (2010, $47 billion)

CEO: Marco Dunand

By Christopher Johnson

Mercuria is just seven years old, but is already one of the world's top five energy traders.

Headquartered in Geneva, Switzerland, and named after Mercury, the god of merchants, Mercuria's business straddles global energy markets.

It has coal mines in Kalimantan in Indonesia, oilfields in Argentina and Canada plus oil trading in Singapore, Chicago, Houston and across Europe.

Its meteoric growth has been piloted by a couple of the sharpest minds in commodities.

Marco Dunand and Daniel Jaeggi, both Swiss, have worked together closely for more than 25 years in a string of commodities companies, buying and selling crude and oil products in many of the hottest oil trading outfits: Cargill, Goldman Sachs' J.Aron, Salomon Brothers' Phibro and Sempra.

In two decades of oil trading, Dunand and Jaeggi built fearsome reputations for seeing profit margins where others could only see potential losses. They were early dealers in a range of financial derivatives that are now commonplace and brought a level of sophistication to their trading books that most of their competitors could often only envy.

"You were always a little worried, taking the other side of their trades," said one European oil product trader, who declined to be identified.

NETWORK

Compared with other independent trading houses, Dunand and Jaeggi are high profile, speaking periodically to the press and giving regular interviews.

Their move to run their own empire came in 2004 when they founded Mercuria, raising capital from two Polish businessmen, Grzegorz Jankielewicz and Slawomir Smolokowski.

Jankielewicz and Smolokowski's company, J+S Group, traded Russian crude oil and was a leading supplier of oil to PKN Orlen, Poland's top oil refiner.

In 2006, J+S was raided by the Polish authorities in connection with an investigation into oil trading in Poland. J+S denied any wrong-doing and suggested the investigation was politically motivated. No suggestions of wrong-doing were leveled against Dunand or Jaeggi.

Dunand, chairman and chief executive, and Jaeggi, head of global trading, used Mercuria to expand their trading base from crude and oil products.

The business has grown to 890 employees in 28 countries with a turnover at $75 billion, trading almost 120 million tonnes of oil, coal and gas.

NO IPO, YET

Dunand says he and Jaeggi have no intention of selling the company they have built so swiftly, or launching an initial public share offering (IPO). But they have seen interest from potential investors, and have considered a tie-up with a sovereign wealth fund.

"We are not thinking about an IPO -- but that doesn't mean we don't have an open mind," Dunand told Reuters in June. "We are keen to consolidate our culture before we could think about changing it. Having said that, we have also been approached by potential investors -- sovereign funds and others -- who wish to make a private-equity type of investment in our company."

Dunand and Jaeggi are Mercuria's largest shareholders but an employee share ownership scheme holds around 40 percent of the company. "We don't see the need to raise money from the market," Dunand said.

A BRIT IN HONG KONG

WHO: Noble Group, founded 1986 by UK scrap metal man Richard Elman

WHERE: Hong Kong

WHAT: Sugar, coal, oil

TURNOVER: $57 billion (2010)

EXECUTIVE CHAIRMAN: Richard Elman

STAFF: 11,000

By Luke R. Pachymuthu

Founded 25 years ago by Briton Richard Elman, the Hong Kong-based, Singapore-listed Noble Group buys and sells everything from Brazilian sugar to Australian coal.

Noble's shareholders include China's sovereign wealth fund, China Investment Corp., which bought an $850 million stake in 2009, and Korean Investment Corp., which has a minority stake.

Elman, the company's chairman, holds around 30 percent of the company. After dropping out of school he began his career at 15 in a metals scrap yard in the UK. He spent time trading metal in Hong Kong before moving to New York and a stint at commodities trading giant Phibro. Back in Hong Kong, he traded commodities with China in the 1970s and was the first to sell China's Daqing crude oil to the United States.

Noble has grown by acquiring troubled competitors. In 2001, for instance, it bought storied Swiss company Andre & Cie, once one of the world's top five grains traders. Finding itself with a big client base, but short of the physical supplies it needed to meet demand, Noble built its own processing facilities. It's a model it has replicated across various commodities.

Noble is now seeking to spin off its agriculture business with a listing on the Singapore Exchange. The grains business accounts for a third of its earnings and could have a value of more than $5 billion. Wall Street heavyweight JP Morgan is advising Noble on the planned listing.

The company's early forays into trading gas and oil left it with a black eye. Noble quit its global liquefied petroleum gas (LPG) operations in 2010, a year it was censured in Nigeria for discrepancies in gasoline shipping lists. Nigeria's Petroleum Product Pricing Regulatory Agency (PPPRA) said that in one transaction the amount of fuel submitted for subsidies did not match the actual quantity delivered. The company did not comment publicly on this incident.

And it sounded a rare retreat this week when sources close to the company said it had shut its European coal trading operations to focus on Asia and trading.

The China connection continues. In April Noble appointed Li Rongrong, former chairman of the state-owned assets supervision and administration commission of China, as a non-executive director.

PRIVATE FIRM, PUBLIC SPAT

WHO: Louis Dreyfus, founded 1851 by Leopold Louis-Dreyfus

WHERE: Paris WHAT: Cotton, rice, grains, orange juice

TURNOVER: $46 billion (2010)

CEO: Serge Schoen STAFF: 34,000

By Gus Trompiz

In the two years since Margarita Louis-Dreyfus inherited control of the world's top cotton and rice trader following the death of her husband Robert, the woman the French press call "the tsarina" has been at the center of one of the most intriguing struggles in corporate Europe.

Analysts and commentators focused on differences between the forty-something, Russian-born Margarita Louis-Dreyfus and chief executive Jacques Veyrat over how to develop the 160-year-old family firm and whether to list its shares or seek a merger deal.

The winner? The tsarina, or MLD, as the press sometimes also calls her. In April, she and Veyrat told business daily Les Echos that the CEO would be stepping down to make way for Serge Schoen, head of Louis Dreyfus Commodities.

The very public power struggle was all the more remarkable because the company normally keeps everything, from its precise earnings to the exact age of its main shareholder and chairwoman, a secret.

Louis Dreyfus is a well-honed global operator, marketing agricultural commodities from wheat to orange juice. But most analysts think it needs fresh capital to grow, or to buy out minority family shareholders who will have the option to sell their stakes in 2012.

Unsuccessful talks have taken place with Singaporean commodities group Olam International Ltd, while bankers say they have been sounded out about a stock market listing.

Margarita Louis-Dreyfus told Les Echos that a listing, merger or the entry of a private investor were all options. But there's little room for maneuver: the majority stake she inherited is locked up in a trust her husband set up to last for 99 years.

"There is no ideal solution. What matters is that the group and its name survive," she said.

In the wake of Glencore's listing this year, there is interest in another big trading house going public; investors want exposure to long-term demand for commodities.

"I would love for them to be listed on the stock market," said Gertjan van der Geer, who manages an agriculture fund for Swiss bank Pictet. "Cargill and Louis Dreyfus are the large missing players in the commodity trading space."

It doesn't look likely anytime soon. "There is no rush, the company has been private for 150 years so there is no specific timing for changing the shareholding structure," one source close to the company said.

A management shake-up this year at France's most popular football club, Olympique Marseille, offers more proof of Margarita Louis-Dreyfus' determination to defend her husband's legacy and impose hard financial choices.

While pursuing Robert Louis-Dreyfus' passion for the club, which drained millions from his fortune, she has placed strict conditions on new investment.

"Olympique Marseille is at a crossroads," she told supporters in a statement to announce the changes at the club. It's a message that could apply just as well to the Louis Dreyfus group.

(Additional reporting by Jean-Francois Rosnoblet)

CASHING IN ON CHINESE PIGS

WHO: Bunge, founded 1818 by Johann Peter Gottlieb Bunge in Amsterdam

WHERE: White Plains, New York.

TRADES: Grains, oilseeds, sugar

TURNOVER: $46 billion (2010)

CHAIRMAN and CEO: Alberto Weissner

STAFF: 32,000

By Hugh Bronstein

Two decades ago, Chinese farmers fed their pigs just about anything they could lay their hands on. But since White Plains, New York-based Bunge set up in China in 1998, many have switched to soy pellets. Result: China's pigs are heavier than ever and Bunge has become a key supplier to one of the fastest growing economies in the world.

The company, which went public 10 years ago, realized early that rising incomes in Asia could be fed by Brazil and Argentina, two of the last remaining countries with new farmland left for crop cultivation.

It helps that the company's CEO Alberto Weisser is a Brazilian, and that Bunge has more than 100 years experience in South America.

"Asian demand for South American soybeans has exploded over the last five years and Bunge is arguably the best positioned company in the world as it relates to servicing and profiting from the Asian demand trend," said Jeff Farmer, an analyst who follows the company for Jefferies & Company in Boston.

Founded in 1818 in Amsterdam, the company is the world's No.1 oilseed processor. Along the way it has moved headquarters to Belgium, Argentina, Brazil and then the United States.

"They go where the business is," said an industry insider who asked not to be named. "No sentimental attachments to any country or location. What matters is results, and you can see that in the way they trade."

It doesn't always work. In May, Argentina kicked Bunge off the country's exporters' register after the government alleged it had evaded $300 million in taxes, an accusation the company denies. Argentina's tax office is investigating dozens of other agricultural exporters as well.

Despite not being on the registry, Bunge continues to export grains and agricultural products as usual, but it cannot cash in on certain tax benefits and it faces hurdles transporting goods within Argentina, which analysts say could hurt the company's bottom line.

ASIA'S NEW SUGAR KING

WHO: Wilmar International, founded 1991

WHERE: Singapore

WHAT: Palm oil, grains, sugar

TURNOVER: $30.4 billion (2010)

CHAIRMAN AND CEO: Kuok Khoon Hong

STAFF: 88,000 plus

By Harry Suhartono and Naveen Thakral

Around two decades ago, Kuok Khoon Hong decided to leave the business empire of his billionaire uncle Robert Kuok to set up an edible oil business with a big bet: China.

He competed fiercely with Indonesia's Salim group, the business group commanded by his uncle, and won, to dominate the edible oil market in the world's most populous nation.

Wilmar is now the biggest soy player in China with a 20 percent market share, measured in processing capacity. It is also the largest producer of consumer pack edible oils with about 45 percent market share.

Wilmar's strategy is to have its fingers in every part of the supply chain, from point of origin to destination.

In the palm oil business, for example, it owns plantations, mills, refiners, shippers, bottlers and the distribution network, in both the top producers, Indonesia and Malaysia, and the top consumers, India and China.

That gives its traders the advantage of timely market intelligence.

"We have a daily sales report from every corner where we operate and if we see sales slowing over a few weeks, we get to know the changing trend before others," one employee said, on condition of anonymity.

In 2006 Kuok, now 62, orchestrated a $4.3 billion merger which consolidated his uncle's palm oil assets into Wilmar, making it the world's largest listed palm oil firm.

Last year he surprised the market when he trumped China's Bright Food in a $1.5 billion deal to buy Australia's Sucrogen.

That complements his plan to set up a 200,000 hectares plantation in Indonesia's Papua island, which could make him the new "Asian sugar king", a title once hold by his uncle.

With nearly $10 billion worth of cash and bank deposits on Wilmar's balance sheet, Kuok is unlikely to stop his expansion drive there. Investors say he might already have his sights set on Brazil, to strengthen his position in the global sugar market.

THE CUSHING CUSHION

WHO: Arcadia, founded 1988 by Japan's Mitsui & Co

BASED: London

TRADES: Oil

TURNOVER: $29 billion, Reuters estimate

OWNER: John Fredriksen

STAFF: 100

By Caroline Copley and Joshua Schneyer

Arcadia Petroleum, the London-based oil trading firm owned by billionaire oil tanker magnate John Fredriksen, was thrust into the spotlight in May when U.S. commodities regulators sued it for allegedly manipulating U.S. oil markets in 2008.

In one of its biggest-ever crackdowns, the U.S. Commodity Futures Trading Commission alleges Arcadia traders amassed large physical crude positions in Cushing, Oklahoma, to create the appearance of tight supply at the delivery hub for U.S. oil futures. Fredriksen's traders then hurriedly sold the physical crude at a loss, the CFTC lawsuit claims, ending expectations for tight supplies. Overall Arcadia profited by $50 million in derivatives markets as oil futures spreads collapsed, according to the suit.

In a May interview with Reuters, Fredriksen refuted the charges and shot back that "maybe they (U.S. regulators) are trying to get some revenge" for the 2010 BP oil spill in the Gulf of Mexico. Several of Fredriksen's traders worked for BP in the early 2000s, where aggressive oil trading at Cushing turned huge profits, and also led to BP paying fines for alleged trading violations.

"It is a normal situation for oil traders ... They are buying and selling oil. That's what it is all about," Fredriksen said of the recent CFTC charges.

Risk has often paid off handsomely for Fredriksen. With a personal fortune estimated by Forbes at $10.7 billion, the 67-year-old was Norway's richest man until he abandoned his citizenship in 2006 to become a national of Cyprus, where tax rates are lower.

Beyond Arcadia, Fredriksen's stable of commodities-related firms includes MarineHarvest, a global salmon-farming conglomerate billed as "the world's largest seafood company." He also owns oil tanker operator Frontline, U.S. oil trader Parnon -- also named in the CFTC lawsuit -- energy driller Seadrill and gas distributor Golar LNG.

Fredriksen became a leading oil shipping magnate well before buying Arcadia, in 2006. His 28-year-old twins Kathrine and Cecilie play a growing role in his sprawling business empire, according to press reports.

Arcadia doesn't make its revenues public. With 800,000 barrels a day to market, a volume similar to OPEC country Qatar, Arcadia's annual gross revenue from oil could be around $29 billion based on current prices.

The company lists its trade in paper derivatives as larger still, or about 10 million barrels a day.

Arcadia has faced controversy before. Founded in 1988 by Japanese trading giant Mitsui Inc., it was sued in 2000 by independent US refiner Tosco for allegedly conspiring to jack up prices of European benchmark Brent oil by cornering part of the North Sea physical crude market. The suit was settled out of court for an undisclosed sum.

Arcadia often trades large volumes of oil from Nigeria and Yemen, where it boasts close relationships with state oil firms. In a 2009 State Department cable from Yemen, obtained by WikiLeaks and provided by a third party to Reuters, sources told U.S. diplomats that the company used intimidation tactics including kidnapping threats to buy Yemeni crude at below market prices. Arcadia's chief executive in Singapore, Stephen Gibbons, denied the contents of the cable and told Reuters the kidnapping allegations were "ludicrous".

60 YEARS OUT OF THE LIMELIGHT

WHO: Mabanaft WHERE: Rotterdam

WHAT: Oil

TURNOVER: $15 billion, Reuters estimate

CEO: Jan-Willem van der Velden

STAFF: 1,772

By Jessica Donati

Mabanaft's profile is low even by the secretive standards of other independent oil traders. The company has spent six decades trying to keep it that way. Its website reveals little more than that it is the trading arm of privately owned oil company Marquard & Bahls.

A rare news release announced that Jan-Willem van der Velden, who started as an international trader at the company in 1997, would take over as CEO from January this year.

Van der Velden took the reins of a company on a roll. Mabanaft sold 20 million tonnes of oil in 2010, up from 18 million tonnes in 2009. Pre-tax income for its parent company Marquard & Bahls was $274 million, up from $252 million the previous year.

That's still a lot less than the billions the biggest independent oil traders make and a long way off the revenue of Marquard & Bahls' oil tanking division, the second largest in the world after Vopak. Which may be why Mabanaft wants to expand beyond its northern European heartland.

From the 43rd floor of a Rotterdam skyscraper, staff members can look out over a network of rivers toward some of Europe's biggest refineries. But Mabanaft has also gradually opened offices in Singapore and the United States and, in the summer of 2010, a representative office in India.

As usual, details are scant. "Mabanaft is aiming to further diversify its product portfolio by pursuing a controlled geographic growth strategy," is all communications manager Maren Mertens is able to offer on the subject. Geography isn't the sole focus of expansion -- it has moved into naphtha, LPG and wood pellets.

CASHEWS TO FORBES

WHO: Olam, founded 1989 by the Kewalram Chanrai Group, began trading cashews from Nigeria

WHERE: Singapore

WHAT: Coffee, cocoa, rice, grains, sugar

TURNOVER: $11 billion (2009/10)

CEO: Sunny Verghese

STAFF: 13,000 plus

By Harry Suhartono

A wealthier world needs more food. That's the argument of Sunny Verghese, chief executive of Singapore-based trading firm Olam International.

"We haven't seen this pace of population growth in our living memory," Verghese told a conference in Singapore late last year. "We have to increase food production by 50 percent by 2030, and 80 percent by 2050, with our hands tied behind our back," he said, referring to constraints to boosting output such as the lack of land, water and infrastructure.

Verghese still plans to cash in. In two decades the Bangalore-born trader has built Olam into a $4.5 billion company involved in around 20 different commodities including coffee, cocoa, rice, grains and sugar, from a startup that sold Nigerian cashew nuts.

These days, Olam has upstream operations in everything from a coffee plantation in Laos to a rice business in Thailand, from almonds in Australia to cashews in Africa. The firm is now the world's largest shipper of Robusta coffee and counts Nestle, Hershey, General Mills and Sara Lee as clients. It is also the world's second largest trader of rice after Louis Dreyfus.

The French trading giant approached Olam with a merger proposal in 2010, but talks failed earlier this year.

Verghese, who Forbes says is worth $190 million, believes he can go it alone and aims to quadruple the company's value by 2015. It helps that Olam has backing in high places: Singapore state investor Temasek holds a 14 percent stake in the trading firm.

Some analysts point to risk factors: Olam's exposure to natural disasters, such as recent flooding in Australia, and social or political unrest such as that in Ivory Coast.

IN SEARCH OF A REFINERY

WHO: Hin Leong, founded 1963 supplying diesel to fishing boats

WHERE: Singapore

WHAT: Oil and tankers

TURNOVER: $8 billion (2010)

CHAIRMAN AND CEO: Lim Oon Kuin

STAFF: About 100

By Yaw Yan Chong

Lim Oon Kuin arrived in Singapore from China over 50 years ago, and started to deliver diesel by bicycle to boatmen. Now in his mid-60s, the reclusive trader is busy with his latest empire-building effort: getting government approval to build the city-state's fourth oil refinery.

Known as OK Lim, the founder of Singapore's Hin Leong Group wants to build the company from oil trader into an integrated company. He's well on the way. A fleet of tankers and Asia's largest commercial storage facility are among the company's assets.

The $5-billion refinery would pit Hin Leong against refineries already operated in Singapore by oil majors Shell, ExxonMobil and a joint venture between Chevron and China's PetroChina.

Hin Leong made its name in the hard-fought Asia fuel oil and distillates market over 20 years ago, and is arguably the largest independent distillates trader in Asia, regularly mounting successful trading plays in the Singapore market. It also has a substantial presence in Asia's fuel oil market, the world's largest.

Lim's Chinese connections have played a big part in the company's success. It focused initially on shipping fuel oil cargoes to the mainland, a relationship that has since deepened. Hin Leong is joining hands with several Chinese firms to build the proposed Singapore refinery, even as it seeks to build a larger oil storage facility in the South Chinese province of Fujian.

Lim's biggest bet may have been an unprecedented 1997 spree in which Hin Leong bought 30 million barrels of jet fuel and diesel in the key Singapore market -- worth nearly US$800 million over a three-month span. The jury is still out among rival traders on whether he made or lost a fortune that summer, a debate Lim is unlikely to settle publicly.

In his only media interview, with Reuters in 2006, Lim credited his success to investment in his tanker armada -- the "secret weapon" that helped him set up stealthy and profitable deals in the 1990s -- and his philosophy of perseverance.

"Sometimes you get it wrong, but you have to accept it," he said.

(Jessica Donati, Christopher Johnson, Ikuko Kurahone, Richard Mably, Dmitry Zhdannikov reported from London, Gus Trompiz from Paris, Caroline Copley from Zurich, Emma Farge from Benghazi, Karl Plume and Christine Stebbins from Chicago, Hugh Bronstein from Buenos Aires, Joshua Schneyer from New York, Luke Pachymuthu, Harry Suhartono and Naveen Thukral from Singapore; Editing by Richard Mably, Simon Robinson and Sara Ledwith)

(This story October 21 story was corrrected in the 17th paragraph to reflect that Trafigura paid a U.S. Customs fine on an Iraqi crude cargo in 2001, but denied wrongdoing; clarifies language on Trafigura's 2009 legal action to prevent a report on toxic waste dumping in Ivory Coast from being published)

Herman Gref Elected to the Board of Directors of the World Economic Forum

2011-11-01T00:06:00.001-07:00

August 24, 2011, Geneva - President and Chairman of the Management Board of
Sberbank of Russia Herman Gref was elected to the Board of Directors of the
World Economic Forum (WEF) for a term of 3 years.

Since 2008, Sberbank of Russia has been a strategic partner of the World
Economic Forum. In 2009, Sberbank's head Herman Gref became a member of WEF
International Business Council.

The World Economic Forum is an independent international organization
committed to improving the state of the world by engaging business,
political, academic and other leaders of society to shape global, regional
and industry agendas. Its annual meeting is known as the World Economic
Forum in Davos, and it brings together the most renowned politicians,
businessmen and public figures from all over the world.

# # #

Sberbank of Russia
Alexander Baziyan
Public Relations
Tel. +7(495) 957 5721
media@sberbank.ru

Sberbank of Russia JSC is the largest bank in Russia, Central and Eastern
Europe, and its share includes about 30% of assets of Russian banking
system with about 240 thousand employees. Central Bank of the Russian
Federation is the founder and the major shareholder of Sberbank of Russia
JSC, owning above 60% of voting shares. Other shareholders include about
245 thousand individuals and legal entities. The Bank has the most
developed branch network in Russia: 17 territorial banks, about 20 thousand
branches and internal organization departments, as well as subsidiary banks
in Kazakhstan, Ukraine and Belarus, a branch in India, and a representative
office in Germany and China.

Moscow Leads Cities With Most Billionaires

2011-10-31T23:37:00.001-07:00

Morgan Brennan 05.17.11, 5:00 PM ET
When the U.S. economy was riding high for most of the 20th century, it would have been impossible to imagine a foreign city--especially one in a Communist country--with more of the planet's very richest than New York, home of old-money Wall Street. But that indeed is the case. Today Moscow is the city with the most billionaire residents in the world.
The Russian capital boasts 79 billionaires, a stunning increase of 21 in just one year. That more than edges out No. 2 New York, with 59 billionaires, and No.3 London with 41. Other cities in the top 15 include such rising stars as Mumbai, Taipei, Sao Paolo and Istanbul. Los Angeles manages a tie for No. 8.
Moscow's most wealthy inhabitants include a number of commodities magnates feasting on the country's natural resources. These include Vladimir Lisin (steel), the country's richest person; Alexei Mordashov (also steel) and Roman Abramovich (oil). The combined fortunes of Moscow's billionaire population top $375 billion, more privately amassed wealth than in any other city in the world.
In Pictures: Cities With The Most Billionaires
Nor is Moscow the only city with a Communist heritage gracing this list. Three Chinese cities ranked high: Hong Kong ranks 4th with 40 billionaires; Beijing, 10th with 19; and Shanghai, 13th with 16.
Despite New York's relegation to second place, the city remains a favored locale of billionaires, whose collective net worth is $221 billion. The Big Apple boasts some of the most expensive ZIP codes in the U.S., due in part to the real estate prices paid by billionaires in this city. Indeed, many Moscow residents own secondary homes in New York, including fertilizer and coal magnate Andrey Melnichenko, whose wife recently closed on a $12.2 million penthouse apartment. Even the world's richest man, Carlos Slim (home: Mexico City), snatched up a $44 million mansion on Central Park last year.
To compile our list, we tallied the primary residences of all 1,210 billionaires on the 2011 Forbes World's Billionaires list, our annual assessment of people sporting 10-figure or higher fortunes in U.S. dollars. We did not take secondary homes into account for this list.
In the U.S. we stuck strictly to city limits. For example, while a smattering of prominent media barons like Viacom founder Sumner Redstone and T.V. tycoon Haim Saban reside in Beverly Hills, they are not included in the pile of Los Angeles residents since Beverly Hills is its own city (although largely surrounded by Los Angeles).
The greatest billionaire growth came in the so-called BRIC nations (Brazil-Russia-India-China), countries whose economies are rapidly growing. They produced 108 new billionaires in the past year alone.
While Sao Paolo and Mumbai (formerly known as Bombay) are tied for No. 6 with 21 billionaires each, the collective net worths diverge. Mumbai's totals $107 billion, compared with $85 billion for Sao Paolo. Giving a boost to Mumbai is the 27-story skyscraper home of energy tycoon Mukesh Ambani. At $1 billion it is the world's most expensive home.

The Faces Behind Moscow’s Facades

2011-10-31T23:36:00.001-07:00

11 March 2010
By Alexander Teddy

In a young real estate market like Russia’s, reputation is key. Following a turbulent year of asset seizures and poor financial results for some companies, it is likely to pay for investors to know just whose experience stands behind the major local development firms.
________________________________________
This year brings hope for more positive financial data in Moscow, and analysts see the year as a time for reassessment and preparation for a distinct real estate deal upturn in 2011. Jones Lang LaSalle maintains a “fundamental belief in a 2011 pick-up,” while “slow and gradual growth” is Aecom’s forecast for the most prominent actors in the development sector over the next 12 months, the company’s spokesperson, Olga Drabkina, revealed.
Financial hardship for many large projects and the developers undertaking them was a recurrent theme throughout 2009, and major news has tended toward refinancing plan announcements, asset seizures or corporate ownership changes. The context for this has been a 63 percent drop in commercial real estate investment in the city versus 2008, according to Cushman & Wakefield Stiles & Riabokobylko.
While one can identify key firms in Russia’s real estate market, it is often unclear who the personalities are that stand behind them. This may be crucial when judging which individuals, based on their track records to date, are capable of steering their companies into positions of success over the next year and safely handling investors’ money. “It is definitely important for investors to know who the owners of these big development companies are,” said Tigran Hovhannisyan, a real estate analyst at Uralsib, an investment bank. “This is especially the case [in Russia] as many shareholders are top management, and there are personal characteristics at play. Many non-traded companies are still falling apart.”
In addition to the ownership changes, court hearings have regularly meant companies have been forced to take on or shed business arms and projects, with bankruptcies and demands for them appearing with frequency in arbitration declarations among both small and large firms. Alfa Bank launched a law suit against Glavmosstroi in July. In December, Kopernik’s disposed subsidiary, MIAN, sought to bankrupt the former’s development arm in an example of complex asset maneuvers in the face of distress. Meanwhile, developer RTM itself filed for bankruptcy in Moscow.
Maxim Gasayev, managing director at Colliers International in Russia, does not see “mass bankruptcies” arising in the coming months, although he is sure further names will exit the market. “Yet in the future, more likely than the takeover of particular development firms, will be the acquisition of decent buildings or sites,” he said. “There is no monopoly of the Russian real estate market — no one who will dictate the market’s condition. This is in contrast to a few years ago, when Enka [a Turkish developer] was a clear leader in the office market.”
Developer LSR is one listed company that noticeably and successfully bucked the hardship trend in 2009, as it weighed up the prospect of a secondary listing later in 2010, but this is an exception to the rules that the crisis has dictated.
Assets have been exchanged and re-exchanged, so tailing the transfer of company stock from one entity to another is a task in itself. But if 2009 has been the year of chaos, 2010’s semi-settling dust indicates that it is the right time to see who stands behind which Moscow developer. Last year’s market tumble meant that in many ways the real estate sector was too much in flux for a careful assessment to be made of its constituent actors; it was, at times, not even clear who they were. “The crisis has left a lot of sick companies,” Hovhannisyan said, “even now a selective approach is required when considering them [for investment] — a case-by-case basis.”
Owning Moscow
Of all the major brands in Moscow development, Sistema-Hals has probably the most widely recognizable corporate name attached to it. One of the few developers floated on the main London Stock Exchange, indeed the first to do so, it is no surprise that a large proportion, just over 21 percent, of its shares are still a free float on the exchange. Its founder, AFK Sistema, is currently under the control of its chairman, Vladimir Yevtushenkov, and in fact only owns 19.45 percent of what on the surface looks like its development subsidiary. The state bank VTB has been, since Dec. 3, the majority holder in Sistema-Hals with a 51.24 percent share. Given the collateralized-asset seizures by the giant state lender since the crisis began, such as hundreds of thousands of square meters in Moskva City, VTB saw strategic sense in gaining majority ownership of a development company — it has an option to take an absolute majority in Sistema-Hals, if its management sees fit.
If 2009 has been the year of chaos, 2010’s semi-settling dust indicates that it is the right time to see who stands behind which Moscow developer.
Holding company AFK Sistema itself, according to its web site, is 62 percent owned by Yevtushenkov, although this figure comes from late 2007. While no other public documents contradict this information, Sberbank and VTB are big lenders to the group and, as such, it is possible that collaterization of assets makes the de facto share position different. Another interesting twist in the Sistema tale is the multitude of Internet reports that say Yevtushenkov’s wife is a relative of Yelena Baturina, wife of Moscow’s mayor, Yury Luzhkov. Natalya Yevtushenkova is a member of the management of the Moscow Bank for Reconstruction and Development, a subsidiary of AFK Sistema. Several of these reports suggest that the Luzhkov-Baturina and Yevtushenkov couples are closely aligned; Yevtushenkov has himself regularly and publicly expressed his allegiance to Luzhkov.
Baturina herself is a formidable force in the Moscow development sector. Inteko, a leading development firm, stated in early December that Baturina owns it 100 percent; a “shareholder breakdown” that the closed-joint stock company provided listed only her. A search on Russia’s corporate registry database, the Unified State Registry for Legal Entities, or EGRYUL, revealed two initial shareholders in the company — Baturina and her brother, Viktor Baturin, with a small minority stake. In early 2007, it was widely reported in the press that Baturin, who founded the company with his sister, was suing her for unfair dismissal from Inteko.
Baturina, whose direct communication with the media is rare, fights off many claims that her husband helps ‘tweak’ her business successes in the real estate market and frequently uses lawyers to dispel suggestions of lavish overseas acquisitions or of undisclosed interests in other development firms active in Russia.
Nevertheless, a Vedomosti article published in early December 2009 laid down a distinct shareholder trail, showing that a company affiliated to Bank of Moscow (48 percent owned by Luzhkov’s Moscow government) was responsible for having bought land from Baturina’s Inteko at a “generous rate” in the summer of 2009.
Equally active in Moscow, yet essentially a foreign firm, AFI Development is one of the seemingly most affluent of the developers currently in Moscow. The firm is a Russia-focused, yet effectively Israeli-owned, venture: it began as a personal real estate project of Lev Leviev, a Tashkent-born Soviet emigre to Israel. In 2009, AFI’s profit rose eight-fold over the first three quarters, and in fall 2010 it is due to open Mall of Russia — a 550,000-square-meter shopping center located in the semi-frozen commercial district of Moskva City. In January, the company said that the project financing is in good health.
Leviev is the 52 percent majority owner of Africa Israel Investments, the parent company of AFI Development through what is now a slender majority. A trip into the offices of AFI shows photos of Leviev and Russia’s prime minister, Vladimir Putin, along with American film-stars — something of an illustration of the prominence he has gained through his successes with Africa Israel, in particular in the diamond industry, since the 1970s. Leviev’s personal star success has been slightly tainted in recent months as his heavily leveraged position in Africa Israel has prompted him to swap around 17 percent of stock in AFI for debt through a second share issue in AFI. Ten percent of AFI belongs to Alexander Khaldei, the company’s CEO, via a Geneva-registered company, Nirro Group; the remainder is on a free-float on the London Stock Exchange.
Several of the leading development firms in Moscow were unwilling to disclose ownership details on any level with the press.
Mirax is a name no observer of the Moscow real estate sector could fail to miss, least of all after the company’s chairman, Sergei Polonsky, expressed his disdain for anyone unable to make a billion. Polonsky, once nominated entrepreneur of the decade, has fallen from grace as Mirax suffered increasing financial difficulties caused by the withering of the real estate boom.
Following the recent resignation of Dmitry Lutsenko, a member of the company’s board, Mirax will lose its debt-restructuring architect. Mirax’s liquidity — or lack of it — has been a major source of news since the crisis began and yet it is still not clear exactly who owns how much of the company. Mirax refused to comment on the company’s ownership structure, although Polonsky is routinely reported in the press to be the majority beneficiary.
The company was founded by both Polonsky and Artur Kirilenko after the two originally set up St. Petersburg-based Stroimontazh in 1994. This latter company has been reported to be in financial dire straits and recent registry information shows that it is split 90:10 between Kirilenko and Polonsky respectively, although Polonsky was reported by Vedomosti sources to have disposed of this stake in November, just as Kirilenko relinquished any holding in Mirax.
Mirax itself originally had four partners alongside Polonsky, three of whom have left the company, leaving only Maxim Temnikov, a current board member and the next executor of Lutsenko’s duties.
Mirax’s founding shareholders, EGRYUL showed, were two offshore entities in the British Virgin Islands: Sunville Trading Limited and Mirax International Limited. No later information was available about Mirax’s shareholding structure, while ownership of the two BVI companies is not public.
One of the more complex sets of construction companies in Moscow revolves around Oleg Deripaska. His Basic Element, or Basel, holding company, of which the businessman is sole owner, has variously sized stakes in four Russian construction-based companies. Most significantly, it is the full owner of Glavstroi and its subsidiary Glavstroi-Management. Basic Element owns 75 percent of Transstroi, said Vitaly Korolyov, Glavstroi spokesman, while it also owns three-quarters of Glavstroi St. Petersburg. Additionally, Basel controls the whole of Altius Development, responsible for parts of the Sochi Olympic construction.
Deripaska’s construction and development ventures had a distinct Austrian twinge until recently, when he disposed of a 25 percent stake in leading Austrian contractor Strabag in exchange for a single share with a buyback option for his previous stake. This was extended in November at a cost of $68.5 million. In the meantime Strabag has been plagued by regulatory conflicts with the Moscow authorities, including threats of license revocation and a large tax bill. Deripaska’s other Austrian construction interest was in infrastructure builder Hochtief, but Basic Element confirmed that the company is no longer in its asset portfolio.
Shalva Chigirinsky is a name that cannot fail to get readers’ attention. Once a leader of Moscow’s real estate race for prominence and success, Chigirinsky’s has been a rough ride in recent months. His Russian Land company, a Jersey-incorporated entity, was the vehicle he used to develop such sites as the Russia Tower site in Moskva City, via ST Towers (STT). Designed by Norman Foster, the project was halted after 14 months and canceled several months later in June 2009. Another Foster-Chigirinsky project looked to be in the making until ST Development, a separate Chigirinsky-controlled company responsible for the site of the former Hotel Rossia in central Moscow, lost a lawsuit in February 2010 against the Moscow government for compensation for allegedly unpaid services on the site. ST Development, which had been working with Foster’s company on the site, fell into financial difficulties in 2008 and was forced to stop work. Numerous attempts to contact ST Development’s lawyers to ascertain the ownership structure of the company were unsuccessful, but EGRYUL listed a single Cyprus-incorporated company, Dabstorm Holdings Limited, as the owner.
Chigirinsky has faced several lawsuits, notably from VTB in London, in connection with unhonored debts. It is not clear exactly what proportion of the construction company Russian Land he still owns, but documents obtained from the UK’s High Court of Justice for a freezing order of Chigirinsky’s assets in July 2009 showed that he owned a house in Belgravia, London, now sold, and Passazh, a luxury retail arcade in St. Petersburg, also now sold, sources told reporters from The St. Petersburg Times in summer 2009, together with a host of plots and properties in Moscow: the Old Sovietskaya Hotel on Leningradsky Prospekt, a one-hectare plot for the New Sovietskaya Hotel in the same area, Nikitsky Pereulok 5 office block, and half of the Mitino development site. He was also listed as owning 400 hectares in Kaliningrad, developments in St. Petersburg, Klin, half of a ‘Tea Factory’ site in Irkutsk, the Krasnaya Polyana Olympic Center in Sochi and a property in Krasnodar. He was also attributed a large mansion in southern France, formerly belonging to Jean-Bedel Bokassa, the African dictator. An acquaintance of Chigirinsky believed him to be living in France, although also maintained that he had sold the $250 million house.
More successful at retaining financial buoyancy in the sector have been Mikhail Prokhorov, via holding company Onexim, and Vladimir Potanin, via his Interros structure. The two remain joint shareholders in Open Investments, or OPIN. The developer is responsible for the Novotel Moscow hotel and the Meyerhold Center on Novoslobodskaya Ulitsa, yet Hovhannisyan described OPIN as “basically a dying company in the sector — it is one of the largest land owners in the Moscow region and is now far more a land bank than a developer.” It is listed on the Russian RTS exchange, while Prokhorov and Potanin, formerly business partners in a range of industries via their joint vehicle KM Invest, each own significant stakes in the business.
Apparently contradicting the shareholder information on the OPIN web site, which is dated Jan. 1, 2010, Prokhorov was reported in Vedomosti in mid-2009 as having a 42 percent share in the company. On the site, Interros structures are shown to hold about 40 percent of OPIN, with Onexim at just under 30 percent.
EGRYUL gave OPIN’s founder shareholders as Interros Estate and Cyprus-based company, Motherlane Properties Limited. However, this information is not required to be updated with the state registry as OPIN is an open joint-stock company listed on the stock exchange.
Several of the leading development firms in Moscow were unwilling to disclose ownership details on any level with the press, although such information is often, albeit belatedly, available on public record in Russia. Barkli, PIK Group and Don-Stroi all gave such refusals, although Barkli is known to have laid down 51 percent of its shares to VTB as collateral on loans.
Barkli is widely believed to be controlled by Leonid Kazinets, and Don-Stroi by Maxim Blazhko, although VTB and Sberbank have recently taken over subsidiaries Don-Stroi Invest and DS Development respectively.
Kazinets was the only name given by EGRYUL as a shareholder in Barkli, although one Alexander Baiyer was also recorded as a physical entity able to act on the company’s behalf with power of attorney.
PIK has been radically restructured after corporate raider Suleiman Kerimov, as part of an aggressive real estate trawl via investment company Nafta-Moskva, consolidated a 45 percent stake in the developer, leaving the founders, Kirill Pisarev and Yury Zhukov with a 33 percent share. It is unclear how this latter stake has been divided. Kerimov’s appearance on the real estate scene in Moscow has been recent and investment-driven in what Hovhannisyan calls a bid to develop “pitfall investments” that can be used to support his Nafta portfolio. The exchange of top executives in February demonstrated an arguably hands-on approach in PIK management by Kerimov’s team.
Pisarev and Zhukov were indeed listed by EGRYUL as the sole founding shareholders in PIK Group, with approximately 71 percent and 29 percent of the total equity in the company respectively. Although the register listed a long series of shareholder changes in PIK, details were not given as to how Pisarev and Zhukov currently sit in the hierarchy of shareholders — Kerimov and Nafta were not mentioned on the documents either.

Read more: http://www.themoscowtimes.com/realestate/quarterly/article/400911.html#ixzz1cGdtqY8I
The Moscow Times

Les entreprises russes dégraissent en prévision des mauvais jours

2011-10-31T23:29:00.001-07:00

Par Emmanuel Grynszpan Moscou

Les entreprises russes dégraissent en prévision des mauvais jours La crise n’a pas encore d’effets sur l’économie réelle, mais les entreprises russes se serrent déjà la ceinture. L’emploi et l’innovation vont faire les frais des économies.
En dépit d’une consommation domestique solide, d’une croissance annoncée de 4% cette année et d’un baril de pétrole restant stable autour de 110 dollars, le monde des affaires russe fait preuve de frilosité. Le souvenir de la crise de 2008 et de la contraction de 7,9% de l’économie russe l’année suivante pousse les investisseurs russes à prendre les devants.

L’oligarque Deripaska, qui s’était trouvé au bord du gouffre en 2008 à cause de l’énorme endettement de son actif principal Rusal, procède dès à présent à des coupes sévères dans ses actifs. Selon le quotidien Vedomosti, il a demandé à plusieurs entreprises de son empire (métallurgie, finance, BTP, énergie, automobile) de réduire de 15% la masse salariale. Des nouveaux projets sont gelés et les coûts administratifs doivent être réduits au strict minimum. Les grands groupes russes savent qu’ils doivent faire très attention concernant leurs plans sociaux alors que le pays entre en période électorale (législatives en décembre prochain et présidentielle en mars 2012). Il ne s’agit pas de s’attirer l’ire du Kremlin. Pour l’instant, les statistiques sont bonnes avec un taux de chômage en baisse, selon le Ministère de l’économie. Il est officiellement de 6% contre 7,2% en avril de cette année.

La tension est plus marquée dans le secteur bancaire, avec l’annonce faite lundi par l’agence Moody’s d’une baisse de la notation du système bancaire russe, qui passe de «stable» à «négative». Moody’s prévoit dans les 12 à 18 mois qui viennent un fort ralentissement de l’offre de crédits et la détérioration des actifs bancaires, le tout conduisant à des problèmes de liquidités. Anticipant les tensions sur le marché interbancaire, la Banque centrale de Russie a proposé mardi 1200 milliards de roubles à ses ouailles, qui en ont profité à hauteur de 706 milliards de roubles, le maximum depuis 2009.

Parallèlement, plusieurs banques étrangères se retirent du marché russe. Barclays vient de vendre ses opérations russes, tandis que HSBC a fermé son activité de banque de détail. BNP Paribas serait en négociations avec le Russe Sberbank pour revendre son activité de crédit à la consommation Cetelem.

Un concert de rapports alarmistes cette semaine ne fait rien pour arranger l’humeur des hommes d’affaires.

Si une crise globale économique s’installe en Europe, l’économie russe sera forcément touchée à cause de la baisse de la demande pour ses hydrocarbures et métaux (2/3 des recettes du budget et 50% du PIB). L’économie russe reste très peu diversifiée et vulnérable à la conjoncture internationale. Dans son étude «La Russie et la crise» publiée la semaine dernière, Citibank affirme qu’en cas de ralentissement de la croissance américaine et de changement de structure de l’économie chinoise, la croissance russe pourrait passer sous la barre de 3%. Si la crise de la dette européenne s’aggrave jusqu’à une perte de contrôle des autorités, le baril de pétrole pourrait tomber à 50 dollars et provoquer une contraction de 3% du PIB russe et relancer l’inflation à 19% (contre 6% aujourd’hui). De passage à Moscou pour rencontrer Vladimir Poutine, le PDG de Procter & Gamble s’est fendu d’un conseil aux entreprises russes. «En période de crise, la première priorité est d’investir davantage dans l’innovation et la recherche», a expliqué Bob McDonald. Jusqu’ici, cette idée n’a guère fait d’émules: une seule société russe (Gazprom) figure parmi les mille groupes investissant dans la recherche et le développement. La Russie est largement très loin derrière ses pairs émergents du BRIC, qui investissent de plus en plus dans l’innovation.

L’Ecole supérieure d’économie a calculé que les dépenses combinées de R&D ne représentaient que 1,32% en 2010 et ont diminué en termes réels par rapport à l’année précédente. Suivant cette tendance, l’Etat russe envisage de réduire son financement de la technopole de Skolkovo, près de Moscou, qui doit devenir le pendant russe de la Silicon Valley.

Up and coming

2011-10-23T00:40:00.000-07:00

by Lidia Okorokova at 20/10/2011 20:26
Like any big city, Moscow is constantly evolving. An area that is considered downmarket today could easily be tomorrow’s trendiest neighborhood.
Since real estate prices in desirable areas are high, those on the lookout for a good deal need to be constantly looking ahead to predict which districts will become prosperous in the near future.
Making such predictions is easier in Moscow than in the capital cities of developed countries, where social movements often determine the trendiness of particular areas. In the Russian capital, it is easy-tofollow infrastructure developments that have the biggest impact on desirability.
Pushing up value

© RIA Novosti. / Alexander Vilf
An luxury apartment block near downtown Moscow’s Novy Arbat
The construction of a new metro station has a significant impact on the status of a neighborhood and on property prices.
“Strogino and Mitino are good examples of neighborhoods where housing prices increased significantly after the construction of a metro station,” Alexei Shlenov, Director General at the MIEL-Brokerage real estate agency told The Moscow News.
Both areas are located several metro stops outside the city center but have steadily rising real estate prices, due in part to their relative cleanliness and goodquality housing developments. Strogino was put on the metro map in 2008, while Mitino’s station was opened in 2009.
Experts say the highly-populated southeastern district of Maryino has all the criteria of an up-andcoming neighborhood.
“Interest in Maryino has increased significantly since a welldesigned housing development began there and two new metro stations opened in the region,” said Shlenov.
The Maryino and Bratislavskaya metro stations were opened in the mid-1990s.
Maryino’s desirability will increase further later this year with the opening of a third metro station, Zyablikovo.
Future elite hubs

© RIA Novosti. / Anton Denisov
A brand new sports complex in Strogino
Realtors say the elite segment is also still growing and there are several areas tipped to be the next hotspots for elite living.
“Major new developments are planned near Prospekt Mira, in the west and southwest of Moscow, and at the embankment of Bolotnaya Naberezhnaya,” said Alexander Ziminsky, director of elite property at Penny Lane Realty.
Always prestigious
Experts say that once an area has become prestigious, it is likely to stay that way, at least for the next five-ten years.
This is largely due to the fact that many of the neighborhoods are located in historical areas of the central district, where new construction is prohibited and living space is in short supply.
“For a long time, the areas considered most prestigious in Moscow have been the central administrative district, Kutuzovsky Prospekt, Khamovniki and the western districts,” Shlenov, of MIEL, said.
Property prices for these areas start at $8,000 per square meter beyond the Garden Ring, and around $15,000 in a trendy central district like Patriarshiye Prudy.

Real estate news

© RIA Novosti. / Pavel Lisitsyn
One of Moscow’s most expensive houses, in the central Khamovniki district
City Hall’s $ 2 billion plan
The Moscow authorities announced this week a plan to construct 13 million square meters of new housing as part of a 63 billion ruble ($2 billion) fi ve-year townplanning program until 2016.
The plan would ensure that each offi cially registered Muscovite has access to 24 square meters of housing, Sergey Levkin, head of the department of urban planning policy at Moscow City Hall told journalists Wednesday, RIA Novosti reported.
The project also includes a proposal to increase the metro network by 75 kilometers to connect the new housing developments to the city.
“We aim to reduce the section of the population that doesn’t use the metro by 13 percent,” Levkin said.
Some 400,000 parking spaces will be also built in the capital in the next fi ve years in a further bid to solve the city’s overburdened infrastructure.
In addition, the plan contains clauses on renovating existing urban areas, including historic areas, and integrating urban developments on the outskirts of the city with projects in the rest of the capital.
Aside from the city government funds allotted to the program, the authorities also hope to attract investment through a public-private partnership, Levkin said.

Smiles Greet the Status Quo at FIAC

2011-10-18T00:28:00.000-07:00

18 October 2011
By Howard Amos

Prime Minister Vladimir Putin impressed a gathering of heavyweight foreign investors with charm and statistics Monday, at a set-piece annual discussion between government officials and foreign chief executives.

Opening the 25th meeting of the Foreign Investment Advisory Council, or FIAC, with a welcoming smile directed at all sides of the rectangular table, Putin told investors that unemployment in Russia had fallen, foreign direct investment was growing and that Russia would not have a budget deficit in 2011.

Despite recent political upheaval, including the firing of internationally respected Finance Minister Alexei Kudrin on Sept. 26, Putin stressed that there would be no changes to government economic policy.

“On the threshold of any big political event, especially parliamentary and presidential elections, investors are interested in how the economy will develop,” Putin said, according to a transcript on the prime minister’s web site. “We do not intend to change the economy’s orientation.”

Putin told his guests that he welcomed criticism as well as praise. “That was all very pleasant for me to hear,” Putin told Paul Bulcke, head of Nestle, who had just made a speech, “including the critical observations.”

Putin said unemployment had dropped by 1 million people since January, Russia’s trade surplus was $147.7 billion in the first three quarters of 2011, and agriculture will grow by a minimum of 14 percent this year.

Investors present at the meeting were quick to compliment Putin. “I had skepticism about investment in Russia, but I walked away with quite another impression,” said George Buckley, chief executive of 3M, in remarks released by his press service after the gathering.

“I was very pleased with this meeting,” Buckley said. “Mr. Putin was very impressive, strong and intelligent. He is extraordinarily well informed.”

Making a keynote speech at the meeting, James Turley, chairman of Ernst & Young, criticized the time required for construction in Russia and the effectiveness of its legislation in today’s global business environment. But he told Putin that FIAC was in favor of his decision to run for a third term as president in 2012.

“We support your candidacy for the post of president, but we will miss your leadership here in your capacity as prime minister,” Turley said.

Klaus Kleinfield, president of aluminum-miner Alcoa, told The Moscow Times that the meeting was, “as always, a frank and direct conversation.”

“Topics ranged from customs to taxes, to easing visa regulations, to welcoming the creations of a new ombudsman to help foreign investors navigate the Russian system more efficiently,” he said.

Russian ministers present at FIAC in addition to Putin included Deputy Prime Minister Igor Shuvalov, Economic Development Minister Elvira Nabiullina, Energy Minister Sergei Shmatko and acting Finance Minister Andrei Siluanov.

Pledging to commit an additional $20 billion to health care and education over the next three years, Putin also looked to reassure investors during the televised gathering that Russia was able to keep a lid on any social protests linked to economic problems. Russians should be able to count on the fact that their country was changing for the better, Putin said. Otherwise, “things may reach the state that we now observe in some countries with an advanced economy where … hundreds of thousands demand what the governments of those countries are actually unable to do.”

Chaired by the Russian prime minister, FIAC was created in 1994 to channel the expertise of foreign companies into the improvement of Russia’s investment climate. It includes 42 chief executives from international companies and banks.

During the committee’s meeting on Oct. 18, 2010, Putin emphasized the government’s privatization program as an important opportunity for foreign investors. Despite ambitious plans, the program has failed to get off the ground, and there was no discussion of privatization Monday.

The expected sale by the Central Bank of a 7.6 percent stake in Russia’s biggest lender, Sberbank, this fall has been postponed because of market turmoil.

Putin also focused less on the importance of high-technology transfer in foreign investment than in 2010. “Although our main aim is diversification, the infusion of our economy with an innovative character, we do not, of course, intend to kill the chicken that currently lays the golden egg — on the contrary, we care about her health and will think about how to attract investment in the sphere of mineral resource extraction,” Putin said.

Noting that the companies represented by the executives sitting around the table — which included BP, Deutsche Bank, Kraft Foods, PepsiCo, Siemens and Unilever — had contributed about $100 billion to the economy, Putin said foreign direct investment, or FDI, had risen 20 percent in the first nine months of this year. Nabiullina, the economic development minister, said Russia attracted $31 billion in FDI that in the first nine months of 2011.

According to figures from the Organization for Security and Cooperation in Europe cited by Frank Schauff, head of the Association of European Businesses in Russia, FDI stood at $41 billion last year and $36 billion in 2009 — indicating that this year’s figure has yet to show any substantive growth.

“The investment climate is more or less stable,” Schauff told The Moscow Times. “Things are pretty much the same as a year ago.”

Read more: http://www.themoscowtimes.com/news/article/smiles-greet-the-status-quo-at-fiac/445695.html#ixzz1b7FwSgQG
The Moscow Times

VTB finishes on top of russia research

2011-10-16T05:03:00.001-07:00

The 2011 All-Russia Research Team - Institutional Investor

VTB CAPITAL FINISHES ON TOP IN RUSSIA RESEARCH

Russia would be a buyer’s market, many analysts and market observers believe, but insufficient reporting and disclosure — coupled with an uncertain political environment ahead of parliamentary and presidential elections — have been scaring off investors. Plunging commodities prices, a strengthening dollar and lingering jitters about the viability of the global economic recovery have also taken a toll on investor confidence — and Russian stocks. The benchmark Russian Trading System index, which had notched a year-to-date gain of 14 percent by early March, tumbled along with the price of oil and by mid-May was up only 4.3 percent for the year.

Money managers depend on guidance from informed analysts to help them keep short-term volatility in perspective and create portfolios that are likely to withstand such nerve-wracking market gyrations, and they say no firm does a better job of providing that guidance than VTB Capital, which leads the 2011 All-Russia Research Team, Institutional Investor’s eighth annual ranking of the country’s top equity and fixedincome researchers.

VTB Capital leaps from fourth place to finish on top for the first time, with 14 positions — eight more than in 2010. Troika Dialog, which tied for first place last year, ranks second; the firm captures 12 spots, one fewer than last year. Despite picking up two more positions, for a total of nine, Deutsche Bank holds steady in third place, for a third year running. Renaissance Capital, which led or co-led the team for the past seven years, tumbles to No. 4 after losing eight positions, leaving it with five. Three firms — Credit Suisse, J.P. Morgan and UralSib Capital — tie for fifth place; they claim two spots each.

To view the complete list of winning firms, click on the Leaders link located in the navigation table on the right. To view the top-ranked researchers in each of the survey’s 12 sectors, click on The Best Analysts of the Year. The full list of winning analysts, including those ranked second, third and runner-up, is available to subscribers only.

For information about how this ranking was compiled, click on Methodology. For information about our detailed Research Team reports, please contact Alyssa Walker at awalker@iiresearchgroup.com.

Who Are Russia's Top Money Mangers: The Russia 20

2011-10-16T04:47:00.001-07:00

Who Are Russia's Top Money Mangers: The Russia 20 - Institutional Investor
September 22, 2011 • Craig Mellow

Page 1 of 3

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These should be good times for Moscow-based asset managers. After all, affluent Russians’ pockets are bulging with cash again. Moscow regained the crown of city with the most billionaires in this year’s Forbes magazine ranking, edging out New York, with 79.
The surge in wealth reflects a vigorous economic recovery from the 2008–’09 financial crisis. Growth is running at a healthy 4 percent, stoked by Brent oil prices that have remained above $100 a barrel even as the global economy has slowed. Privately administered pension funds are growing rapidly in Russia, promising the formation of a much-needed institutional capital base. Stocks and bonds are increasingly attractive to retail investors as bank deposit rates lag well behind inflation.

For now, though, those positive factors offer more potential than actual benefit to local fund managers. Oligarchs and the merely wealthy are managing their money through Western-based family offices or entrusting it to European private banks, engaging in what Russian financiers euphemistically call “geographical diversification.”

Ordinary savers, meanwhile, remain scarred by a number of violent market swings since the country’s mutual fund industry was born in the privatization wave of the mid-1990s. The stock and bond markets cratered after Russia defaulted on its debts in 1998, and it took nearly a decade of economic and market recovery to begin enticing retail investors back into funds. That tentative confidence suffered a fresh blow in 2008, when the financial crisis wiped out three quarters of the Russian Trading System’s market capitalization between May and October. The RTS index was just approaching its precrisis highs when the latest global economic jitters triggered a 30 percent correction between April and August.

Given that volatility, it’s little surprise that Russian mutual funds hold a derisory $4 billion in assets, a pittance compared with the country’s $150 billion in bank deposits, according to Troika Dialog Asset Management. “Russia has one of the most unfortunate mutual fund industries in the world,” says Anton Rakhmanov, Troika’s director of asset management. “We’ve been in existence for 15 years and had two crises.”

In contrast to the subdued domestic players, international investors are edging cautiously back into Russia, spurred by the general vogue for emerging markets. This trend is evident in the Russia 20 , Institutional Investor’s exclusive new ranking of the country’s largest money managers. Two Western-run asset managers top the list. Prosperity Capital Management, an independent firm that focuses exclusively on investments in Russia and the former Soviet Union, had $4.85 billion in Russian assets under management at the end of June. It is followed by TKB BNP Paribas Investment Partners, a joint venture between the French bank and TransCreditBank, a subsidiary of Russia’s state-owned VTB Bank. The outfit had $4.09 billion in assets.

Mattias Westman, the Swedish founding partner who runs Prosperity from London, says the firm’s investor base, traditionally dominated by European family offices and Scandinavian institutions, is becoming more diverse. Since the crisis the firm has attracted money from four sovereign wealth funds, including Norway’s deep-pocketed Government Pension Fund Global, and two U.S. pension funds, a class of investors that has typically been Russia-averse. “A lot of investors are willing to have a real look at Russia now rather than dismissing it out of hand,” Westman says.

UralSib Asset Management ranks third on the list, with $4.01 billion in assets, followed by Troika Dialog Asset Management ($3.33 billion) and Promsvyazbank ($2.41 billion), Russia’s tenth-largest bank, which is one quarter–owned by Germany’s Commerzbank and the European Bank for Reconstruction and Development.

Homegrown Russian asset managers would love to build a bridge to Western capitalists. Aton Asset Management Co., which ranks No. 12 on the list, will launch a hedge fund next year targeted at international investors and domiciled offshore, deputy CEO Pavel Nikonov says. (If it were registered in Russia, the government might tax all the fund’s gains, not just the manager’s earnings.)

Yet most Russian managers still place their biggest hopes on reviving the domestic retail business. Here the potential seems impressive. The same Russian wealth explosion that has produced the country’s fabled nouveau riche has trickled down to millions of middle-class families with considerable means to build a traditional bourgeois nest egg. Per capita GDP reached $15,900 on a purchasing power basis last year, according to the Central Intelligence Agency’s World Factbook. That’s 30 percent higher than Turkey’s income level and nearly 50 percent more than Brazil’s. The average mutual fund account at Aton is worth $70,000.

Russia Tries to Court Foreign Investment

2011-10-16T04:40:00.001-07:00

13 Oct 2011 - Craig Mellow - Institutional Investor

A summons to meet Vladimir Putin can be an unnerving thing for a business executive to receive. Mikhail Khodorkovsky, the former Yukos Oil CEO serving a 14-year prison sentence for fraud and tax evasion, is said to have aroused then-President Putin's wrath in part by turning up for a Kremlin conclave without a tie. Igor Zyuzin, the controlling oligarch of coal and steel producer Mechel, ducked a meeting with now-Prime Minister Putin in 2008 on grounds of illness and paid a steep price. Putin quipped that "maybe we should send a doctor" for Zyuzin, then asked prosecutors to investigate pricing policies that seemed to minimize Mechel's tax burden. The company's share price plunged 37 percent in one day.

For foreign investors, however, Putin is showing a more welcoming face these days. In May he convened 16 of the world's leading investors to Moscow. The group that met in a grandiose conference room at the government's Vozdvizhenka guesthouse, a converted prerevolutionary mansion steps from the Kremlin, included such Western buyout legends as Blackstone Group chairman and CEO Stephen Schwarzman and TPG Capital founding partner David Bonderman, as well as sovereign wealth fund titans like Lou Jiwei, chairman and CEO of China Investment Corp., and Bader al-Saad, managing director of the Kuwait Investment Authority. Altogether the invitees controlled a cool $2 trillion in investable assets.

In a 40-minute pitch, after which he took questions for more than an hour, Putin offered his high-powered visitors a deal: The Kremlin stood ready to coinvest with them if they would put money into Russia's nonresource economy by building toll roads, producing medicines and modernizing ports and warehouses, among other things. Russia would contribute $10 billion over the next five years to a new entity, the Russian Direct Investment Fund, which would hunt for undervalued companies, broker deals with foreign investors and share up to half the financial risk.

Putin's sovereign visitors responded enthusiastically. "CIC is willing to invest in Russia," Lou told a Chinese news service a few days later. The country, he said, had "big development potential given its vast market and rich resources." (CIC backed up Lou‚s words earlier this week by striking the first deal with the Direct Investment Fund. Under the arrangement, CIC and the Direct Investment Fund will each contribute $1 billion to a new vehicle, the Russia-China Investment Fund, that will make equity investments in Russia. The new fund also aims to raise up to $2 billion from other investors.)

The emissaries of private capital were intrigued but more cautious. "There is no doubt that having the government as a co-investor ought to be attractive," Bonderman tells Institutional Investor. TPG has some experience in Russia, having spent $110 million to obtain a 31 percent stake in supermarket chain Lenta in 2008.

Today the Direct Investment Fund is fast taking shape under the direction of Kirill Dmitriev, a U.S.-educated financier who until recently worked for a leading Russian private equity firm. Last month Dmitriev announced the hires of six investment professionals from prominent Russian and foreign firms, the first members of a team of fund managers he expects will grow to two dozen by the end of this year. He also aims to sign his first few deals by December. The Direct Investment Fund will invest on a 50-50 basis with foreign partners in its early projects, then take smaller equity stakes as outsiders grow more comfortable with the process, he says.

“We could move to 5-to-1 or 4-to-1 in favor of the outside investor,” he tells II in an interview at a roomy corner table in Café Pushkin, an elegantly restored prerevolutionary eatery on Moscow’s Boulevard Ring that serves as an office of sorts while the fund’s headquarters at the Moscow City financial towers are being finished.

Such a new stream of funding could play a critical role in helping Russia diversify its economy away from oil, gas and other raw materials — a key government goal. The country has had little of the type of investment Dmitriev aims to attract. He hopes to sell sovereign funds on big infrastructure projects, the need for which is abundant across Russia’s enormous land mass. The fund wants to generate a steady 15 percent annual return on such investments over a period of decades. For Western private equity players, Dmitriev will scout underperforming manufacturing or service companies that could yield returns of 25 to 30 percent through restructuring and eventual public share sales.

Russia lags other big emerging markets in foreign direct investment. It received about $14 billion in FDI in 2010, according to the Finance Ministry, well below India’s $26 billion and China’s $106 billion. Nearly all the foreign investment in Russia has come from corporations like IKEA, which operates 13 of its furniture outlets in the country, or PepsiCo, which spent $3.8 billion last year to buy 66 percent of dairy and juice maker Wimm-Bill-Dann Foods.

A small, intrepid band of venture capitalists has worked profitably in Russia since the 1990s. Baring Vostok Capital Partners, a Moscow-based private equity outfit run by American Michael Calvey, bought 36 percent of Internet search engine provider Yandex for a reported $5 million in 2002. It cashed in handsomely when the company made a $1.3 billion initial public offering in May, a week after Putin’s investor conclave, selling a 10 percent stake for about $800 million. But these funds’ average bet is in the $50 million range. Private equity on the scale Dmitriev is aiming at — $500 million to $600 million per target — is virtually unheard-of in Russia.

There are good reasons for that. Foreign businesses have been beset by a seemingly endless array of difficulties. A prospective partnership between BP and state oil company Rosneft was torpedoed earlier this year by litigation from the Russian partners in existing joint venture TNK-BP even though the Rosneft deal had Putin’s apparent blessing. For smaller-scale investors, sticky-fingered officials and local rivals or partners can bend a pliant legal system to undermine presumed property rights. IKEA, whose success in Russia Dmitriev boasts about (sales per square meter are more than double the company’s worldwide average, according to a recent study by real estate consulting firm Jones Lang Lasalle), halted new store openings in Russia in 2009, blaming the “unpredictable character of administrative procedures.” IKEA’s octogenarian founder, Ingvar Kamprad, said the company had been “cheated” out of $190 million by power suppliers who reneged on contracts and other unreliable partners. IKEA finally opened a complex in the oil-refining center of Ufa this summer, its first new Russian outlet in two years.

TPG has had headaches of its own with Lenta. The CEO it installed, Jan Dunning, was deposed in a boardroom coup last year by a fellow investor, U.S.-born businessman August Meyer, who had teamed up with one of Lenta’s founders. When Dunning tried to reclaim his office, armed with a Russian court judgment, fisticuffs broke out and 20 people were arrested. TPG managed to overcome that setback. In August it agreed to buy Meyer’s 44 percent stake for $1.1 billion, taking control of Lenta in partnership with Russian state-owned VTB Bank and the European Bank for Reconstruction and Development.

Political risk exists at a higher level too. Putin’s announcement late last month that he would run for president next year — effectively swapping jobs with Medvedev, who will become prime minister — prompted the resignation of Finance Minister Alexei Kudrin, a man regarded by most foreign investors as the best guarantor of financial stability in Russia.

Given that background, critics say the Direct Investment Fund will have little impact without systemic improvements to reduce corruption and firmly establish the rule of law in Russia. “They need to do the hard work of real reform, not launch another fund,” says Florian Fenner, managing partner at UFG Asset Management, a Moscow-based firm active in both direct and portfolio investment for more than a decade.

Dmitriev says his fund will not do what many foreign investors would like it to do: ride herd on the bureaucracy so that projects can proceed more smoothly. For that purpose, foreign investors already have an ombudsman’s office run by influential First Deputy Prime Minister Igor Shuvalov, he insists. He is backed up by Stanislav Voskresensky, a deputy minister of Economic Development and Trade, who helped get the Direct Investment Fund established. “The fund’s job is not to get construction permits,” he says curtly.

Instead, Dmitriev says, the fund will help multinational investors access an opportunity that is too complex for most to explore on their own: modernizing Russia’s domestic economy to meet surging demand from consumers who are rapidly growing richer and more sophisticated. “How does Korea Investment Corp. get deal flow in Russia?” he asks hypothetically, naming another sovereign wealth fund he hopes to partner with.

For statistical illustration, Dmitriev reaches for the iPad resting next to his espresso cup and whips through a few screens: At $15,900 a year on a purchasing power basis, Russia’s per capita income is by far the highest among the big emerging markets, almost 50 percent greater than Brazil’s and more than two times China’s, according to the Central Intelligence Agency’s World Factbook. The number of families with annual incomes of more than $10,000 has tripled in the past three years, according to official statistics

The Russian economy is crying out for improvements to match that rise in purchasing power, says Vyacheslav Pivovarov, a former adviser to the Economic Ministry who also helped lay the groundwork for the Direct Investment Fund. Like Dmitriev, Pivovarov is a “repat,” as Western-trained professionals who return to Russia are called. He earned an MBA at the Stanford Graduate School of Business, worked as a portfolio manager at New York hedge fund firm Third Point Capital, then became a partner at Vikram Pandit’s Old Lane Partners, which Citigroup acquired in 2007.

The potential for investors in Russia is enormous considering that average productivity is just one fourth of U.S. levels, Pivovarov explains. The country’s wealthy oligarchs have focused on where the easiest money is, in commodities and in heavy manufacturing like steel. A less-well-known group of entrepreneurs has overhauled retailing and is spreading smart new supermarkets across Russia. But a vast array of sectors, ranging from light manufacturing to business services to infrastructure, remains badly underdeveloped. “There are a lot of companies that oligarchs are just sitting on” because they are too busy milking their cash cows, Pivovarov contends.

The key to raising efficiency in these lagging sectors is better management, not heavy capital spending, he says, citing a 2009 McKinsey & Co. study that attributed 80 percent of Russia’s productivity lag to inefficient processes rather than outdated equipment.

Dmitriev identifies a number of early target sectors for his new fund. Health care, port and railroad logistics, and services related to municipal housing, such as building management and electricity distribution, will be among the fund’s early priorities, he says. Further down the road, he expects the fund to invest in pharmaceuticals, energy efficiency, agribusiness and forestry.

Pivovarov left the ministry to start his own firm, Altera Capital, in partnership with former deputy Economic minister Kirill Androsov. He has raised a $350 million private equity fund that is focused on opportunities in logistics, food processing and housing.

Dmitriev says he is heartened by the apparently solid backing his fund has received from both sides of Russia’s dual power structure: the ministerial network overseen by Putin and the Kremlin apparat that answers to Medvedev. The seed of the Direct Investment Fund was planted by the Economic ministry, the driving force behind market-oriented reforms since Putin first took power in 2000. In March 2009, in the depths of a recession that saw Russia’s economy contract by almost 8 percent, the ministry asked Pivovarov to come home from New York and advise it on “new sources of growth after the crisis,” as he puts it.

Medvedev unveiled the concept for the new fund in June 2010 at the St. Petersburg International Economic Forum, which has become Russia’s key annual business event. The final push came from Putin at his May meeting. The fund had to buck opposition from Kudrin, the former Finance minister, who was skeptical about adding such a large government expenditure, but he ultimately agreed to support it, Dmitriev says.

Perhaps more important, after years of building up state holding companies to control so-called strategic industries and maintain jobs, Russia’s leaders seem more inclined to promote private investment and the profit motive as the best engines of long-term growth. “At the May meeting Putin clearly said that the goal of the fund is return, and employment will be generated as a by-product,” Dmitriev says.

The Kremlin is preparing an ambitious new privatization campaign. According to the Economic Ministry, the program aims to raise $40 billion over the next three years. A key test will come next year with the planned sale of a 15 percent stake in oil giant Rosneft, which would be worth more than $10 billion at the current market price. For now, though, the government has delayed planned sales of shares in Sberbank, the country’s leading lender, and Sovcomflot, the No. 1 shipping company, because of poor market conditions. The Russian Trading System share index has dropped 35 percent from its high in early April.

The appointment of Dmitriev to head the Direct Investment Fund is a positive sign in itself, Russia watchers say. It marks a rare instance when the state has reached beyond its own bureaucratic ranks to pick a financial professional with actual experience in private equity.

Dmitriev is very much a product of post-Soviet Russia. In 1989, a year when the Berlin Wall crumbled and Mikhail Gorbachev’s perestroika policies gave Russians hope of a freer future, Dmitriev got his first taste of the wider world when an exchange program brought a California couple to visit his parents, both molecular biologists in Kiev. The visitors gave 14-year-old Kirill a Stanford University T-shirt, sparking his ambition. A few years later he went to Palo Alto on a full scholarship and earned a bachelor’s degree in economics from Stanford, then proceeded to obtain an MBA from Harvard Business School. Equipped with his degrees, Dmitriev put in stints at McKinsey, where he consulted for clients ranging from theme park operators to insurance companies, and at Goldman, Sachs & Co., where he worked on technology IPOs at the height of the tech boom.

He returned to Moscow in 2000 to work for a computer systems company, then settled two years later at Delta Private Equity Partners, an outgrowth of one of the funds the U.S. Congress started in the early 1990s to seed capitalism in Eastern Europe.

Despite Dmitriev’s impressive résumé, mingling with the world financial elite and managing billions of dollars in state money represents a big career leap, and some Moscow financial hands question his readiness for the task.

His American boss at Delta, Patricia Cloherty, says Dmitriev was the star of the firm’s seven investment professionals. He focused, among other things, on the successful disposals of two financial institutions: Delta Bank, which the firm sold to GE Capital, and DeltaCredit Bank, which was bought by Société Générale. Cloherty says she was grooming Dmitriev to succeed her as chief executive in 2007 but his outsize ego caused her to change plans. “I was asking him to be a CEO, not a king,” she says. “His attitude made it difficult for other people to perform their jobs.”

Dmitriev faces a dual challenge at the Direct Investment Fund. Working with sovereign wealth funds looks promising, judging by the initial reaction of fund managers as well as the interests of their governments. China, for instance, is eager to secure energy supplies and has a strategic interest in developing closer ties with Russia as the country develops oil and gas exploration in eastern Siberia and off Sakhalin Island. Russia’s Gazprom and China National Petroleum Corp. signed a framework agreement two years ago to build two pipelines to ship massive quantities of Russian natural gas to China, but the two sides haven’t been able to agree on price terms that will allow the deal to go ahead. By the standards of that proposed deal, which would involve billions of dollars’ worth of gas a year, a few billion from CIC to improve Russian roads would be a pittance.

South Korea and other Asian countries are also warming to Russia for its energy riches and as a potential counterweight to China’s economic might. The Middle East’s oil-rich Gulf states may be willing to invest in all the friends they can find given the turmoil sweeping the Arab world and an equivocal U.S. policy toward the anciens régimes.

Luring billions of dollars from the likes of TPG and Blackstone could be a much tougher sell. As Russia rebounds from the 2008–’09 crisis with a solid growth rate of about 4 percent a year, Western capitalists are increasingly convinced of the investment potential of the country’s nonresource economy. “Growth is coming from almost everywhere” in Russia, Blackstone’s Schwarzman told reporters at this year’s St. Petersburg economic forum. “One doesn’t have to be in resources and minerals to do well.”

But whether he himself will dive into Russia, and if so, via the Direct Investment Fund, is another question. “I think we have an open mind in terms of looking at that vehicle,” Schwarzman added. With growth markets like China and Brazil beckoning, private investors are likely to exercise caution in Russia until Putin can demonstrate that the country’s investment climate has changed.

Still, Dmitriev insists that private equity will play an equal role alongside sovereign wealth funds in investing with the Direct Investment Fund. He points out that it will take only a modest amount of those funds’ vast resources to make the new Russian venture a success. “There’s a total of $27 trillion in long-term capital available through sovereign funds, private equity and family offices, and just $20 billion of it is available for Russia right now,” he says.

The future seems promising. But starting from scratch under the watchful eye of Vladimir Putin means Dmitriev needs to succeed quickly. “Now comes the time for execution, where there is very little room for error,” he concludes. “We are like someone who clears mines on a battlefield. You can only make a mistake once.” • •

Moscow Ranked Top for New Business

2011-10-14T09:05:00.001-07:00

13 October 2011
The Moscow Times

Moscow has been designated the most desirable European city for companies to expand into for the second year running, according to a survey by global property consultant Cushman & Wakefield.

Of the 501 European companies participating in the survey, 57 said they expect to open an office in Moscow within the next five years — up 20 percent from 2010.

“This [rise in corporate development in Moscow] is being accelerated by very strong expansion in consumer spending, with the potential for this to be leveraged up considerably due to the current low levels of penetration of consumer credit, strong growth in B2B [business-to-business] sales and large potential in regional cities beyond the traditional powerhouses of Moscow and St. Petersburg,” said Tim Millard, managing director of Cushman & Wakefield in Russia.

“This growth in corporate activity will drive the next commercial property cycle and will give the bold investor the opportunity to earn significant returns from both income growth and capital appreciation,” Millard said.

One of the factors driving Moscow’s popularity as a destination is an increasing focus by European companies on growth markets. Those surveyed viewed “new opportunities from the emerging markets for products and services” as the No. 1 trend likely to impact business over the next five years.

Companies also increased their opinion of Moscow’s ability to provide easy access to markets, moving up to 11th position, from last year’s ranking of 19th.

Putin pitches to investors

2011-10-09T23:16:00.000-07:00

the moscownews

Prime Minister Vladimir Putin’s pitch to investors at the VTB Capital “Russian Calling!” investment forum Thursday sounded more like the kind of rhetoric the country is used to hearing from President Dmitry Medvedev.

In a half-hour speech and rare question-and-answer session with foreign investors, Putin gave his best shot at persuading a fairly skeptical audience of some 500 business leaders what they prob- ably wanted to hear - that Russia is following a path of modernization, privatization and diversification away from oil and gas.

“Our strategic line is that the state should gradually reduce its direct presence in the economy... privatize state-owned shares and introduced independent professionals to the boards of directors of state-owned companies,” Putin said.

Putin has traditionally taken a more cautious line on economic reform, while leaving investor-at-tracting rhetoric about modernization to Medvedev. This has caused analysts to predict an outflow of investment from the country when Putin returns to the presidency in March. However, this did not seem to be a worry facing many of the foreign investors at the event, who were cautiously optimistic about the country’s future.

I think Putin’s return is a good thing – stability is good for Russian politics and the Russian economy,” said Tarek Fawaz, managing partner at Swiss-based Rayan Capital Advisors. “If you look at how the market was behaving before the announcement, there was a flight of capital due to uncertainty of what was coming next. In the short-term at least, it is a positive development.”

Nevertheless, others cited the usual stumbling blocks still standing in the way of the country having an attractive investment climate, and Putin’s roundabout answers to the questions put to him about corruption and the fact that most Russians want to leave the country, will likely have done little to allays these fears.

Russia’s capital outflows reached an estimated $18.7 billion in the third quarter, bringing this year’s total to $49.3 billion, the Central Bank said in a statement Tuesday. Although part of this figure can be put down to investor uncertainty over who would run in the March elections, there are other factors at play.

“The current investment climate is better than it was but there is still a crying need for transparency in the courts, in the government and in the bureaucratic divisions. This process has been started, but it is only a start,” Clive Bode, a partner at the global private equity firm TPG Capital, told The Moscow News on the sidelines of Thursday’s event.

And the recent departure of Russia’s long-serving finance minister, Alexei Kudrin, may not help to calm investors’ nerves.

Kudrin, who still holds the role of chairman of the National Banking Council, was notable for his absence at the VTB event, after he was apparently struck off the program at the last minute.

Investors may have also picked up on the abundance of words such as “stability” and “continuity” in Putin’s speech, suggesting that the rhetoric about modernization may yield as little result as that spurted by Medvedev over the past 3 1/2 years.

Both Putin and Economic Development Minister Elvira Nabiullina stressed the importance of the country’s privatization drive, a process which began earlier this year with the successful sale of a 10 percent stake in VTB. However, subsequent sell-offs have been repeatedly delayed due to a weakening ruble. Skeptics fear the much-needed process may have grounded to a halt.

Current concerns focus on the looming financial crisis. Russia’s dependence on oil and gas exports make the country particularly vulnerable to global instability. The Micex stock index has tumbled more than 25 percent since the start of August on snowballing concerns surrounding the European debt crisis and a potential economic slowdown in the United States and Europe.

Although Putin and other panel speakers attempted to brush off fears of the effects of the turbulence on the Russian economy, investors have already shown that they are worried by selling Russian stocks at a faster pace than any other emerging markets in recent months.

Стоит ли инвестировать в Россию?

2011-10-09T02:30:00.000-07:00

Такой очень конкретный вопрос обсуждался международными
экспертами, собравшимися на прошлой неделе в Женеве по
приглашению компании JetFin. Однозначного ответа не
последовало.

Cette question très concrète a été débattue par des experts internationaux venus à Genève sur l'invitation de la compagnie JetFin. Les
réponses se divergent.
Когда конференцию организовывает компания под названием JetFin, то на ум сразу приходят другие вошедшие в
русский язык англицизмы: топ, класс, брэнд, гламур… Если разобраться, все они означают одно: громкое имя и
качество. И, действительно, на деловое обсуждение перспектив развития российского рынка, главными
спонсорами которого выступили такие российские гиганты, как Уралсиб Кэпитал и Внешторгбанк Кэпитал и
независимая компания East Capital, съехалось немало умных людей, не понаслышке знающих о том, что
происходит в экономике и России, и других стран.
Рабочие сессии были организованы по принципу контрастов: чаще всего присутствовавшим предлагались два
радикально противоположных мнения, что немного напоминало словесный поединок между прокурором и
адвокатом и вынуждало публику внимательно прислушиваться к аргументам. Интересно, что, по признаниюнескольких докладчиков, им пришлось частично изменить тексты своих выступлений после сообщения об отставке
российского министра финансов Андрея Кудрина.

Надо сказать, что, честно отслушав профессиональные суждения
в течение всего дня, мы бы в российский рынок инвестировать не
стали: и нестабильный он, и коррумпированный, и
непредсказуемый. Но это, разумеется, только наше дилетантское
мнение. А вот как формулировали свои мысли эксперты.
В первой утренней сессии участвовали, ведомые создателем
JetFin Пьером Лаво, два «тяжеловеса» конференции: глава
постоянного представительства Международного валютного фонда (МВФ) в России Одд Пер Брекк и заместитель
руководителя Управления аналитических исследований Уралсиба Вячеслав Смольянинов, который в программе
значился почему-то как просто Слава.
Господин Пер Брекк сфокусировал свое внимание на вызовах российской экономике после президентских выборов.
(Его задача облегчалась тем, что к моменту выступления итоги выборов были практически предопределены.) Его
выступление нельзя назвать оптимистичным. Прежде всего, он отметил большую, чем в других сравнимых с
Россией странах, нестабильность российской экономики, более высокий уровень инфляции и неровность его
показателей.
По мнению эксперта, причина этих негативных явлений, помимо всемирного финансового кризиса, - в слишком
тесной зависимости российской экономики от национальной сырьевой базы. Россия – один из крупнейших
экспортеров нефти и газа, от этого во многом зависит приток капиталов в страну, пояснил Одд Пер Брекк. А
значит, снижение мировых цен на эти продукты немедленно ведет и к снижению притоков капиталов.
Что же рекомендуется предпринять для выхода из этой ситуации? Господин Пер Брекк дает несколько советов:
усилить банковскую систему и сделать ее более компетентноспособной; переосмыслить фискальную политику и
создать условия для развития частных банков (это не только усилило бы внутреннюю дисциплину, но и послужило
положительным сигналом для других участников рынка); приоритетом же должно быть скорейшее сокращения
инфляции. Рекомендуется также дать больше полномочий Центральному банку.Одд Пер Брекк считает, что инвестиционный климат в стране
нуждается в значительных улучшениях – по его словам,
незначительный уровень инвестиций объясняется засильем
коррупции и неверие потенциальных вкладчиков в
эффективность правовой системы.
После таких суровых заявлений Вячеславу Смольянинову нелегко
было, наверное, взять микрофон. Занимая высокий пост в одной
из ведущих инвестиционных компаний в России, предлагающей
полный спектр услуг в области финансов и инвестиций и специализирующейся, в частности, на интернет-
трейдинге, он, разумеется, прекрасно владеет ситуацией.
Не желая приукрашивать действительность, господин Смольянинов признал, что российская экономика истощила
свои возможности в смысле роста цен на нефть. Однако заметил, что с момента финансового кризиса доверие
потребителей постепенно возрастает.
Он перечислил несколько областей, в которых аналитики наблюдают положительные сдвиги. Это банковское дело;
информационные технологии (к 2013-15 годам здесь ожидается рост на 75%, благодаря, в частностям, усилиям
правительства по модернизации и развитию программного обеспечения); телеком (к 2015 году распространение
широкополосной сети по стране должно удвоиться); СМИ (нас не могло не порадовать, что ожидается увеличение
объема онлайн рекламы на 150%).
Однако реализации этого громадья планов мешают многие нерешенные проблемы, такие как бюрократия,
неэффективность государственных институтов, недостаточное стремление к модернизации – несмотря на большой
реальный потенциал; сложная демографическая ситуация; необходимость институционных реформ… Одним
словом, планы планами, а на сегодняшний день Россия, по словам Вячеслава Смольянинова, занимает в рейтингепо уровню защиты прав собственности 135 место из 150 возможных. Как оптимистично отметил эксперт, «хорошо
то, что дальше падать некуда».
Чуть позже, во время перерыва на кофе, Вячеслав Смольянинов
прокомментировал Нашей Газете.ch смысл проведения и данной
конференции, и ей подобных. «Я на стороне брокеров. Как бы то
ни было, сегодня инвестиции в Россию превосходят докризисные
показатели. Экономический рост России по-прежнему
несопоставим с другими странами, наша страна остается
крупнейшим рынком – что и объясняет большой интерес к
женевской конференции, - сказал он. – Рынок и экономика
развиваются циклично, и важно понять, в какой стадии цикла мы находимся. На конференцию собрались не
оппортунисты, а дальновидные специалисты с долгосрочными планами».
Среди спонсоров конференции был и сравнительно небольшой швейцарский частный банк Valartis, в московском и
петербургском офисах которого трудится 35 человек. В своем выступлении глава отделения банка по управлению
активами Тим Маккарти попытался «защитить» россиян, заметив, что 90% международного долга приходится на
долю развитых, а не развивающихся стран, а жители России больше ориентированы на успех, чем их европейские
соседи. Делая, в целом, оптимистический прогноз, он посоветовал коллегам-инвесторам не соваться в сырьевой
сектор, а заняться, например, транспортом.
Оживление в зале вызвало выступление уроженца Харькова, а теперь – американского эксперта Стефана
Дашевского (в прошлом Станислава), покинувшего Украину в 1991 году. Начал он с такого заявления: «Послушать
предыдущих ораторов, так Россия – прекрасная страна, в которую так и хочется вкладывать деньги».
Затем, оставив ироничный тон, Стефан Дашевский отнес себя к тем, что не верит в российские инвестиции. «Когда
вы не занимаетесь макроэкономикой, а вкладываете собственные деньги или деньги знакомых, ваш подход
меняется, а 6% ставка не кажется привлекательной». Он подчеркнул, что «94% российского рынка акций
представлено государственными компаниями и крупнейшими олигархами» и что «политические риски напрямую
связаны с экономикой».
Как часто бывает, иностранцы были настроены более
оптимистично, чем «свои». Вот и Тимоти Краузе, старший
управляющий фонда IFC при Всемирном банке, занимающегося
исключительно инвестициями в частные компании, признав, что
60% потенциальных инвесторов не идут на российский рынок,
опасаясь политической нестабильности, заметил, что еще одна
причина этого явления – систематическое негативное освещение
российской действительности западными СМИ. Он заметил также,
что в России живет 140 миллионов хорошо образованных людей,
а «соотношение задолженности и ВВП составляет 9%, по сравнению с Китаем – 19% или США – 100%».
Среди положительных моментов господин Краузе отметил также наличие множества полезных ископаемых,
соседство с Китаем (который, по мнению эксперта, в конце концов начнет покупать товары широкого потребления
в России, а не в Африке), формирование среднего класса. Не отрицая, что России есть, к чему стремиться и с
борьбе с коррупцией, и в обеспечении гражданских прав, он напомнил, что подобные проблемы существуют и во
многих других, развитых, странах. Многие хотят прийти на российских рынок, но не знают, как это сделать, сказал
он, выразив уверенность, что благодаря представляемому им Фонду «буква Р вернется в BRIC» (этой
аббревиатурой обозначают четыре крупнейшие развивающиеся страны, Бразилия, Россию, Индию и Китай).
Интересным было и выступление англичанина Ричарда
Хейнсуорта, возглавляющего независимое рейтинговое агентство
RusRating, с 2001 года работающее на российском рынке. «Вот
уже более часа я слушаю радикально противоположные взгяды,
и согласен со всеми», - заявил он в начале выступления.
Развивая свою мысль, он пояснил, что смотреть на Россию извне – все равно, что гулять по комнате кривых
зеркал: суть верна, но она искажена. По словам Хейнсуорта, «Россия - не монстр, каким ее изображают западныеСМИ» (говори он по-русски, это прозвучало бы как «не так страшен черт, как его малюют») и «если не полагаться
на западных аналитиков, то можно найти очень интересные возможности для бизнеса».
Одним словом, сколько на конференции было выступающих, столько прозвучало и мнений, подробный анализ
которых предложит читателям через несколько дней наш экономический обозреватель Лев Комлев
(http://www.nashagazeta.ch/news/12330) .
Есть ли от таких конференций толк ? Очевидно, да, если с 2005 года компания JetFin организовала в Швейцарии
уже шесть подобных встреч, посвященных России. «Мы твердо верим в потенциал страны и региона, включая
бывшие советские республики, - утверждает создатель и глава компании Пьер Лаво. Надеемся, он знает, что
говорит.

Some ways to make money in Russia

2011-10-09T02:19:00.001-07:00

Opalesque Exclusive: Some ways to make money in Russia Benedicte Gravrand, (gravrand@opalesque.com)

Opalesque Geneva: There is convergence between Russian and the world economy. Russia's Micex index lost more than a quarter of its value and the RTS index of 50 Russian shares fell around 40% in the last five months, said the BBC. The Russian government says investors are pulling back because of falling oil prices and global economic turmoil; others are blaming internal political turmoil – increased by long-standing finance minister Alexei Kurdrin’s exit, which might lead to a government reshuffle. But some insiders say the latter factors are minor, at least for the domestic market. Russia is simply struggling in a worldwide economy that is slowing down, just like (almost) everywhere else. Here are some view points on the opportunities that can be seen in Russia, gleaned at yesterday’s JetFin conference in Geneva. UralSib: growth on consumer demand Slava Smolyaninov, Strategist at UralSib Capital, a Russian research firm, thinks that manufacturing is the driving force for Russia’s recovery; the ruble depreciated on the back of August volatility and it follows oil price – and oil does not help anymore he said, as its purchasing power has no upward trend. So growth is really driven by strong consumer demand, with improving confidence and credit expansion. Leaving out natural resources, the areas of growth with the most potential are Banking, IT, Telecom, Media, Utilities, Transportation, Food retail, Pharma. The key long term risks are found in the high level of bureaucracy, the low efficiency of state expenditure, the lack of motivation to modernise, and poor demography (contraction of active population). There is also a clear negative trend in diversification, and lack of competitiveness, he added, referring to the World Economic Forum’s Russia Competitiveness Report 2011. The WEF’s report says that almost two decades after transitioning from a planned to a market economy and following a decade of buoyant growth, Russia was hit hard by the 2008 crisis. Oil prices collapsed and its financial sector from narrow liquidity. The government moved rapidly to protect the economy through stimulus measures and, since then, recovery has been slowly underway. The WEF reportedly places Russia in a "transition" stage between stage 2 "efficiency driven" and stage 3 "innovation driven" along with 17 other countries. The corruption perception has increased too in the last few years, Smolyaninov continued, but it cannot get any worse – and so it can only improve. Valartis: Russia is cheap once again There is a strange dichotomy between emerging markets (EMs) and developed markets (DMs) in terms of asset allocation. According to Timothy McCarthy, head of asset management at Valartis SA, a Geneva-headquartered independent asset manager focused on EMs that manages CHF1bn, asset allocation in EMs is too small. Indeed, EMs have 75% of the world land mass, 87% of the world population, 85% of the global oil reserves, 89% of the global gas reserves, 74% of the global FX reserves, 10% of the global external debt, and 52% of global PPP Adjusted GDP (he puts all countries not part of the DMs in EMs). Furthermore, policy rates have peaked in EMs where they have troughed in DMs, and in EMs, people are motivated to improve their lives, whereas DMs people are "bloated on excess consumption." He noticed this in his 18 years living in EM countries. Now we are seeing outflows from EMs ($20bn YTD) following strong inflows in ’09 and '10. According to EPFR Global Data, Russia-focused funds had their second-biggest weekly outflow in two years, amounting to $443m during week-ending Sept.28. Russia, vs. EMs, stands out as being once again one of the cheapest countries, McCarthy continued, as it generally trades at a discount. Oil
prices and money supply are economic factors for growth in Russia; and inflation is declining, so monetary policy may ease soon. Valartis anchors its investment methodology in fundamentals and favours liquidity. The firm’s election-cycle strategy will focus on less exposure to politically sensitive sectors (electricity, telecom, gas), more exposure to political beneficiaries (food retailers, banks, transport and infrastructure). Its outlook for Russian on a 12-month basis us upbeat (43% on equity); and oil price will probably be around $90 p.b. (Brent Crude (ICE) is now up 0.40 at $104.35 and Light Crude (Nymex) is up 0.31 at $82.45, said the FT this morning). EME: favourable stock picking environment Russian returns are down, risk is up and correlation is close to 1, claimed Carl Meurling, co-founder of EME Partners, a $70m long/short equity fund manager based in Stockholm. And volatility is much higher and will likely remain so. In the last four years, nobody made money in Russia, he said. However, the market there is sophisticated enough to allow long/short equity investing. The high dispersion of equity returns can be a strong advantage, and correct stock-picking is key to strong performance. Trading costs are decreasing, so there is no need to "buy and hold" anymore. Meurling suggest keeping a constant low directional exposure to the market, as exposure to Russia also means exposure to other markets. He added that one should not believe it is possible to time the Russian market… hardly anybody can do this. Building a comprehensive approach to risk management is also necessary when investing in Russian equities, as there are liquidity and currency risks. "All these measures will lead to consistent risk adjusted returns," he concluded. EME’s Emeralt fund was up 15% YTD as of 31-Dec.2010. Dashevsky: event-driven strategy the only to invest Russian, in the long term, is very risky and possibly not very profitable, according to Steven Dashevsky, founder of Dashevsky & Partners, a new independent investment management advisory firm based in Moscow. So one must focus on specific trades and events to make money. Durring the "Putin area" (from 2000 on), he said, the Russian market went up almost five times between 2000 and 2005, outperforming other EM countries, due to deleveraging, improved balance sheet and massive reforms. From 2006 to last week, the market stopped its growth, annual volatility was 6% and the market underperformed oil prices. The RTS index went from 1,556 in Oct.06 to 1,367 on 28-Sept.11 (with a slump to below 500 in early 2009), whereas the MSCI World Index went from 1,372 to 1,122 in the same period. According to Dashevsky, the problem is quite simply corporate governance. In Russia, the shareholders (portfolio investors) are the last to receive any cash –as management, controlling shareholders, government and employees come first. 94% of the equity market is represented by the state and by the few oligarchs. So there is no incentive for investors to invest in companies. Which is a shame since foreign inflows and outflows directly affect growth. However, in most corporate actions (mergers, buybacks, share consolidations, dividend distributions, spin offs), the shareholder rights are better protected. In special situations with foreign investments, legal misbehaviour is less likely for example. And laws and regulations or other motivations that force business owners to behave legally are good for investors. For this reason, special sits and event-driven funds can outperform in down markets, says Dashevsky. He quoted the example of PepsiCo buying a Russian company called Wimm-Bill-Dann. PepsiCo announced the acquisition, all minorities bought out at the same terms as majority owners, and an 18% profit on the rising share price was made.

Russia feels the pain as investors take flight

2011-09-27T07:02:00.000-07:00

By Catherine Belton in Moscow - FT

The re-emergence of Vladimir Putin as Russia’s political supremo failed to prevent the country’s markets being buffeted by the global financial turmoil on Monday, with the pressure only set to intensify after the sudden dismissal of the country’s finance minister and leading fiscal hawk.

The rouble fell just more than 1 per cent in morning trade to its lowest rate against the dollar since August 2009, and analysts predicted no end to the capital outflows that have grown to more than $70bn over the past year.

More
On this story
Medvedev fires finance minister
Gideon Rachman Russia steps backwards
beyondbrics Kudrin quits [with video]
Editorial Putin votes for return of Putin
Russian job swap sparks Kremlin revolt
While the rouble’s slide is seen as mainly connected to global woes, bankers said the downward spiral would strengthen after Dmitry Medvedev, the current president and Mr Putin’s would-be prime minister, sacked Alexei Kudrin late on Monday. Open warfare had broken out over his refusal to work under Mr Medvedev in a future cabinet.

Furthermore, Mr Putin’s imminent return to the top spot in Russian politics is dimming hopes among a section of big and middle-level business for greater competition, kindled by Mr Medvedev’s economic reform plans. Despite expectations that Mr Putin will seek to present a more liberal image, fears prevail that the country is now on course for economic stagnation and continued crony capitalism that has benefited Mr Putin’s friends and allies.

“Kudrin’s departure is just another brick in the wall separating Russia from investors, and that wall is getting higher,” said Steven Dashevsky, the head of an investment fund.

Even though Mr Kudrin has won plaudits from investors for his fiscal conservativism, lately he has been unable to prevent excessive state spending and the growing crony system, Mr Dashevsky said. “Now for rational investors there are just not that many reasons to invest in Russia any more,” he said.

“The capital outflows will not weaken as the biggest part of the business community does not have much faith in Putin’s economic policies and no one ties their hopes with him significantly improving the investment climate,” said Sergei Aleksashenko, a former deputy central banker.

“The country is going down the toilet,” said one senior western banker.

The country’s growing urban middle class could join big business in voting with their cash, analysts said.

“The worst thing is that the middle class, which should be a new driver of growth for the Russian economy, is now starting to take capital out of the country too,” said Yulia Bushueva, head of an investment fund at Arbat Capital, a Moscow investment bank.

“This used to be the prerogative of the oligarchs. But now the middle class are looking to buy property abroad and educate their children abroad. They don’t see much future in their country.”

A recent survey by the independent pollster Levada suggested that 22 per cent of Russia’s adult population wanted to emigrate, compared with 7 per cent in 2007.

Fearing stagnation, some better-known names in Russian big business have quietly been seeking to transfer assets to safer havens.

Mikhail Prokhorov, the country’s third richest man who, until recently, spearheaded the push for liberal party representation in parliament via his leadership of the Right Cause party, this year secured a London listing for his Polyus Gold miner. Together with Oleg Deripaska, he also last year won a Hong Kong listing for the UC Rusal aluminium giant controlled by Mr Deripaska.

Behind the scenes, a group of oligarchs was “clearly backing Medvedev to remain as president”, said another senior banker. “Plan B was for him to stay on as prime minister.”

As a result of Mr Putin’s return to the presidency and an expected shake-up in government, “there are going to be winners and losers,” said a third senior western banker. “There are some oligarchs who are going to have more issues than others.”

Among this group could be Viktor Vekselberg, one of the billionaire owners of TNK-BP, the Russian oil venture half-owned by BP, and a big stakeholder in UC Rusal, who heads a Medvedev initiative to build Russia’s version of Silicon Valley in Skolkovo, the banker said.

Mr Deripaska too had appeared to hope that a raft of corporate governance reforms being prepared by Mr Medvedev would help him in his battle for control of Norilsk Nickel against rival metals tycoon Vladimir Potanin. Though no one expects any of these oligarchs to be attacked over their tacit support of Mr Medvedev, their positions could be weakened.

The position of Igor Sechin, the energy tsar, who had appeared to be under fire in Mr Medvedev’s corporate governance drive amid great rivalry between the two men, is now likely to remain strong, analysts said. Even if Mr Sechin loses his post as deputy prime minister, he could take an equally powerful one in Mr Putin’s new Kremlin administration.

.......................................................................

Putin’s business allies

At least one class of Russian big business has been celebrating following news that Vladimir Putin will be the ruling party’s candidate for the presidency, writes Catherine Belton. Even as Mr Medvedev attempted to pursue plans for a liberalisation of the economy, over the last four years a coterie of businessmen with close ties to Mr Putin have seen their fortunes surge.

This group is led by Gennady Timchenko, a close Putin ally from St Petersburg whose Gunvor oil trading group rose from niche player to become the world’s third biggest with an annual turnover of $70bn during Mr Putin’s presidency. In the last four years, Mr Timchenko has expanded his empire into holdings in a fast growing independent gas producer, sea ports and coal mines, as well as control over gas pipeline construction firm Stroytransgaz. The group denies its rise is connected to Mr Putin’s position.

Others in the group include Arkady Rotenberg, the head of a St Petersburg judo club founded by Mr Putin and owner of Stroygazmontazh, an energy services firm, and Yury Kovalchuk, the head of St Petersburg bank Bank Rossiya and a former neighbour of Mr Putin’s.

Back to developmentalism

2011-09-26T23:22:00.001-07:00

Luiz Carlos Bresser-Pereira
Folha de S. Paulo, September 26, 2011
________________________________________
Brazil is behaving again as an independent country, after realized that the neoliberal project was a huge mistake.
________________________________________
Since 1991 Brazilian economic policy was ruled by conventional orthodoxy or the Washington Consensus. However, from 2006 on, with Guido Mantega in the Ministry of Finance and Luciano Coutinho in the BNDES [Brazilian Economic and Social Development Bank], the Lula administration started to shift the development strategy towards the new developmentalism. In 2009 a decisive step in this sense was taken with the beginning of the control of capital inflows. Now, in the ninth month of the Dilma Rousseff administration, the Central Bank's decision to lower the interest rate, surprising the financial market, and the government's decision to tax the import of vehicles that have less than 35% of domestic content consolidate this shift. The deepening of the world crisis, with Europe at its center, and the cooling down of Brazilian economy confirm the good quality of this decision.

The new developmentalism is not a panacea, but is theoretically anchored in a structuralist development macroeconomics, whose criterion is the national interest, and it knows that the national interest can only be met by government leaders who, instead of applying ready-made formulas, evaluate competently each problem and each policy. If adopted with firmness and caution, Brazil will grow at higher rates, with more financial stability and inflation under control.

Whereas the orthodox tripod is “a high interest rate, an overvalued exchange rate, and a minimum State”, the new-developmentalist tripod is “a low interest rate, an equilibrium exchange rate, which makes competitive the industrial companies using modern technology, and a strategic role for the State”.

Whereas for the conventional orthodoxy financial markets are self-regulated, for the new developmentalism only regulated markets are able to guarantee stability and growth. Both the new developmentalism and the conventional orthodoxy defend fiscal responsibility, but the same is not true regarding exchange rate responsibility. Whereas the new developmentalism rejects the current account deficits, the conventional orthodoxy promotes them, and, therefore, behaves in a populist way (exchange rate populism). It argues that “foreign savings” would increase the country's investment, but the capital inflows needed to finance those deficits increase consumption rather than investment, make the country indebted, make it dependent on creditors and on their “advices”, and result in a balance-of-payment crisis.

By returning to new developmentalism, Brazil is behaving again as an independent country. It had ceased to act like this in 1991, because the country faced a profound crisis, and because American neoliberal hegemony over the whole world was, at that time, almost irresistible. But since the middle of last decade Brazilian society started to realize that the neoliberal project was a huge mistake, and that there was an alternative to it. As the 2008 global financial crisis demonstrated beyond doubt, the neoliberal economic policies were not good, not even to rich countries. This way, the neoliberal hegemony collapsed, and the developmentalist forces – the industrial entrepreneurs, the workers and part of the professional class – became stronger, which opened the way for the Dilma administration to deepen its commitments to them. A new and wide-ranging political pact is forming in Brazil. Let's hope that it will lead Brazil faster to development

Commodities Investors to Keep Powder Dry on Allocations

2011-04-04T05:43:00.001-07:00

By Reuters

NEW YORK (Reuters)—Commodity traders waiting for a fresh onset of institutional investment with the dawning of the second quarter may be in for disappointment.
Two years of steady allocations into raw material, energy and agricultural markets may stall for the time being, with several weeks of moribund activity extended by deep uncertainties in the Middle East, Japan and euro zone. As if that weren't enough, investors must now squarely confront the ending of the super-easy monetary policy cycle and the tricky act of raising rates without upending an economic recovery that remains fragile at best.

Investors reckon this spells "hold" for commodities, many of which have lost momentum during a first quarter in which many new post-2008 highs were swiftly followed by deep correction.

In the last two weeks, daily volume in energy, metals and grains was off 30 percent or more versus the 30-day average, underscoring traders' indecision. That, some say, could affect the momentum of the long money that had been flowing into commodities — meaning the record high sums tracked since December by the U.S. Commodity Futures Trading Commission may slow from March.

"You can bet most commodity-related investors were fairly near full-invested approaching the quarter-end," said Oliver Pursche, president at Gary Goldberg Financial Services, a firm in Suffern, N.Y., which manages $500 million of assets, including a commodities mutual fund. "Now, everything is pointing to stay the course, don't do anything and if you get new capital coming in, don't rush to commit it."

Net investment into U.S. commodity indices peaked for a third month in a row in February, with long positions that bet on price gains crossing $300 billion the first time, government data showed this week.

The value of holdings by institutional investors and others who buy into baskets of commodity futures that represent such indices surged more than $45 billion over those three months. Rising prices was one reason: U.S. crude oil rose 16.8 percent on the quarter, and the Reuters-Jefferies CRB commodities index 8 percent for a third straight quarterly gain.

Fed Policy

Liquidity in commodities could also dry up quickly if the U.S. Federal Reserve embarks on monetary tightening for any reason, despite all promises in the past that it wouldn't.

Since the financial crisis, the U.S. central bank has approved one stimulus package after another to boost the economy and the latest — a $600 billion bond purchase program known in market lingo as Quantitative Easing II, or QE II — will end in June. While there is no word yet of a QE III, some senior Fed officials have been calling for the current package itself to be cut by $100 billion.

Others have suggested an outright rate hike soon, like Minneapolis Fed President Narayana Kocherlakota, who said rates could rise by three-quarters of a percentage point by the end of 2011 — faster than markets expect.

"Stimulus money has been one of the biggest drivers of commodities and any attempt to choke this lifeblood is likely to be greeted by investor panic," said the managing partner of a New York hedge fund that manages $70 million in commodities.

Trading volumes in oil shrunk after investors began to worry about how long the market will be able to capitalize just on the freeze in Libyan oil exports and unrest in other oil-producing Arab countries. Crude futures in New York defied high U.S. oil stockpiles to rise $15 during the quarter to a 2-1/2 year high above $106 per barrel.

Traders say prices could dive if Libyan rebels locked in fierce fighting with Muammar Gaddafi's troops succeed in taking key oil-producing towns to resume exports. Even so, no one really wants to bet on the direction in oil now.

"Generally speaking, our stance on the energy sector and oil in particular is going short right now doesn't make sense and adding to the long position doesn't make a lot of sense either," Mr. Pursche said. "So, it's a hold, and that obviously impacts trading volumes."

Don Steinbrugge, managing partner of Agecroft Partners in Richmond, Va., concurs with that.

"The average institutional investor thinks there's more downside than upside in the oil market if this whole situation in Libya is resolved in the next couple of weeks," said Mr. Steinbrugge, a hedge fund consultant who also gives advice on portfolio building to big investors like pensions. "That said, I think it's a lot easier to predict long-term trends in commodity prices based on projections of global GDP, and what demand will be for various components of the market, than to forecast supply shocks."

Japan Woes

Copper prices have fallen almost 10 percent since hitting record highs of nearly $10,200 a ton in mid-February. Trading volumes in copper — a key economic bellwether — have dwindled, too, on fear that the post-earthquake nuclear radiation leaks in Japan and the euro zone's debt woes would get worse before getting better.

Japan remains one of the world's largest economies although it is not as big a commodities consumer as China.

The huge sovereign debt of countries such as Greece and Portugal have dragged on market sentiment for more than a year, taking a fresh blow after credit rating downgrades this week.

Despite the run-up in oil, the average energy hedge fund is down nearly 3 percent year-to-date, according to data tracked by Chicago-based Hedge Fund Research.

Unless the market overcomes its trading inertia, returns could remain dismal, putting pressure on fund managers.

"As investors, we want the best risk-adjusted returns," said Mike Hennessy, managing director at Morgan Creek Capital, a $10 billion fund-of-funds in Chapel Hill, N.C., that invests with managers specializing amongst others in energy and commodity portfolios. "We download all capital to managers and expect them to have a view and navigate those markets on a short-term basis."

Cube Capital wins InvestHedge "best fund of hedge funds" award

2011-03-21T09:02:00.000-07:00

Friday 18 Mar 2011 12:14 GMT

Cube Capital is proud to announce being awarded Investhedge’s “Best Fund of Hedge Funds for 2010” award in the global multi-strategy category of funds with $500 million to $1 billion. The award was given this month in New York City.

This is Cube's 5th award across its hedge fund strategies. Its funds have now been awarded the following for their innovation and risk-adjusted performance:

InvestHedge Awards 2010, "Best Global Multi-Strategy FoHF $500m-$1bn"
HFM Awards 2010, "Best Multi-Strategy Fund of Hedge Funds $250m-$1bn"
Asian Investor 2009, "Best Hedge Fund Distressed & Special Situations"
Eurekahedge Awards 2009, "Best Greater China Fund"
AsiaHedge Awards 2008, "Best Fixed Income, High Yield & Distressed Fund"
Issued by Peregrine Communications on behalf of Cube Capital

For media enquiries, please contact:

Peregrine Communications Chris Marquardt +44 (0)20 3178 3068 or +44 (0)7702 717 342 chris.marquardt@peregrinecommunications.com

Max Hilton +44 (0)20 3178 6873 or +44 7950 003 138 max.hilton@peregrinecommunications.com

About Cube Cube Capital (http://www.cubecap.com) is a London based alternatives firm that employs 49 people globally. Firm AUM is approximately $1.2billion USD. Its flagship product, the Cube Global Multi-Strategy fund, has 11% annualised returns with 6% volatility since inception in 2003 and a beta of less than 0.25.

Key firm characteristics include:

Opportunistic and unconstrained approach to strategy selection as a diversified source of alpha beyond manager selection.
Use of in-house investment expertise to manage beta exposure via overlay.
Unconventional manager selection, including significant allocations to smaller managers, specialist and custom mandates.
Seeking dislocations in the markets has provided 30% of our returns over time.
Monthly liquidity, with 90 days' notice (no gates or suspensions).

Japan a "buying opportunity," will recover: Buffett

2011-03-21T06:11:00.000-07:00

By Hyun Joo Jin

DAEGU, South Korea (Reuters) - Billionaire investor Warren Buffett believes Japan's devastating earthquake is the kind of extraordinary event that creates a buying opportunity for shares in Japanese companies.

Japan, the world's third-largest economy, has been battling to bring an overheating nuclear plant under control after it was battered by the March 11 earthquake and tsunami that rattled global markets and prompted massive intervention in currency markets by the Group of Seven industrial nations.

"It will take some time to rebuild, but it will not change the economic future of Japan," Buffett said on Monday on a visit to a South Korean factory run by a company owned by one of his funds. "If I owned Japanese stocks, I would certainly not be selling them.

"Frequently, something out of the blue like this, an extraordinary event, really creates a buying opportunity. I have seen that happen in the United States, I have seen that happen around the world. I don't think Japan will be an exception," said the 80-year-old investor, dubbed the "Sage of Omaha" for his successful long-term investment strategy.

Buffett heads Berkshire Hathaway Inc, which has substantial insurance and utility investments globally.

Japan's Nikkei share average rose 2.7 percent on Friday, buoyed by the G7 support, but still ended the week down around 10 percent, with some $350 billion wiped off share values -- the market's biggest weekly slide since the global financial crisis in 2008. Japanese markets were closed on Monday.

Buffett said Berkshire Hathaway, which at the year-end was sitting on $38 billion of cash equivalent and last week bought U.S. specialty chemicals maker Lubrizol for $9 billion, was looking for more large-scale acquisitions anywhere in the world.

In his annual letter to Berkshire Hathaway shareholders last month, Buffett had said he was looking for more acquisitions.

"The United States is most likely where we will do something," he said at a ground-breaking ceremony for a South Korean factory run by a unit of an Israeli firm owned by his investment vehicle.

Buffett will have yet more money to invest after Goldman Sachs buys back $5 billion of its preferred stock from Berkshire Hathaway, which the fund bought at the height of the global financial crisis.

EYE ON KOREA

Buffett, ranked the world's third-richest man by Forbes this year, said he was also looking to buy entire businesses and large-cap shares in South Korea -- where Berkshire is already a leading shareholder in steelmaker POSCO.

He said geopolitical risks associated with North Korea had not curbed his interest in South Korea, Asia's fourth-largest economy. Berkshire also owns a stake in Chinese car and battery maker BYD.

Buffett did not disclose any holdings in Japan on Monday, and Berkshire Hathaway's annual report did not show any major investments there. He had been due to visit Japan later this week, but canceled due to the earthquake.

Unlike many foreign fund managers, Buffett, who arrived in the southeastern city of Daegu on Sunday by private jet, won plaudits from ordinary South Koreans.

Sporting gray sweat pants and running shoes, Buffett was greeted by signs reading "Mr Buffett: Daegu Loves You."

Many in this country of nearly 50 million people have bad memories of the 1998 Asian financial crisis when a deal with the International Monetary Fund bailed out the country but at the cost of tens of thousands of jobs.

Some U.S. hedge funds have been branded "vultures" for buying South Korean assets on the cheap in the wake of that crisis.

"It's a once in a life-time opportunity. I'm honored to meet such a respected businessman," said Seo Hyun-joo, a housewife wearing Korean traditional dress.

Buffett later meets South Korean President Lee Myung-bak in Seoul and heads to India on Tuesday to launch his firm's insurance selling portal.

Russia Funds See First Outflow in 16 Weeks on Japan Concern

2011-03-21T03:49:00.000-07:00

By Jason Corcoran - Mar 18, 2011

Russia-focused equity funds had their first outflows in 16 weeks as investors shunned riskier assets on concern Japan’s earthquake will slow a global recovery, UralSib Financial Corp. said, citing EPFR Global data.

Outflows from Russian funds reached $58 million in the seven days to March 16, after inflows of $486 million the week before, the data compiled by Cambridge, Massachusetts-based research firm EPFR Global show.

“It’s a knee-jerk reaction to events in Japan,” Chris Weafer, chief strategist at UralSib, wrote in an e-mailed report today. “The redemption from Russia funds should be short- lived,” he said. “Continuing fighting in Libya and the threat of instability in Saudi Arabia is supporting the oil price.”

Oil, Russia’s biggest export, gained as much as $2.24 to $103.66 a barrel today. Futures slipped as much as 1.4 percent yesterday on concern damage from Japan’s earthquake and tsunami will curb demand for crude.

Russia’s benchmark Micex index has gained 3.5 percent so far in 2011, beating indexes in Brazil and India, as the biggest energy-exporting country benefits from a 23 percent advance in oil during the the past year. The 30-stock Micex gauge advanced to its highest in a more than a week, adding 0.6 percent to 1,747.32 by the 6:45 p.m. close in Moscow.

Russian markets are “cheap,” Goldman Sachs Asset Management Chairman Jim O’Neill said yesterday at the Bloomberg Link Hedge Fund Conference in London. The country is GLG Partners LP’s “favorite” emerging market and will benefit from a flight of capital away from the Middle East, Bart Turtelboom, co-head of emerging markets, said at the same event.

Japan's Nikkei plunges 6.18% in earthquake aftermath

2011-03-14T01:21:00.000-07:00

Manufacturers and power companies are badly hit, as the Bank of Japan pledges 18 trillion yen ($220bn) in liquidity to reassure markets following earthquake and tsunami

Shares in Japan's major companies fell sharply on Monday in the aftermath of the devastating earthquake and tsunami that struck the country last Friday, despite efforts by the Bank of Japan to shore up confidence.

After a heavy sell-off, the Nikkei has just closed for the day down 633.94 points at 9620.49, a fall of 6.18%. At one stage it was down by 7%.

The trading session was dominated by the ongoing rescue efforts across the country, and the news that a second reactor building at the Fukushima Daiichi atomic power plant had exploded.

Tokyo Electric Power, which operates the Fukushima plant, saw its shares plunge by 23.6%.

Japanese manufacturers, many of whom have been forced to suspend operations, also led the fallers. Nissan fell by 9.5%, Sony by 9.12%, Toyota by 7.93% and Canon by 5.92%.

The losses came as the BoJ offered to pump a total of 18 trillion yen (£136bn) into the banking system, to reassure any investors who feared that the Japanese markets would simply seize up. It had already promised to prevent speculators profiting from the disaster.

The offer of liquidity helped to weaken the yen, which had threatened to hit record highs against the dollar early this morning.

The BoJ also expanded the size of its asset-purchasing programme by around 5 trillion yen, and voted to leave interest rates at their current record low [of zero to 0.1%]. Some economists, though, were disappointed that the BoJ did not change its overall assessment of the Japanese economy.

Middle East unrest changes outlook for Asian equities

2011-03-04T08:43:00.000-08:00

2011-03-03
Before the outbreak of uprisings in the Middle East oil exporting nations, the consensus among investors appeared to be that equities in Developed Markets would outperform Emerging Markets because of the gradual recovery in the US corporate sector, while Asia needed to tighten to curb rising inflation.

Now, however, there is a growing concern that the price of oil will continue to rise and negatively affect the consumption recovery in developed markets. How this plays out remains to be seen, but encouraging for China focused investors is that China’s economy is relatively less sensitive to international oil prices. Domestic growth in China remains as strong as ever, and so does the outlook for earnings growth in the corporate sector.

Massive investments continue
In addition to a healthy export sector and booming consumption growth, China’s leaders continue to press ahead with massive infrastructure investments. Updated plans for the aviation sector revealed that China will build 45 major airports in the next five years. This year the government also announced plans to build 10 million subsidized homes corresponding to a total of 600 million square meters. This is an amazing amount of additional building in just one year and will lead to increased demand of labor, construction equipment and building materials such as cement, steel and copper.

Strong earnings growth
On the corporate front, some of our portfolio holdings have recently reported and earnings have been either strong or very strong. Sporting goods company Anta reported a net profit increase of 24% and a sales growth of 26% for 2010. Mining giant BHP Billiton recorded a 72% rise in profit during fiscal first half year to AUD 10.5 billion, up from AUD 6.1 billion for the same period last year.

Chinese computer maker Lenovo reported a third-quarter profit increase of 25% with revenues reaching USD 5.8 billion, up 22% year-on-year. Lenovo accounted for 10.4% of global PC shipments in the last quarter, up from 8.8% a year earlier, and was the only major supplier to gain market share. Later this month, Lenovo will launch a competing product to Apple’s iPad, called LePad, on the Chinese market. Apple’s globally awaited launch of iPad 2 in March will benefit Hon Hai, the Taiwanese producer of the iPad and also one of the portfolio holdings.

China climbs on patent-filing ladder
Finally, telecom equipment supplier ZTE grew net income by 26% to 3.0 bn RMB and sales by 14% to 70.1 bn RMB. Speaking of ZTE, the company moved up to 2nd place in the global rankings of international patent filings 2010, up from 20th place in 2009. As a nation, China increased international patent filings by 56% last year according to World Intellectual Property Organization’s Patent Cooperation Treaty, thereby overtaking South Korea as the fourth PCT filing country of origin worldwide.

One of ZTE’s key customers, and the world’s number one cellular operator China Mobile, presses ahead at full steam to speed up the adoption of China’s 4G standard TD-LTE. Trials with TD-LTE have been successful and have gained international interest with applications such as handset TV. Telecommunication infrastructure could become yet another example of how China goes from practically nowhere to global industrial leadership in less than 30 years.

Gustav Rhenman
Fund manager

Hedge Funds Slashing Food-Price Bets After ‘Harrowing’ Fall

2011-02-28T06:00:00.000-08:00

By Asjylyn Loder and Yi Tian - Feb 25, 2011 Hedge funds are leading an exodus from agricultural markets, slashing bullish bets in the U.S. from almost the highest levels on record after grain prices slumped, money managers said.

Speculators reduced bets on rising wheat prices by 57 percent in the week ended Feb. 22, the biggest drop since November, according to data released today by the Commodity Futures Trading Commission. Bullish bets on soybeans fell 17 percent, declining for a third straight week, and those for corn slid 1.8 percent to a seven-week low.

Holdings in eight agriculture commodities by money managers are higher than during the global food crisis three years ago. Floods from Canada to Australia and drought from China to Russia ruined crops and drove food prices tracked by the United Nations to a record in January. That helped spark protests across North Africa and the Middle East, toppling leaders in Tunisia and Egypt.

Agricultural “products had a great run, but now the opportunity appears to be in oil and gold,” said Walter “Bucky” Hellwig, who helps oversee $17 billion at BB&T Wealth Management in Birmingham, Alabama. “If I am the hedge-fund manager, I’m getting killed on the long grain positions.”

‘Off The Charts’
Before today, the Standard & Poor’s GSCI Agriculture Index of eight futures declined 6.8 percent since Feb. 17, a four- session slump that was the longest since October and included an 11 percent plunge by Chicago wheat futures. The managed-money category of investors tracked by the CFTC includes hedge funds, commodity pools and trading advisers.

“The amount of speculative positions is off the charts,” said Nic Johnson, who helps manage about $30 billion in commodities at Pacific Investment Management Co. in Newport Beach, California. “What you’ve seen in the last few days is liquidation of that length.”

Wheat futures reached a 29-month high of $9.1675 a bushel on the Chicago Board of Trade on Feb. 14, and since then the price is down 12 percent. Before today, corn dropped 6.4 percent from a 31-month high of $7.4425 a bushel reached Feb. 22, and soybeans slid 8.7 percent since touching a 30-month high of $14.5575 a bushel on Feb. 9.

Prices rebounded today. Wheat futures for May delivery advanced 28.75 cents, or 3.7 percent, to close at $8.1125 a bushel, while corn futures for May delivery gained 25.5 cents, or 3.7 percent, to $7.22. Soybean futures for May delivery jumped 45.75 cents, or 3.4 percent, to $13.75.

‘Nerves on Edge’
“Some funds definitely had a harrowing moment,” Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset Advisors, said by telephone from Cincinnati. “There were some nerves on edge.”

Crude oil traded on the New York Mercantile Exchange jumped to $100 a barrel on Feb. 23 for the first time in two years as clashes in Libya threatened to disrupt supplies from Africa’s third-biggest producer. Through yesterday, gold rose for eight consecutive trading sessions in New York.

Loyalists of Libyan leader Muammar Qaddafi are seeking to crush dissent in the capital, Tripoli, as opponents tighten their control of eastern cities. The fighting is the most violent yet seen in six weeks of protests across the Middle East and North Africa.

In agriculture, “the big speculators were holding very large net-long positions and have begun to liquidate those positions to take some profits after the strong rally,” said Dan Cekander, the director of grain research at Newedge USA LLC in Chicago. “We may have reached the limit of their buying.”

Agriculture Move
The move into agriculture accelerated in the past six months. Corn is up 46 percent since the end of September, while soybeans advanced 24 percent and wheat 20 percent. Open interest, or contracts outstanding, reached record levels this month for all three commodities, according to Chris Grams, a spokesman for CME Group Inc., the world’s largest futures market.

Investors put a record $2.6 billion into agriculture-index swaps, exchange-traded products and medium-term notes last month, after pouring $5.7 billion during the fourth quarter of 2010, according to Barclays Capital.

Bullish Bets
In the week ended Feb. 8, hedge funds and other speculators increased bullish bets on wheat to a combined 51,787 futures and options contracts, the highest since August 2007, CFTC data show. The net-long position in soybeans reached an all-time high of 179,753 contracts in the seven days ended Nov. 9, and corn reached a record of 429,189 the week ended Sept. 28.

Demand for new shares of 19 exchange-traded products tracking agricultural commodities rose 33 percent this year, according to data compiled by Bloomberg. Shares outstanding in Deutsche Bank AG’s $3.5 billion PowerShares DB Agriculture exchange-traded fund expanded 24 percent, data compiled by Bloomberg show. The number of shares in the fund fell 4.9 percent since reaching a record on Feb. 17.

“The trend itself is based on fundamentals, but price moves are magnified on the upside and downside by demand from speculators,” said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees $340 billion. “There are a whole host of portfolios out there, and for a small fraction of them to be convinced to own some commodities, that is a huge new demand.”

Livestock
Barclays Plc’s iPath Dow Jones-UBS ETNs also attracted money. Shares outstanding in its $347 million grains ETN rose 83 percent since the start of the year, the $295 million agriculture index ETN more than doubled, and units in the $117 million livestock ETN increased 75 percent, according to data compiled by Bloomberg.

Demand also increased for structured notes, or debt packaged with derivatives linked to agriculture prices. Banks issued $139.4 million of agriculture-linked structured notes in the U.S. this month, 86 percent more than in all of 2010, according to data compiled by Bloomberg.

“There’s real scarcity there,” said Peter Timmer, a professor emeritus at Harvard University and an expert in food policy. “We need to deal with that. But we don’t need to exacerbate the scarcity with all this hot money.”

The Dodd-Frank Act, enacted in July and named for its primary sponsors, former Senator Christopher Dodd and Congressman Barney Frank, expanded the CFTC’s authority to the over-the-counter market. The agency is drafting new market rules that may to go into effect later this year, including caps on the number of speculative positions one firm can hold.

Economy, Crops

Chicago-based CME Group said in an October letter to the CFTC that the agency can’t set caps without proof that excessive speculation is a problem.

“The real driving force behind what’s going on is global economic growth and reductions in crop size,” Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, said in a telephone interview Feb. 16. “Political figures who are trying to blame rising prices upon speculation are ill-advised.”

French President Nicolas Sarkozy accused commodity speculators of “extortion” and “pillaging” in an address to the African Union on Jan. 30. He pledged to take action against traders during his leadership of the Group of 20 policy makers this year.

“Without a doubt, these higher prices will encourage a more robust regulatory effort,” said Gary Blumenthal, the president of World Perspectives Inc., an agricultural consulting company in Washington. “It’s very hard for politicians to ignore public angst even when that angst is founded on imperfect information.”

New Asian hedge funds raise $3.8 bln in 2010

2011-02-24T06:56:00.001-08:00

HONG KONG (Reuters) - Assets raised by new hedge funds in Asia surged nearly 50 percent to $3.84 billion in 2010 from a year earlier, yet another sign that investor interest in regional funds has been on the mend since a tough 2008.

The number of fund launches increased to 95 last year from 78 in 2009 while the average launch size rose to $40 million from $33 million, according to a survey by AsiaHedge.

"Despite a slightly lacklustre second half, new Asian hedge fund launches continued to see sustained interest," said AsiaHedge editor Aradhna Dayal in Hong Kong. "Anecdotal evidence suggests that U.S. allocators were probably the largest contributors to start-up capital last year."

She added that most of the assets went to either second-generation managers with a strong pedigree or offerings from established hedge funds, given the rising entry barrier since the financial crisis wiped out trillions of dollars in investor wealth.

Some of the biggest launches were Gaoling Natural Resources Fund ($250 million) from Hillhouse Capital, Hareion Fund ($220 million) from Areion Asset Management and Sertorius Global Opportunities Fund ($200 million) from CSAM Asset Management.

While Hong Kong, with 57 launches and $2.4 billion in collections, maintained its lead as the preferred destination for hedge funds, Singapore improved in the second half ending the year with 15 launches and collections worth $673 million.

Strategy wise, new hedge funds chasing China were most in demand, attracting $817 million.

Hedge funds, including large American hedge funds, are making a beeline for Asia as more institutional investors aim to boost exposure to the fast-growing region in search for higher yield with 2011 expected to be another good year for new fund launches.

"Just like the class of 2009, the class of 2011 will be an interesting one to watch, with star prop traders such as Morgan Sze, Ben Fuchs and Charlie Chan expected to make their debuts," Dayal added.

JPM unveils EM currency fund

2011-02-22T04:41:00.001-08:00

21 Feb 2011 | 10:28

Emma Dunkley
J.P. Morgan Asset Management has launched the JPM Emerging Markets Currency Alpha fund, targeting a return of EUR cash plus 8%.
The Ucits III absolute return fund will be managed by the firm's currency specialists Amit Tanna and Harry Bazzaz, while supported globally by fourteen strategists and analysts with on the ground presence in many of the markets.

Tanna says: "There is a structural case for investing in emerging markets, and currencies are a critical part of that equation. Domestic demand is likely to be an increasing contributor to growth, and this is expected to continue to attract capital flows and enhance productivity.

"These trends will likely support EM currencies from a long-term structural perspective."

The fund aims to take advantage of the divergences between the countries in terms of differing economic cycles, policy stances and valuations.

Tanna says: "Not all EM countries were created equal. Differences in fundamentals provide a significant opportunity to exploit relative value trends within emerging markets."

The firm adds returns generated from these strategies are uncorrelated with other asset classes.

Northwest Seeks to Raise $250 Million for Asia Stock Hedge Fund

2011-02-22T02:32:00.000-08:00

By Bei Hu - Feb 21, 2011 Northwest Investment Management Ltd., a Hong Kong-based company sold by RAB Capital Plc in 2009, plans to raise $250 million in a year for an Asia-focused stock hedge fund, said Chief Executive Officer George Philips.

The market-neutral Northwest Equity Alpha Fund, which won’t bet on general market direction, is slated to start trading in early April, Philips said in an interview yesterday. The six principals of Northwest, the manager of $750 million assets that Philips co-founded with David Rogers in 1998, will contribute an unspecified amount of the initial capital, he added.

Northwest is tapping institutional investor demand for stock hedge funds whose performances do not move in tandem with the broader markets and with competitors, Philips said. The Eurekahedge Asia Long/Short Equities Hedge Fund Index, which tracks a strategy that invests in rising and falling stocks, was 89 percent correlated with the MSCI Asia-Pacific Index from 2000 to January, according to data compiled by Bloomberg.

“The route we want to take is reliant on not making the mistake that many other groups have made in that space,” said Philips, 46. “The link between economic growth and equity returns is just not a good one. On top of it you are getting too many people in a crowded space.”

Courting Pensions
Northwest expanded assets by 37 percent in 2010 as pension and endowments concentrated their hedge fund investments in a smaller group of established and larger houses in the wake of the global financial crisis, said Mark Smith, Northwest’s head of business development.

About 75 percent of Northwest’s assets now come from such institutions, he added. Funds of funds, which farm out money to different hedge funds, contributed about 70 percent of Northwest’s capital in 2007, Smith said in May.

The new fund may appeal to pension funds which already have large amounts of money invested in equity funds that don’t short and want to limit the market risks of additional equity investments, Smith said. Shorting involves selling borrowed stocks with the view they can be bought back cheaper.

Northwest already has two multi-strategy market-neutral funds that trade shares, convertible bonds, warrants and options. A third fund, which invests in warrants, bets on market direction.

The new fund will use fundamental analyses to pick no more than 15 stocks in each of its major markets: Hong Kong, China, Japan, Taiwan and India, Philips said.

“Per market, people have 30, 40, 50 positions,” Philips said. “Once you start going above that number, you do become the market.”

Stock Picking
Northwest in April hired Nial Gooding, most recently a Hong Kong-based executive director of equity sales at UBS AG focused on Greater China, to strengthen its stock-picking ability, Philips said. Gooding, 51, also worked for Chase Manhattan Bank, Barclays Plc and CLSA Asia-Pacific Markets.

The Northwest Equity Alpha Fund will target an annual return of at least 20 percent, Philips said. As part of the strategies of the two existing market-neutral funds, it returned 30 percent between April 14, 2010, and Feb. 7, said Philips.

The new fund will limit borrowing to no more than 50 percent of its assets, Smith said. It will use index futures to hedge risks, Philips added.

Philips and Rogers met trading baskets of Japanese warrants and convertible bonds for Cresvale International.

The $369 million Northwest Fund Ltd. and the $300 million Northwest China Opportunities Fund Ltd., the two market-neutral funds, each returned about 7 percent in 2010. The $18 million Northwest Warrant Fund Ltd. gained 61 percent in 2010.

Hopu's Ong raising $2 bln Asia fund-source

2011-02-21T04:49:00.001-08:00

By Stephen Aldred

HONG KONG, Feb 21 (Reuters) - Hopu Investment Management Co founding partner Richard Ong is establishing his own $2 billion Asia fund, a source with direct knowledge of the matter said on Monday, ending speculation on the next move for the high-profile former Goldman Sachs dealmaker.

Ong's new fund, RRJ Capital, aims to focus on traditional private equity investments, the source said.

While China-focused Hopu is widely considered a private equity firm, it also invested in hedge fund-style block trades, and took on investment banking-style advisory roles.

Among Hopu's high-profile investments were the acquisition of stakes in China Construction Bank (0939.HK: Quote, Profile, Research, Stock Buzz) and Bank of China (601988.SS: Quote, Profile, Research, Stock Buzz). Hopu was also a sell-side adviser to Argentina's Bridas Energy and Chinese offshore oil giant CNOOC (0883.HK: Quote, Profile, Research, Stock Buzz).

RRJ Capital will invest in similar sectors to Hopu, including food, natural resources, consumer goods and financial institutions, but will have a stronger focus on traditional private equity investments including private buyout deals, the source said.

Hopu was co-founded with Fang Fenglei, who helped Goldman establish its China investment banking joint venture, and Dominic Ho, a former KPMG executive.

Hopu, which completed raising a $2.5 billion investment fund in 2008, declined to comment. (Reporting by Stephen Aldred; Editing by Jacqueline Wong and Jonathan Hopfner)

Emerging markets hedge funds lead industry into 2011

2011-02-21T00:29:00.000-08:00

Emerging markets hedge funds posted industry-leading gains in 2010, led by funds with regional exposure to Russia and the Middle East, according to Hedge Fund Research, Inc (HFR).

As a direct result of these gains, assets invested in emerging market (EM) hedge funds increased by nearly USD10 billion in the fourth quarter to end the year at more than USD114 billion, approaching the record level of AUM for EM hedge funds set in 2007.

The HFRI Emerging Markets (Total) Index gained 11.79 per cent for 2010, topping the gain of 10.30 per cent for the HFRI Fund Weighted Composite Index, the leading benchmark of global hedge fund industry performance. EM performance in 2010 follows gains of more than 40 per cent in 2009 and is particularly significant considering the EM volatility which characterised 2010. Several regional EM equity markets posted declines for the year and the HFRI EM (Total) Index posted gains in only six of the twelve months in 2010.

Middle East-focused funds posted the strongest gains among all EM regions, with the HFRX MENA Index gaining 22.67 per cent for 2010. This was followed by the HFRX Russia/Eastern Europe Index, which gained 21.60 per cent for the year; the HFRX Multi- Emerging Markets Index, comprised of funds investing globally across several emerging market regions, posted a gain of 17.34 per cent.

Fourth quarter EM inflows highest in over 2 years

Investors allocated over USD500 million in net new inflows to EM hedge funds in 4Q10, the largest quarterly inflow since 2Q08, reversing the trend of capital redemptions and investor risk aversion that had characterized the last nine quarters for EM hedge funds. Total capital invested in EM hedge funds peaked at over USD116 billion in 2007 before drawing down to a post-financial crisis low of USD66 billion in 1Q09. EM fund managers have expanded the number of funds compliant with UCITS III guidelines; in total, more than 140 Emerging Market hedge funds are presently UCITS III compliant.

“As the global economic recovery accelerates into 2011, global investors interested in accessing superior growth characteristics will continue allocating to Emerging Markets hedge funds,” said Kenneth J. Heinz, President of Hedge Fund Research, Inc. “EM hedge funds allow investors to access local market expertise via sophisticated strategies and have demonstrated the tactical flexibility to manage through the challenges presented by inflation, liquidity, sovereign debt and currency instability inherent in EM investing.”

Insparo launches equity long/short hedge fund with North Africa focus

2011-02-16T02:20:00.000-08:00

Source: Hedge Funds Review | 15 Feb 2011

Topics: Africa, South Africa, Equity long/short, Insparo Asset Management, China, Tunisia, Egypt

Civil unrest in North Africa may provide interesting investment opportunities for Insparo Asset Management's recently launched Africa Equity long/short equity hedge fund.

The Africa-focused fund, managed by Jamie Allsop, launched with $7.5 million of assets under management (AUM).

Allsop is hoping to capitalise on the recent unrest in Tunisia and Egypt. "The recent events in North Africa make this an auspicious time to be launching a fund like this. 2011 is an exciting year for the African electorate with 17 presidential elections scheduled," said Allsop.

"Although we are taking a long-term view with our investment strategy, the recent volatility will provide good entry points into the positive long-term story of Africa," he added.

This is Insparo's second hedge fund. The first, the Africa and Middle East Fund, was launched in June 2008 and currently has $189 million AUM. It also follows a long/short equity strategy and has returned 36% since launch.

The Africa fund will invest in companies across North Africa and sub-Saharan Africa. Unlike Insparo's other fund the strategy will also make investments in South African equities although these will be limited to 20% of the portfolio.

Insparo is optimistic about investment opportunities in Africa, particularly following China's announcement in December 2010 that its bilateral trade with Africa increased by nearly 45% last year to reach just under $115 billion.

Half of the 25 fastest-growing economies in the next five years are expected to be African, according to data provided by the McKinsey Global Institute in June 2010.

Allsop hopes the fund will achieve 15%-20% returns by capitalising on opportunities in African businesses and the continent's growing consumer culture.

"African consumers are projected to spend $1.8 trillion in 2020, an astonishing increase of over $1 trillion from 2008. The aim of this fund is to invest in sustainable companies that will benefit from and aid this positive tailwind," he said.

Allsop joined Insparo from New Star Asset Management and has over eight years of experience in UK and African equity markets. He formerly managed the New Star Heart of Africa Fund, launched in 2007, which invested in sub-Saharan equities excluding South Africa.

The seed capital for the Afica fund came from internal and external investors. The fund will be soft closed at $250 million.

The fund will be marketed to a range of investors including funds of funds, high net worth individuals, family offices and pension funds. It has a minimum investment of $100,000 and offers monthly liquidity with a management fee of 2% and a performance fee of 20%.

The fund, domiciled in the Cayman Islands, is administered by Quintillion, Ireland. The auditor KPMG and the custodian HSBC.

Insparo Asset Management, founded in July 2007 by CEO Mohammed Hanif, is an asset management company concentrating on frontier markets with a current total AUM of $200 million.

Quick fund facts
Name of fund: Insparo Africa Equity Fund
Portfolio manger: Jamie Allsop
Management company: Insparo Asset Management
Launch date: February 1, 2011
Strategy: long/short equity
Minimum investment: $100,000
AUM at launch: $7.5 million
Share classes: US dollar
Administrator: Quintillion, Ireland
Auditor: KPMG
Custodian: HSBC
Domicile: Cayman Islands
Management fee: 2%
Performance fee: 20%
Redemption/liquidity terms: monthly

Guotai Junan says to launch China hedge fund

2011-02-14T05:06:00.000-08:00

Feb 14 (Reuters) - The asset management arm of Guotai Junan Securities Co said on Monday it would launch a $45 million hedge fund, the first of such among brokerage firms and mutual fund managers in China.

Although many privately-run Chinese asset managers call themselves hedge funds, none of them have been approved by the securities regulator.

The hedge fund, to be managed by Guotai Junan Securities Asset Management Co, plans to raise 300 million yuan ($45 million) initially and will use index futures to mitigate systematic market risks, President Zhang Biao told Reuters in an interview.

The fund will adopt a so-called market neutral strategy, which aims to maintain a close balance between long and short positions.

"There's huge demand for such products in China, with the market awash with cash seeking modest, but stable returns," Zhang said, adding the product targets wealthy individuals with a subscription threshold of 2 million yuan.

The asset management firm aims to launch identical funds later to raise up to 5 billion yuan, he said.

While the hedge fund industry has been partly blamed for the global financial crisis, Zhang brushed aside concerns that the funds could play a destabilizing role in China's stock market.

"The door is just open. Hedge funds in China are rabbits and sheep now, not wolves and tigers," Zhang said. ($1=6.60 Yuan) (Reporting by Samuel Shen and Kazunori Takada)

Investors Boost Bullish Gold Bets as Egypt Turmoil Fuels Demand

2011-02-14T05:04:00.001-08:00

By Pham-Duy Nguyen - Feb 13, 2011 Hedge funds are piling back into New York gold futures and options as turmoil in Egypt sent bullish bets on the metal to the highest since April 2010, government data show. Holdings in silver also increased.

Managed-money funds held net-long positions, or wagers on rising prices, totaling 145,846 contracts on the Comex as of Feb. 2, U.S. Commodity Futures Trading Commission data showed on Feb. 11. The holdings jumped 17 percent, after five straight weeks of declines.

Gold rallied 0.8 last week, the biggest price gain since December, as protests in Egypt forced President Hosni Mubarak to flee the country after 30 years in power. In January, the metal dropped 6.1 percent as an improving world economy eroded gold’s appeal as a haven investment. Prices have rallied for 10 straight years, touching a record $1,432.50 an ounce on Dec. 7.

“You’re seeing a renewed interest in gold from speculative money who put the brakes on the metal earlier this year,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago. “There’s turmoil in Egypt, and inflation is heating up. Investment advisers and money managers are ready to put their money back to work. People are more comfortable jumping back into gold after a correction.”

Gold futures for April delivery settled on Feb. 11 at $1,360.40, after rallying to a three-week high of $1,369.70 during the session.

Investments in exchange-traded products backed by gold fell to 2,019.4 metric tons as of last week, down 0.6 percent since January, when holdings plunged 3.1 percent, the biggest decline since April 2008, data compiled by Bloomberg show. ETPs trade on exchanges, with each share representing metal held in a vault. They accounted for 21 percent of investment demand last year, according to GFMS Ltd., a London-based research firm.

Silver Holdings
Bullish silver holdings by managed-money funds totaled 29,742 contracts, up 27 percent from the previous week and the highest total since November, CFTC data show. Silver settled Feb. 11 at $29.995 an ounce on the Comex, capping three straight weeks of gains.

This year, silver rose to $31.275 on Jan. 3, the highest in 30 years, before dropping as low as $26.30 on Jan. 28.

“We’re more bullish on silver than gold because of its industrial component,” said Barry James, the president of James Investment Research Inc. in Xenia, Ohio, which manages about $2.5 billion.

“After silver’s dipsy doodle, it’s creeped right back to where it started the year,” said James, who has reduced the fund’s holdings of silver and gold to about 2.5 percent from 7.5 percent in the fourth quarter. “We’re more neutral than bullish on gold and don’t expect it to pick up steam and race to a new record. The dollar will probably recover and show some strength.”

Managed-money positions include hedge funds, commodity- trading advisers and commodity pools. Analysts and investors follow changes in speculator positions because such transactions may reflect an expectation of a shift in prices.

China 20: A Roller-Coaster Ride for China's Largest Money Managers

2011-02-11T06:45:00.000-08:00

03 Oct 2010

Allen T. Cheng

Firms look to new products to generate growth in the face of today’s volatile equity market.

Fan Yonghong has a problem most fund managers would love to have. As president and chief executive officer of China Asset Management Co., Fan has overseen a phenomenal period of growth during which the company has extended its lead as China’s largest fund manager. In the 12 months to August, however, Fan has actually turned away $1.5 billion in fresh money from institutional investors. The reason? He worried that China AMC wouldn’t be able to maintain strong performance if it grew too rapidly, especially at a time of high market volatility.

“In some countries mutual funds normally say ‘the bigger, the better the company,’ because they can charge a fixed rate of fees,” says Fan. “So being bigger is going to attract more income. That is why some Chinese fund managers are striving to increase their assets under management rapidly. The problem is, if they don’t make a good return for investors, that will damage those investors. This creates a crisis of trust.”

So far, Fan has succeeding in maintaining the trust of his investors better than most. China AMC’s assets under management jumped by 46 percent in 2009, to $45 billion, according to the China 20, Institutional Investor’s exclusive ranking of the country’s largest money managers. Those gains lift the company well above industry rivals. Harvest Fund Management Co. holds on to the No. 2 spot in the ranking, with assets of $35.1 billion, up a more modest 23 percent. Bosera Asset Management Co. follows in third place, with $30.7 billion, up 30 percent. E Fund Management Co. moves up one place, to fourth, thanks to a 78 percent surge in assets, to $27.9 billion. And Penghua Fund Management Co. advances one place, to fifth, following a 25 percent rise in assets, to $19.4 billion.

The days of effortless growth for Chinese fund managers have ended, though, with some notable casualties. China Southern Fund Management Co. falls two places on the list, to No. 6. Its assets dropped by 19 percent, to $17.9 billion, at the end of 2009. HFT Investment Management Co., known formerly as Fortis Haitong Investment Management Co., tumbles eight notches, No. 20. Its assets declined by 1 percent, to $8.3 billion.

Increasingly, volatility is the name of the game for Chinese fund managers, as it is for their peers in most other markets. The country’s economy may have staged the most-dramatic comeback from the global economic crisis, with growth currently running at a pace of about 10 percent, but the stock market has been on a roller coaster. From a peak of 5,877 on October 16, 2007, the China Securities Index 300 fell 72 percent, to a low of 1,628 in November 2008, then more than doubled, to 3,787, by August 2009 before easing back again. The benchmark index has oscillated between 2,500 and 3,000 since May and was trading late last month around 2,857.

Those movements have been challenging for fund managers, as assets under management have also seesawed. The industry’s total assets stood at some 2.1 trillion yuan ($308 billion) at the end of June, down from 2.67 trillion yuan at the end of 2009 but up from a 2008 low of 1.89 trillion yuan, according to Shanghai-based Z-Ben Advisors, a firm that tracks China’s asset management industry.

“The financial crisis did have an effect on China but not immediately: It was deferred over half a year,” says China AMC’s Fan. “Retail funds suffered losses, and in some cases investors withdrew money, but the institutional investor base is more stable. Now we return to a period of more stable development, but there are many difficulties still to deal with.”

Strong performance stands out in difficult markets, though. China AMC’s top five equity funds delivered average returns of 40 percent in the 12 months ended March 31, compared with a 33 percent rise in the CSI 300 over the same period. “We do not seek scale as our goal but best performance,” says Fan.

Good returns have enabled China AMC to open a daunting lead over its rivals, says Min Tha Gyaw, an analyst at Z-Ben. “Their top portfolio manager, Wang Yawei, is very good,” says Min. “The company is strong in marketing and distribution. That is backed up by strong performance, and as a result they have a very high investor retention rate. So far they’ve been able to do everything right.”

Other fund managers are looking to sustain growth through innovation. In September, E Fund launched China’s first officially registered hedge fund. It will target both global and domestic institutional investors and will employ a mostly long/short equity strategy, says Liu Zhen, a managing director of E Fund’s index and quantitative unit.

Other firms are eyeing similar moves. Harvest Fund Management, which is 30 percent owned by Deutsche Bank, hired a Hong Kong–based team of fund managers from Deutsche’s asset management arm and created its own Hong Kong subsidiary, Harvest Global Investments. The unit is looking to develop products for global and Chinese investors, and a source close to the company says it has received regulatory approval to launch a Hong Kong–based hedge fund
specializing in H shares. “We are seriously looking at the alternative investment space,” says Michele Bang, CEO of Harvest Global.

Harvest isn’t the only firm looking to grow abroad. Many of the country’s 62 asset managers, including China AMC, Bosera and E Fund, have established Hong Kong offices in the past 18 months to target global investors and wealthy Chinese looking for offshore vehicles.

“I see Chinese asset managers expanding globally in two to three years,” says Daniel Enskat, head of global consulting at Strategic Insight, a firm that advises on global expansion strategies. “Some are planning acquisitions overseas. Opening offices in Hong Kong is the first step in this process.”

Carlo Venes, Hong Kong–based head of Fidelity International’s institutional business in Asia, says Chinese asset managers are beginning to climb a steep learning curve. Fidelity has been hosting portfolio managers in seminars in Hong Kong and London, as well as in Beijing and Shanghai. “We are teaching them how to monitor counterparty risk, do in-house research and not blindly follow credit rating agencies,” Venes says. “They realize the importance of tracking risks and managing risks.”

Notwithstanding all the innovation, there’s still plenty of room to work on the basics. Bosera, for instance, is focusing on changes in the underlying economy and emphasizing stocks likely to benefit from a shift to consumption- rather than export-led growth. “We are investing in companies that produce consumer durables, especially automobiles, electronics and medical equipment,” says CEO Li Zhihui.

Haitong International AMC looks to launch hedge funds

2011-02-11T06:38:00.000-08:00

By Leanne Wang | 11 February 2011

The Hong Kong subsidiary is also in fundraising talks with private equity investors in further proof that Chinese AMCs are using the offshore channel to tap alternatives.

Haitong International AMC is looking to launch two hedge funds this year and is also in fundraising talks with private equity investors in the latest example of a Chinese asset manager tapping offshore alternatives opportunities via a Hong Kong arm.

There are at least 10 Chinese asset management companies with global growth aspirations that have set up Hong Kong subsidiaries. Many are exploring opportunities in alternatives, including hedge funds, private equity and real estate.

Haitong International AM is the offshore arm of Haitong International Securities Group. According to Ben Zhang, the subsidiary’s joint managing director, it is looking to launch a long/short hedge fund and a quantitative hedge fund focusing on emerging markets this year.

The Hong Kong-based asset manager also has five staff on its private equity team and invests its own capital. Supported by the recently launched qualified limited foreign partners (QFLP) scheme, it is in fundraising talks with several overseas investors as potential limited partners.

Zhang says he expects the AUM of its private equity division to hit $100 million, with further details due to be announced in March.

Meanwhile, Harvest Global Investments (HGI), the Hong Kong subsidiary of Harvest Fund Management, has developed both onshore and offshore alternatives platforms, which are managed by Harvest Alternative Investment Partners.

“We are adopting a multi-boutique strategy across the alternatives spectrum, including hedge funds, private funds, real estate and special situations,” notes Lindsay Wright, head of Harvest Alternative Investment Partners and HGI’s vice-chairman.

Deregulation is providing a chance for these Hong Kong subsidiaries to cultivate the more exotic landscape of alternative investment that their mainland parents have hitherto had little access to.

Consultancy Z-Ben Advisers believes that Chinese institutional investors will, in fact, be able to build far more sophisticated offshore portfolios than many observers, and even Chinese FMCs, expect.

It suggests that, to date, lack of access to such assets combined with regulatory controls over onshore-earned capital have hampered development.

“However, as HGI’s development suggests, while access to onshore alternatives remains limited, Hong Kong represents the ideal place to offer it to mainland customers,” notes Francois Guilloux, director of regional sales at Z-Ben.

Harvest, he points out, appears to have decided that domestic investments are best managed from Beijing, while regional (and later global) investments are best managed from Hong Kong.

Harvest Alternative Investment Partners, which was set up in the fourth quarter of 2010, has completed two investments. It acquired a 30% stake in JT Capital, an offshore Greater China long/short hedge fund that started trading last November, and it took a 30% stake in Ample Harvest Capital, a mezzanine debt firm that employs an onshore China fund strategy and is due to start trading in the next month.

When it comes to private equity and real estate, Wright suggests Harvest Alternative Investment Partners will be looking to establish onshore RMB funds.

She adds: “With the recently launched QFLP scheme, as a general partner we can raise funds both onshore from domestic Chinese investors and also from offshore investors, subject to certain restrictions.”

Launched in Shanghai in January, the QFLP scheme enables foreign investors meeting certain qualifications to invest in private equity funds provided the dollar amount of their investments does not exceed the limit approved by the State Administration of Foreign Exchange (Safe).

Investments by QFLP may be in foreign currency, although investees can settle in renminbi. However, the total dollar amount that each qualified PE fund can settle in RMB cannot exceed $100 million, or 50% of the total capitalisation of the PE fund. The dollar amount of foreign currency that the general partner of the PE fund can settle shall not be more than 5% of the total capitalisation of the PE fund.

During an interview with Wright last November, she said: “Alternatives investment is still in its fairly early stages for Chinese asset managers, but we believe there will be tremendous opportunities going forward.”

She added that although Harvest Alternative Investment Partners’ portfolio will not be significant to the earnings of Harvest Group in 2011, it is expected to become a relevant contributor to earnings over the next three-to-five years.

Tiresias Aims to Triple Asia Event Fund Assets After 20% Return

2011-02-11T06:28:00.001-08:00

By Bei Hu - Feb 10, 2011 Tiresias Capital Ltd., a Cayman- based hedge fund manager, plans to start taking capital from investors for its Asia event-driven fund for the first time, after it returned more than 20 percent in its first year.

Tiresias aims to raise $150 million directly from investors starting as early as March 1, bringing the size of the Omni Asia Fund to $250 million within a year, Matthew Moskey, 34, its Hong Kong-based fund manager, said in an interview yesterday.

Hedge fund investors are seeking managers taking advantage of a revival in mergers and acquisitions, share sales and reorganizations after the global financial crisis without suffering from stock market gyrations. Deals with Asia-Pacific region target companies rose to 23 percent of total mergers and acquisitions globally last year, a 10 percentage points increase over 2004, according to a Citigroup Inc. report this month.

“Some investors want direct Asia exposure,” said Moskey. “We’re happy to provide that platform and have a more diverse investor base.”

Investors added $765 million to Asia-focused event-driven funds last year, making it the most popular strategy in the region, according to Chicago-based Hedge Fund Research Inc. That was more than the $511 million total inflows into the regional hedge fund industry.

Tiresias’s market-neutral Asia event fund so far has only taken money from Tiresias’s $635 million Omni Global Fund, said Moskey. The global fund’s allocation allowed the Asian pool to start trading on Jan. 14, 2010, with $50 million, which has been increased to more than $70 million now and will grow to $100 million by March, he added.

Outperformer
The Asia fund is estimated to have returned just over 20 percent last year, compared with the 15 percent preliminary gain of the Eurekahedge Asia Event-Driven Hedge Fund Index.

A number of existing investors in Tiresias’s global fund have indicated their interest to invest directly into the Asian pool, Moskey said, without giving specific numbers.

Tiresias plans to cap the size of the Asia fund at $250 million for better returns and to retain its focus on “hard events” such as mergers and acquisitions involving publicly listed Asian companies, Moskey said. The fund targets a 15 percent annual return after fees.

It will further expand the fund when Asian opportunities grow and market trading becomes more active, he said. Asian trades offer greater returns to compensate for risks, he said.

‘More Difficult’
“The Asian markets tend to be more difficult to trade mergers and acquisitions than Europe and the U.S.,” Moskey said. “That’s primarily because you are dealing with a number of different regulatory and legal regimes. And you don’t always have the rule of law in Asia.”

The Asia fund aims to make about 80 percent of its investments in announced mergers and acquisitions, which contributed the majority of its profits last year, Moskey said. It also acquires shares in initial public offerings and secondary sales and trades stocks in industries that are ripe for corporate events, he added.

Moskey said he expects more deals in Japan, second-tier markets such as Malaysia, Indonesia and Thailand, and among resource-related companies. Private-equity buyers have returned, selectively putting money to work, providing further support for deal volumes, he added.

“We think 2011 will be a very good year for mergers and acquisitions,” said Moskey.

Fortress to launch Asia Macro Fund

2011-02-10T04:32:00.001-08:00

Fortress Investment Group has formalised plans to launch an Asia-focused macro offering, HFMWeek can exclusively reveal.

According to an investor document, the offering, called the Fortress Asia Macro Fund, will roll out next month. It will take advantage of fundamental trends, thematically linked to the Asia-Pacific region.

Last year, Fortress co-chief investment officer of global macro funds, Adam Levinson, relocated to Singapore to lead the firm's expansion and to head up its macro-trading activities in the region.

Levinson, who will lead the new fund, lived in and traded in Asia for almost a decade. The document revealed that he will be supported by an investment team of portfolio managers and analysts based in Singapore.

The launch comes at a time when many managers are setting up offices in Asia to capitalise on economic growth in the region. The debut also follows large inflows into Asia.

Hedge Fund Research (HFR) revealed that Asian hedge funds attracted $500m in new net capital in the fourth quarter of 2010.

China Asset's Wang Buys Property Stocks as Fund Trumps Rivals for 5th Year

2011-01-21T07:16:00.000-08:00

By Bloomberg News - Jan 21, 2011 China Asset Management Co., the nation’s biggest mutual fund company, boosted its holdings in property stocks in its flagship fund in the fourth quarter even as the government tightened policies to curb asset bubbles.

Wang Yawei increased the proportion of real-estate shares in his China AMC Large-Cap Select Fund to 19 percent from 13 percent, while cutting holdings of banks and insurers to 20 percent from 24 percent. China AMC had 7.7 billion in assets ($1.2 billion) as of Dec. 31, a quarterly report posted on its website showed. The fund has beaten 97 percent of rivals over the past five years, according to data compiled by Bloomberg.

A gauge of property stocks in the Shanghai Composite Index jumped 3.8 percent today, the most among the five groups and the biggest gain since Jan. 4. The benchmark measure climbed 1.4 percent. Goldman Sachs Group Inc. also boosted its stock rating for Chinese real-estate shares to “overweight” today, citing the prospect of “more decisive policy action” in the near term.

“China’s stock market will continue to fluctuate,” Wang said in the report. “Investment opportunities may depend on China’s inflation levels.”

The nation’s property stocks are rebounding this year on speculation rising demand for real estate will bolster prices, which climbed for a 19th month in December. The gauge of developers has jumped 3.4 percent in 2011, compared with a 3.3 percent slump for the broader index. Wang increased his equities allocation to 89.3 percent as of Dec. 31, compared with 87.8 percent in the previous quarter, the report showed.

Policy Tightening

The property gauge plunged 28 percent in 2010, the most among the five industry groups, as Premier Wen Jiabao’s government ordered banks to set aside more reserves six times and boosted interest rates twice to tame inflation and curb asset bubbles after record gains in lending and property prices.

Jim Chanos, the hedge fund manager who was one of the first investors to foresee the 2001 collapse of Enron Corp., said in a Bloomberg Television interview last month that China’s property boom continues “unabated” and has even picked up since the government enacted policies to cool speculation.

Chinese property stocks were raised to “overweight” from “neutral” at Goldman Sachs, which said earnings risks to developers and banks are “limited,” according to a report by analysts including Helen Zhu.

China Vanke Co., the nation’s largest developer, increased 3 percent to 8.38 yuan today. Yunnan Metropolitan Real Estate Development Co. added 0.5 percent to 18.63 yuan, the first gain in a week. The company was Wang’s 10th biggest holding, according to the quarterly report.

‘Best Fund Manager’

Wang cut his holdings of Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., the nation’s two largest lenders, in the fourth quarter. He bought shares of China United Network Communications Ltd., making it No. 7 on the list of his top 10 biggest holdings. Xinjiang Guanghui Industry Co., a real-estate company that has surged 76 percent over the past year, remained the biggest holding, while China Gezhouba Group Co. and China Construction Bank Corp. ranked second and third.

The China AMC Large-Cap fund has beaten the Shanghai Composite in the past five years. In 2010, it returned 24 percent, after a 116 percent jump the previous year. In 2008, the fund fell 36 percent as the index plunged 65 percent.

“Wang is no doubt the best fund manager in China,” said Zhang Haochuan, head of research at Z-Ben Advisors, a Shanghai- based funds adviser. “He’s like the Peter Lynch of China for his value investing.”

Lynch, one of America’s best-known investors, managed Fidelity’s Magellan Fund from May 1977 to May 1990. Assets under management during that time grew to $14 billion from $22 million, according to Adam Banker, a Fidelity spokesman.

Morgan Stanley launches Asia-Pacific long/short Ucits III fund

2011-01-21T07:14:00.001-08:00

Morgan Stanley has launched Indus PacifiChoice Asia Fund, its fifth Ucits hedge fund under the FundLogic Alternatives umbrella domiciled in Ireland.

The fund strategy is equity long/short using a bottom-up approach to stock-picking. It will focus on the Asia Pacific region as "Asia offers some of the most exciting investment opportunities for a long/short equity strategy," commented managing director and global head of fund-linked business at Morgan Stanley David Armstrong.

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Asian markets are inherently inefficient and are "an excellent backdrop for long/short strategies", according to investment manager for the fund Indus Capital Partners.

The fund will launch with $10 million of assets under management (AUM). Sheldon Kasowitz and Ethan Devine are the portfolio managers.

The portfolio will consist of 60-90 long and short ideas with the top 10 positions representing 30%-35% of net asset value (NAV).

Morgan Stanley chose to work with Indus Capital as it "has one of the longest track records of alpha generation in the Asia-Pacific region," Armstrong said.

Indus Capital was founded in 2000 and since entering developed European markets in 2006 has brought its funds under management from $70 million to approximately $4 billion.

Kasowitz and Devine have 29 years of combined experience investing in Asian equities and will be supported by a team of 21 analysts mostly on the ground in Tokyo, Hong Kong and Singapore.

The pair will offer an early bird share class for a limited time period with a management fee of 1.5%, after which it will rise to 2% for institutional investors and 2.5% for retail investors. The performance fee remains at 20% for both institutional and retail shareholders. Share classes are offered in euro, sterling and US dollars.

Minimum investment is $/€/£1 million although an early bird offer with no minimum investment will also be available for an undisclosed time period.

The fund will be marketed primarily within the European Union (EU) to institutional investors including funds of funds, pension funds and banks and will also be offered through distributors such as private banks and platforms.

Ernst & Young is the auditor. The administrator is Northern Trust Fund Administration Services (Ireland) and the custodian is Northern Trust Fiduciary Services (Ireland).

FundLogic Alternatives, launched in 2006, is the platform brand name for Morgan Stanley fund solutions offering Ucits and non-Ucits funds globally. The platform includes a range of products including simple index funds, structured funds and third-party manager Ucits funds.

The first fund launched under the Ucits III umbrella was the MS PSAM Global Event Ucits Fund which now has $54 million AUM. This was followed by Salar Convertible Absolute Return Fund (AUM $63 million) and Indus Select Asia Pacific Fund (AUM $11 million).

In early January 2011 Morgan Stanley and investment manager Algebris launched the long/short equity MS Algebris Global Financials Ucits Fund under the same umbrella structure.

A sixth fund in the FundLogic Alternatives series is expected to be launched in February 2011 with a US long/short sector focus.

Kasowitz is a founder of Indus Capital Partners and has over 25 years of experience in the investment industry. Prior to founding Indus Capital in 2000, Kasowitz was a managing director and partner of Soros Fund Management.

Devine is a partner of Indus Capital Partners having joined in August 2001 from Goldman Sachs investment research where he was part of the Latin American industrial conglomerates team.

Quick fund facts
Full name of fund: Indus PacifiChoice Asia Fund
Name of portfolio managers: Sheldon Kasowitz and Ethan Devine
Name of management company: Indus Capital Partners
Launch date: January 12, 2011
Assets under management: $10 million
Strategy: equity long/short
Share classes: US dollar, euro, sterling
Administrator: Northern Trust Fund Administration Services (Ireland)
Auditor: Ernst & Young
Custodian: Northern Trust Fiduciary Services (Ireland) (sub-custodian Morgan Stanley)
Domicile: Ireland
Management fee: 1.5% (early bird)/2% (institutional)/2.5% (retail)
Performance fee: 20%
Minimum investment: $1 million
Liquidity: weekly

CAI Opens China Office

2011-01-18T22:11:00.001-08:00

Hong Kong hedge fund Central Asset Investments is making the move to the mainland.

The firm plans to open an office in the Chinese city of Shenzhen, Asian Investor reports. The new base will be staffed by new hire Bill Tsai and three young analysts.

Tsai joined CAI from Chinese real-estate firm Longridge Capital and formerly worked at Hypo Vereinsbank and Deutsche Bank. In Shenzhen, he'll be joined by analysts Alex He, Ferry Feng and Franky Xie.

CAI picked Shenzhen, a city of 9 million people that borders the Hong Kong Special Administrative Region, due to its proximity to the firm's headquarters and the lare number of Shenzhen-based companies listed in Hong Kong.

Emerging market funds on the way to record-setting year-EPFR

2010-12-27T08:45:00.001-08:00

Fri, Dec 24 2010
KUALA LUMPUR, Dec 24 (Reuters) - Emerging markets are on their way to report record inflows in 2010 with equity fund inflows so far reaching $92.5 billion, $10.5 billion above last year's and bond funds attracting $52.5 billion, nearly seven times 2009 total, fund tracker EPFR Global said on Friday.

The totals were up to the week ending Dec. 22.

For the week's performance however, emerging market equity funds saw their 29-week inflow streak snapped due to profit-taking and uncertainty about inflation and fresh capital controls, said Boston-based EPFR, a unit of Informat Plc

Overall, EPFR said that during the final weeks of 2010, investor focus has shifted from bonds to equities. As such, equity funds globally took in a net $4.5 billion for the week ending Dec. 22 while bond funds saw redemptions totalling $2.3 billion.

EMERGING MARKET EQUITY FUNDS

EPFR said global emerging market equity funds have attracted two out of every three dollars committed to emerging market funds this year, but that it was the EMEA equity funds that would be carrying the greatest momentum into 2011 as they have seen inflows for 15 straight weeks with half of their year-to-date total coming in the fourth quarter alone.

Latin American Equity funds have stumbled in recent weeks as political uncertainty and worries about Chinese demand cooled investor sentiment toward the region.

U.S., GLOBAL, EUROPE, PACIFIC AND JAPAN EQUITY FUNDS

U.S. and Japan equity funds saw inflows with three of the other developed market fund groups seeing outflows. The latest inflows to the United States reduced year-to-date redemptions to $34.2 billion, which would be the smallest annual outflow since 2006.

Japan equity funds extended their inflow streak to four consecutive weeks while Europe equity funds turned negative despite continued inflows into Germany equity funds.

SECTOR FUNDS

Commodity and energy sector funds continued their strong run this year. Financial sector funds however struggle with concerns about higher funding costs in the coming months and the perception that Europe's sovereign debt problems could further damage balance sheets.

BOND FUNDS

U.S. bond funds and western Europe bond funds saw outflows offsetting the gains in global bond funds and emerging markets bond funds.

In the case of U.S. bond funds, redemptions from municipal bond funds accounted for more than half of the total outflows while in western Europe, concerns about the ability of peripheral euro zone countries to avoid default continued to have an impact.

Middle East and emerging Asia lead hedge fund gains

2010-12-06T00:46:00.000-08:00

By Emily.perryman
Created 05/12/2010 - 14:13

Hedge funds investing in the emerging markets of Russia, Latin America, emerging Asia and the Middle East have produced the strongest year-to-date gains across the hedge fund industry, according to the latest data from Hedge Fund Research.

The HFRI Emerging Markets (Total) Index has gained 9.3 per cent through October, outpacing the 6.8 per cent gain of the broad-based HFRI Fund Weighted Composite Index.

Despite the gains, investors remained cautious on new allocations to emerging markets hedge funds, allocating only USD10m of net new capital to emerging markets funds in 3Q10.

In comparison, investors allocated over USD19bn of new capital to hedge funds focused primarily on developed markets over the same period.

Performance based gains resulted in an asset increase of over USD10bn to emerging markets hedge funds, bringing total AUM in these to nearly USD105bn, the highest AUM level since 2Q08.

Regionally, funds investing in the Middle East and emerging Asia have posted the strongest gains, trailed by Russia and Latin America. The HFRX MENA Index has gained 13.3 per cent and HFRI EM: Asia ex-Japan Index returned 9.5 per cent through October, while the HFRI EM: Russia/Eastern Index and the HFRI EM: Latin America Index have returned 9.5 and 6.7 per cent, respectively.

The trend of emerging market-focused funds locating in the markets in which they invest also continued, with increases in the number of firms locating to Singapore, China and Brazil. At the same time, the percentage of emerging markets firms located in the US and UK continued to decline, falling to less than half of all EM funds.

More than two-thirds of all emerging markets funds are equity hedge strategies, more than double the overall industry average of thirty per cent. Fewer emerging markets funds offer relative value arbitrage or event driven exposure, while the percentage of emerging markets funds focusing on macro strategies is only slightly lower than the overall industry.

Emerging markets fund managers have expanded the number of funds compliant with Ucits III guidelines; in total, more than 120 emerging market hedge funds are presently Ucits III compliant.

“As global investors continue to focus on sovereign credit and currency risks, performance gains in emerging market hedge funds have failed to attract net new investment capital,” says Kenneth Heinz, president of Hedge Fund Research. “However, emerging markets hedge funds offering more strategic exposure, Ucits III conformity and local-market specialisation are likely to appeal to investors as the EU sovereign credit crisis continues.”

HFR: Emerging markets hedge funds top industry performance, fail to attract new investor capital in Q3 2010

2010-12-03T04:11:00.000-08:00

Opalesque Industry Updates - Hedge funds investing in the high-growth emerging markets of Russia, Latin America, Emerging Asia and the Middle East have produced the strongest YTD gains across the hedge fund industry, according to the latest data from Hedge Fund Research, Inc., which today released the HFR 3Q Emerging Markets Industry Report. The HFRI Emerging Markets (Total) Index has gained +9.3 percent through October, outpacing the +6.8 percent gain of the broad-based HFRI Fund Weighted Composite Index.
Despite the gains, investors remained cautious on new allocations to Emerging Markets hedge funds, allocating only $10 Million of net new capital to EM funds in 3Q10. In comparison, investors allocated over $19 Billion of new capital to hedge funds focused primarily on developed markets over the same period. Performance based gains resulted in an asset increase of over $10 Billion to EM hedge funds, bringing total AUM in these to nearly $105 Billion, the highest AUM level since 2Q08.

Regionally, funds investing in the Middle East and Emerging Asia have posted the strongest gains, trailed by Russia and Latin America. The HFRX MENA Index has gained +13.3 percent and HFRI EM: Asia ex-Japan Index returned +9.5 percent through October, while the HFRI EM: Russia/Eastern Index and the HFRI EM: Latin America Index have returned +9.5 and +6.7 percent, respectively.

Trends toward localization, secular growth and UCITS III pervasive in EM
The trend of Emerging Market-focused funds locating in the markets in which they invest also continued, with increases in the number of firms locating to Singapore, China and Brazil. At the same time, the percentage of EM firms located in the U.S. and UK continued to decline, falling to less than half of all EM funds.

More than two-thirds of all Emerging Markets funds are Equity Hedge strategies, more than double the overall industry average of thirty percent. Fewer EM funds offer Relative Value Arbitrage or Event Driven exposure, while the percentage of EM funds focusing on Macro strategies is only slightly lower than the overall industry. EM fund managers have expanded the number of funds compliant with UCITS III guidelines; in total, more than 120 Emerging Market hedge funds are presently UCITS III compliant.

“As global investors continue to focus on sovereign credit and currency risks, performance gains in Emerging Market hedge funds have failed to attract net new investment capital,” said Kenneth Heinz, president of Hedge Fund Research, Inc. “However, emerging markets hedge funds offering more strategic exposure, UCITS III conformity and local-market specialization are likely to appeal to investors as the EU sovereign credit crisis continues.”

Brummer Said to Start Asian Event Hedge Fund With Ex-Millennium's Collison

2010-12-03T04:09:00.001-08:00

By Netty Ismail - Dec 3, 2010 Brummer & Partners, the largest Scandinavian hedge fund, plans to start an event-driven fund that seeks to profit from events such as mergers in the Asia- Pacific region, said two people with knowledge of the matter.

The Stockholm-based firm has teamed up with Scott Collison, a former portfolio manager at Millennium Management LLC’s Asian business, to start Orvent Asset Management Pte in Singapore to manage the fund, the people said, asking not to be identified because the information is private. Collison, Orvent’s chief investment officer, declined to comment.

The fund will start in January with about $150 million in initial capital from Brummer & Partners, the people said. It will be the second Asia-focused strategy that Brummer & Partners, which manages $10 billion, will invest in through its multistrategy fund after it put an initial $50 million into a long-short fund managed by Karakoram Asset Management Pte in 2009.

The Brummer & Partners Multi-Strategy Fund, a global portfolio of the firm’s hedge funds, gained 2.5 percent this year through October, according to data compiled by Bloomberg. Event-driven strategies focusing on Asia returned 9.9 percent this year, outperforming the average Asian hedge fund’s gain of 6.9 percent, according to Singapore-based industry data provider Eurekahedge Pte.

Market Neutral

Event-driven funds are among strategies that currently appeal to investors, leading to a “larger proportion of such launches” this year, GFIA Pte said in its latest monthly newsletter.

“Event-driven funds are popular because they can give strong equity-like returns without the correlation to markets,” said Peter Douglas, principal of Singapore-based GFIA, which advises investors seeking to allocate money to hedge funds and runs a wealth-management business. “Each trade is stock- or situation-specific.”

Orvent will have a market-neutral approach by hedging its bets on company events, the people said. The strategy will trade securities affected by events such as announced mergers, earnings surprises, corporate reorganizations and changes to equity index components, the people said.

Millennium, Rubicon

Collison, 42, was portfolio manager of an internal fund focusing on Asian equity event-driven and arbitrage strategies at Israel Englander’s Millennium in Singapore. He previously managed Rubicon Asset Management’s Rubicon Asia Special Events Fund and was before that an equities and derivatives trader specializing in the region’s markets at Credit Suisse Group AG in Hong Kong, New York and Sydney.

Investors with the ability to provide “substantial seed” capital would invest in managers with a “good track record of managing substantial amounts of hedged capital for good clients,” GFIA’s Douglas said.

Institutional investors are paying more attention to the organizational and risk management setups of managers they allocate money to. There should also be confidence that the manager’s strategy would work in the current climate, Douglas said.

Orvent’s prime brokers are Goldman Sachs Group Inc. and Skandinaviska Enskilda Banken AB, the people said. Collison and two other portfolio managers own 50 percent of Orvent, while Brummer & Partners holds the remaining stake, the people said.

Orvent will be the 11th fund worldwide in the Brummer & Partners platform, according to the people.

PineBridge, Japan's Biggest Emerging-Bond Fund, to Invest in India in 2011

2010-11-19T05:41:00.000-08:00

By Masaki Kondo and Makiko Asai - Nov 18, 2010 PineBridge Investments Japan Co. said its 160 billion-yen ($1.9 billion) bond fund will start to invest in India next year on expectations the nation’s currency will appreciate.

The firm’s Blue Ocean fund is Japan’s biggest that invests in sovereign bonds in emerging economies without letting customers choose in which currency to invest, according to data compiled by Bloomberg. Investment in India is expected to start in 2011 with an initial allocation of at least 5 percent of the fund’s assets, or about 8 billion yen, said Kazuya Sugiura, managing director at PineBridge’s fund-business development division.

“India is undoubtedly an important country,” Sugiura said in a Nov. 17 interview in Tokyo. The rupee “is moving in almost the same way as the U.S. dollar, but I think the time will come when it starts to move differently.”

Prolonged deflation in Japan enhances the value of fixed payments from bonds, boosting demand for government debt and driving down its returns. While the Bank of Japan maintains interest rates almost zero to boost lending and combat deflation, its Indian counterpart has lifted borrowing costs six times this year to contain inflation.

India’s rupee has depreciated 7.6 percent versus the yen this year, while the dollar has lost 10 percent. Yields on India’s 10-year bonds are seven times higher than similar- maturity Japanese debt.

Sovereign Ratings

Japan’s investments in overseas debt have reached a net 22.3 trillion yen this year through September, exceeding a yearly total of 13.3 trillion yen in 2009, reports from the Ministry of Finance show. Purchases of Indian securities amount to a net 100 billion yen this year, more than any annual total on record dating back to 2005.

Other investment opportunities for Blue Ocean lie with Indonesia and Turkey, whose sovereign ratings may be raised, Sugiura said. There are investors who avoid countries with a rating of BB or lower, and a rating upgrade will spur their purchases, he said.

“Indonesia’s rating may be lifted in 2012 or 2013 if everything goes smoothly,”Sugiura said. “The countries’ interest rates are high and their economies are robust despite some problems.”

Indonesia and Turkey are rated BB by Standard & Poor’s Ratings Services. Turkish securities accounted for the biggest portion of the fund’s asset, or 12 percent, as of Oct. 20, followed by Brazil’s 11 percent, according to the company’s report. Indonesian debt made up 9 percent.

Shift from Latin America

Last month, Brazil raised tax on foreigners’ investments in fixed-income securities to prevent the currency’s appreciation and safeguard export growth. Japan’s purchases of Brazilian debt rose to a net 882.4 billion yen this year through September, reports from Japan’s Ministry of Finance show. That exceeded a 12-month total last year, the most on record since 2005.

“The fund’s allocation will shift from Latin America to Asia to a certain extent,” Sugiura said. “I’m expecting Asian countries to play an increasingly important role in Blue Ocean.”

The International Monetary Fund projects 1.5 percent growth in Japan’s economy next year, and 8.4 percent for India. Turkey’s economy may expand 3.6 percent, compared with 6.2 percent for Indonesia’s real gross domestic product, according to the IMF.

Investing In Central Europe: Too Hot, Too Cold, Or Just Right?

2010-11-12T04:03:00.000-08:00

Nov 11 2010 | 9:58am ET

Central Europe (CE) has a problem, says Armando D’Amico of Acanthus Advisors. To potential investors, it seems less safe than Western Europe but less exciting than Brazil, Russia, India and China. It’s “between two stools,” says D’Amico, whose company has been advising clients on European investment for over 10 years.

“If I speak to investors,” says D’Amico, “Those who have a global view say, ‘Look, if I wanted to do something more adventurous, what’s on my mind is Brazil, India, China to some extent.”

At the other end of the spectrum, says D’Amico, are investors who are very conservative and who say “Why should I invest in Poland or Hungary? I’d rather stick to good German funds, or the UK, or something more solid.”

And that’s CE’s dilemma—a good prospect but “if you want a real growth story you go to Brazil and India and China, if you want a conservative story, you go to Europe, and CE falls in between.”

Joanna James, managing director for Central and Eastern Europe for the global private equity firm Advent International, agrees with this summation of the situation:

“It used to be, up until a couple of years ago, that if I saw an article in the FT or somewhere that said ‘emerging markets’ in the headline, I would read it because I knew it was going to say something about Central Europe,” she says. “These days it never includes Central Europe—it’s Brazil, India, China—the whole of the Central Europe region is out of the emerging market definition as far as investors are concerned.”

Moreover, she questions whether you can even refer to Central and Eastern Europe as a region anymore:

“At the time of the financial crisis, the end of 2008, people tended to assume that the whole of the former Communist bloc must all be the same and so their currencies were treated the same and people fled from their markets and so on. In fact, Poland had the highest growth in any European country in 2009.”

The region is one of contrasts between countries like Poland, the Czech Republic and Slovakia, which James says are “doing pretty well,” and countries having greater difficulties because of their deficits like Bulgaria, Romania and Hungary.

“Then you’ve got the Baltics, where Latvia is in particular difficulties but Estonia is doing quite well, so you can’t even says there’s Central Europe, Southeast Europe, the Baltics—they’re all different buckets [and] depending on the economic and political choices made by governments in previous years they can be performing in fundamentally different ways.”

And yet, within this mixed bag of investment opportunities, there is still money to be made. Advent is still investing in the region and so is Brian Wardrop of Prague-based ARX Equity Partners. ARX was spun out of Deutsche Beteiligungs in 2008, and manages €102 million in the ARX CEE III fund.

ARX specializes in lower mid-market buyouts, but within this the firm has a sub-specialization in a rather specific area: succession-driven buyouts.

“That’s an area that is very, very interesting in terms of the demographic drivers of deal-flows and the characteristics of the succession-driven opportunities in Central Europe [which], in our view, are unlike anywhere else in the world,” says Wardrop.

ARX focuses on the sort of company that was started in the early ‘90s, particularly in the Czech Republic, by a group of friends or a group of managers privatizing a state-owned company. These founders were generally in their 30s when they launched what Wardrop calls their “entrepreneurial partnerships.”

“Now, if we fast-forward to today,” says Wardrop, “Fifteen or 20 years later, basically there’s a massive demographic boom in terms of entrepreneurs hitting 50…and the normal things start to happen over time—relationships break down in some cases, strategic objectives differ, lifestyle ambitions might differ, sometimes you have medical issues. The core of what we’re trying to do at ARX—basically our last five or six deals—is to partner with one or two managers that are the driven members of the team, [the ones] that have a vision in terms of taking the company forward for the next 4 or 5 years with us.”

ARX organizes LBOs in which they buy out the owners, with the keener managers, whom they term “reinvesting shareholders,” rolling over their equity stakes into the new buyout.

“If we think of our target market at ARX—basically companies doing over €10 million in sales and companies with at least one owner 50 years of age or older—due to the demographic shift and first-generation entrepreneurs hitting 50, there’s tremendous growth in those types of targets.”

Advent’s James also sees potential in the region:

“We can do really well by investing in individual companies—you know, we’re not investing in GDP. We’re constantly looking for the high-growth subsectors and these change over time. In the mid ‘90s, mobile telephony was an extremely high-growth subset; today it isn’t because it’s saturated. So what are we looking at today? We’re looking at things like healthcare services which, having not really got anywhere very fast in the past, are suddenly booming on the back of the fact that the states can no longer afford to maintain public health services and so people are increasingly turning to private health services.”

Wardrop says that while he’d agree CE is “between two stools” as an investment proposition, he doesn’t think that’s necessarily a bad thing:

“I think it’s a question of risk-adjusted returns…We see the region as less risky than some other emerging markets—like China, for example, clearly less risky—and though we’re certainly not seeing Chinese or Indian-style growth rates in the region, the region will grow faster than Western Europe over the foreseeable future….It’s basically developed market risk with—maybe not emerging markets growth on par with China and India—but still growth that is higher than in Western Europe.”

Wall Street Trading Desks May Boost Emerging Market Holdings, Hintz Says

2010-11-12T03:52:00.001-08:00

By Christine Harper - Nov 11, 2010 Trading desks of big Wall Street banks, grappling with higher capital requirements, may decide to boost their holdings of emerging market securities and sovereign debt, according to Brad Hintz at Sanford C. Bernstein & Co.

The so-called Basel III capital requirements imposed by the Basel Committee on Banking Supervision as well as limits to proprietary trading and changes to derivatives rules in the U.S.’s Dodd-Frank law make it harder for trading desks to earn a sufficient return on equity, Hintz wrote in a note to investors today. One solution will be changing the types of assets held on trading desks, Hintz said in the note.

“Our belief is that the ‘new optimal’ balance sheet of Wall Street will include larger emerging market positions in equity and debt” because they are fast growing and earn a higher return, Hintz wrote. Banks will also emphasize “a large government and sovereign book” because such holdings require little capital even if they earn low returns, he wrote.

Such a shift by Wall Street’s biggest firms, which include JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and Citigroup Inc., has potential risks if emerging market equities and bonds as well as sovereign debt lose value.

The MSCI Emerging Markets Index, which tracks 754 stocks, is up 15 percent this year after climbing 75 percent last year. The yield on the 10-year U.S. Treasury note is 2.6 percent, compared with a 3.94 percent average over the last five years and a 5.29 percent average over the last 20 years.

Crowded Trade

Hintz said there is a risk that too many market participants pile into the same types of assets, known as a crowded trade, inflating prices and then leading to losses when investors all try to sell at once.

“The idea of the crowded trade is exactly one of the curses, but that’s a common curse whenever you make a regulatory change,” Hintz said in a voicemail response to a question. “You’ve tilted the playing field and as a result all the balls are going to roll in one direction.”

In his note today, titled "Is Trading, As We Know It, Dead?," Hintz said that the Wall Street trading desks that will adapt most easily to changing capital requirements and regulations will be those that already have well-developed franchises in emerging markets, are more reliant on fixed-income trading than on equities trading, have a track record of strong trading results and have a strong position in debt and equity underwriting.

Emerging Markets Funds Lead The Way In Sept.

2010-10-20T11:37:00.001-07:00

Oct 20 2010 | 2:42am ET

September was a good month for hedge funds all around the world.

The French business school Edhec’s suite of hedge fund indices did very well last month, with only one suffering a loss. Emerging markets funds had the strongest month with a 4.63% return, followed by equity long/short, which added 4.26%. Event-driven funds rose 2.94%. Equity market-neutral funds had their best month in a decade, returning 1.81%.

Only short-sellers did poorly during the best September for the Standard & Poor’s 500 Index and Dow Jones Industrial Average since the Great Depression. Such funds lost 8.63% on the month.

Funds of hedge funds added 2.2%, as well, bringing them out of the red on the year.

Canadian and Australian hedge funds were no exceptions to the global rule. The former returned an average of 3.58% last month, according to the Scotia Capital Canadian Hedge Fund Performance Index. The index is up 9.16% on the year.

“Gains were muted relative to broader financial markets, however, due to hedge fund managers’ relatively low gross and next exposures,” Scotia explained.

Down Under, hedge funds also failed to match the broader markets. The Australian Fund Monitors Hedge Fund Index returned 3% in September. The index is up 3.2% on the year.

«L’état d’une économie frontière se voit dans son système financier»

2010-09-06T21:51:00.001-07:00

Par Tommaso Bonanata* pour le Temps
Tommaso Bonanata, gérant du fonds Julius Baer Northern Africa, croit au potentiel de croissance de l’Afrique du Nord et parie essentiellement sur les marchés «frontières», plus que sur l’Afrique du Sud.
Investir en Afrique se limite généralement au choix de l’Afrique du Sud, tant il est difficile de trouver des fonds qui ne privilégient pas le marché le plus liquide du continent. Tommaso Bonanata, gérant du fonds Julius Baer Multistock Northern Africa, croit pour sa part au potentiel de croissance de l’Afrique du Nord et parie essentiellement sur ces marchés «frontières».

Le Temps: Votre fonds investit principalement sur les «marchés frontières». Qu’entendez-vous par là?

Tommaso Bonanata : Ce sont des marchés où les volumes de transactions sont encore assez faibles, mais risquent d’augmenter à l’avenir au point de transformer, peut-être, ces places en marchés émergents. Grossièrement, il y a trois types de marchés: les développés (Etats-Unis, Europe, Japon…), les émergents (Russie, Chine, Afrique du Sud…) et les marchés frontières dont font partie Maroc et Tunisie, par exemple. Nous considérons l’Egypte comme un marché frontière, puisque les transactions journalières s’élèvent à 200 millions de dollars, contre environ 2 milliards dans un pays émergent comme la Turquie. Cela dit, le volume journalier en Egypte demeure largement supérieur à celui de pays comme le Maroc ou le Nigeria, où il se situe à peine entre 20 et 30 millions de dollars.

– Pourquoi tenez-vous autant à cette classification?

– Parce qu’elle permet de distinguer notre travail de celui des autres fonds. Habituellement, un fonds panafricain investira entre 40 et 50% de ses avoirs sur des valeurs sud-africaines car c’est le plus gros marché du continent. Or, la corrélation entre la bourse de Johannesburg et les grandes places financières de la planète est plutôt élevée, ce qui tend à aligner leurs performances respectives. Notre fonds n’est pas investi dans ce pays. De même, la plupart des fonds qui investissent en Afrique du Nord placent également leur argent sur des titres du Moyen-Orient, ce qui n’est pas notre cas. Enfin, les fonds globaux marchés émergents, qui pèsent souvent près de 500 millions de dollars, ne peuvent investir que marginalement dans des pays où la liquidité des titres est relativement faible, à l’instar du Maroc.

– Ce manque de liquidité des titres africains ne vous pose-t-il pas problème?

– Notre priorité va effectivement à la liquidité des titres. C’est une des raisons pour laquelle une part, comprise entre 35 et 40% du fonds, est allouée aux valeurs égyptiennes dont la liquidité est élevée en comparaison d’autres titres africains, mais relativement faibles en comparaison internationale. Cela dit, il faut bien comprendre que notre fonds est un produit de niche, qui doit être perçu comme un complément à un investissement global sur les marchés émergents et non pas à une classe d’actifs représentant 10% du portefeuille de l’investisseur.

– Votre fonds met l’accent sur les pays nord-africains. Pourquoi ce choix?

– Ce sont des pays dont la croissance a bien résisté à la crise financière, avec des taux souvent proche de 5%, à l’instar de la Tunisie en 2009. Cela s’explique par une demande interne toujours plus vigoureuse, au niveau de la consommation aussi bien que de la construction. Malgré le ralentissement des investissements étrangers directs, ces pays connaissent un véritable développement de la classe moyenne qui est le moteur de cette croissance de la demande domestique. A cela il faut ajouter une stabilité politique que de nombreux pays d’Afrique subsaharienne sont encore loin d’atteindre.

– Le titre Orascom est la principale position de votre fonds. Est-ce en raison de cette bonne tenue de la construction?

– Oui, entre autres. Orascom est une société égyptienne qui est non seulement active dans la construction d’habitations, mais également des infrastructures du pays. Elle a aussi participé à la construction de la Dubai Tower et d’autres projets au Moyen-Orient. De plus, c’est une compagnie qui est en train de diversifier ses activités, notamment dans la production de fertilisants, un domaine dans lequel elle jouit d’avantages comparatifs par rapport à ses concurrents (nationaux ou internationaux), en particulier après avoir signé des contrats à long terme pour s’approvisionner en gaz auprès du gouvernement algérien et égyptien. D’ailleurs, c’est le titre le plus liquide de la bourse du Caire.

– Outre la construction, vous êtes également très exposé au secteur financier, y a-t-il une raison particulière?

– L’état d’une économie de type «frontière» se voit, avant tout, à travers son système financier. Dans un pays comme l’Egypte, par exemple, le crédit à la consommation ne représente que 2 à 3% de l’ensemble des prêts, le reste étant destiné essentiellement aux entreprises. A terme, nous pensons que les prêts aux consommateurs vont émerger et créer toute une nouvelle industrie pour les banques locales.

*Gérant du fonds Julius Baer Multistock Northern Africa

Bilan de vingt ans d’investissement étranger en Europe de l’Est

2010-09-06T21:45:00.000-07:00

Par Anton Khmelnitski*
Le défi pour les économies d’Europe orientale reste de s’éloigner des rentes de situation. C’est cela, plus qu’une adhésion à l’Union européenne, qui leur permettra d’attirer des capitaux et d’obtenir une croissance stable et forte
En vingt ans, l’Europe de l’Est a reçu un total de 700 milliards de dollars (707 milliards de francs) d’investissements étrangers directs (IDE) net, confirmant l’impact positif des réformes économiques. La Pologne a reçu la part du lion de ces flux – avec près de 110 milliards de dollars – alors que le plus grand de ces pays, la Russie, n’a reçu que 43 milliards. Sur trente pays, quinze sont rentrés dans l’Union européenne (UE) qui a joué un grand rôle en termes d’investissements directs, quelles que soient les réformes achevées. Cela laisse encore, en dehors de l’Union, un marché de 300 millions de personnes dans lequel investir.

Dans la région, la Pologne figure parmi les économies les plus résistantes, avec une croissance positive de 0,8% annualisée en 2009. A l’inverse, sa voisine, l’Ukraine, a enregistré une correction de 14% de sa croissance, parmi les plus brutales au monde. En plus du décalage de développement, l’exposition en devises des banques, des ménages et des entreprises, combinée avec d’importants éléments économiques cycliques a joué un grand rôle dans l’incapacité à résister de l’Ukraine. De plus, ce pays, comme la Géorgie, a reçu 85% de ses IDE dans les cinq à sept dernières années, en raison de leurs révolutions successives.

La Pologne reste le bon élève des économies de transition. En 1998, elle a à peine senti la crise russe, ayant déjà réussi à séparer sa structure d’exportation de la Russie. Le pays a bénéficié d’un important programme de privatisation, y compris de son système de retraites, la bourse devenant une vraie source d’épargne complémentaire pour la population.

La Turquie a bénéficié d’un énorme processus de désinflation – la hausse des prix est passée de 90% à moins de 10% durant cette période – créant la stabilité nécessaire aux investissements étrangers directs.

Le Turkménistan a bénéficié, lui, de l’importante monétisation de ses réserves de gaz et reste plutôt une exception.

A l’autre extrémité, un groupe de pays, incluant la Serbie, l’Ukraine, la Géorgie, le Tadjikistan et la Moldavie, semble, comme la Russie, avoir affiché de plus faibles performances. Cette dernière a souffert de sorties de capitaux en 2003-04, très peu en 2005 – l’année qui a suivi l’affaire Yukos – et encore peu en 2009.

Au total, la Russie n’a attiré que 43 milliards de dollars en 20 ans, seulement deux de plus quel’Ukraine sur une base de flux net. Néanmoins, cela n’explique pas pourquoi des économies comme le Kazakhstan se sont relativement bien comportées aussi bien en termes de performance que d’investissements étrangers directs. La Russie est un cas intéressant, étant donné sa taille. La propriété par exemple tend à être concentrée entre les mains d’un petit groupe d’acteurs dominé par l’Etat et les oligarques. Le cas de l’investissement russe repose de facto seulement sur ses ressources naturelles puisque le pays a été incapable pour l’instant de diversifier son économie et d’attirer des investissements étrangers importants dans d’autres secteurs clefs. Le manque de concurrence, des infrastructures faibles, une forte dépendance à l’importation de biens et un secteur bancaire non réformé restent problématiques. Un fort ratio de dépenses publiques – supérieur à 30% du produit national brut depuis 2005 – et une importante chute des revenus en 2009 ont déclenché un retournement budgétaire équivalent à 14% de la richesse nationale. Si un seul de ces éléments devait s’améliorer, l’économie russe serait capable d’attirer des centaines de milliards d’investissements.

L’Ukraine reste un cas un peu à part. Il s’agit du plus important marché de la zone après la Russie avec près de 46 millions d’habitants. Elle bénéficie d’une monnaie dépréciée, d’importantes ressources et d’une situation stratégique. Le cadre institutionnel faible limite encore le potentiel pour des investissements étrangers. Néanmoins, jusqu’à la «révolution orange» en 2004, le pays était absent de tous les projets d’investissement, en dehors de ceux visant son secteur bancaire. L’Ukraine a été particulièrement touchée par la crise et, sans le soutien des banques européennes, son système financier aurait probablement implosé.

Son agriculture attire encore peu l’attention, alors qu’elle peut potentiellement nourrir un milliard de personnes. Ce secteur représente 8% du produit national brut et 20% de ses exportations. Il reste cependant encore très en retard en termes de productivité. Les investissements directs liés à l’agriculture ukrainienne ont représenté environ 10% de l’argent reçu ces trois dernières années, mais la capitalisation boursière totale des compagnies agricoles représente déjà 4 milliards de dollars. La réforme des terres sera un catalyseur majeur pour les prochains investissements à long terme.

Finalement, la Bulgarie et la Roumanie ont réussi à attirer des investissements principalement grâce à leur intégration européenne. Il semble cependant que cette adhésion n’ait pas vraiment résolu les problèmes, bien au contraire, puisque les déficits des comptes courants et fiscaux se sont aggravés depuis.

L’Europe de l’Est et ces nouvelles régions sont susceptibles de continuer à bénéficier le plus d’investissements directs, alors que ce marché de 300 millions de personnes est encore largement peu pénétré par les multinationales. Les gains pour les investisseurs seront largement liés à la capacité de ces économies d’adapter leur modèle «de rente de situation» aux nouvelles réalités économiques. Plus que les aspirations d’intégration européenne trop rapides, cette mutation permettrait de mieux réaliser son potentiel de croissance à long terme. L’importance des investissements étrangers ne fera qu’augmenter naturellement au vu des déficits budgétaires courants et de l’état des infrastructures de ces pays.

Baer Capital eyes new PE fund, plans first exit

2010-09-03T08:21:00.001-07:00

PE FIRM: Baer Capital says PE investors in India need diverse portfolio.India-focused Baer Capital Partners expects to raise around $300 million for a second private equity fund and plans its first exit by floating a power distribution company, its chief executive told Reuters.

The Dubai-headquartered investment firm, which also operates a hedge fund in India, said one of its portfolio companies, A2Z Group, has sought Indian regulatory approval for an initial public offering that it expects to launch by December.

"Here's a company that has grown phenomenally since its inception. It's one of those stories which tells you why India is such a great investment story," said Brij Singh, Baer's co-founder and chief executive.

Castlestone fund to target new "BRIC" countries

2010-08-27T03:12:00.000-07:00

LONDON, Aug 27 (Reuters) - Fund firm Castlestone Management plans to launch a portfolio investing in emerging markets from the Philippines to Iran, hoping they will show the same rapid growth seen in China and India in recent years. The Next 11 Emerging Markets fund, set to launch around the start of October, is based on a Goldman Sachs (GS.N) idea of the 11 countries most likely to follow the rapid growth of BRIC countries Brazil, Russia, India and China.

Around 10 percent of the fund's assets will be invested in stocks in South Korea; 65 percent in Mexico, Indonesia, Turkey and the Philippines; 20 to 25 percent in Egypt, Vietnam, Pakistan and Nigeria; and 5 percent in Bangladesh and Iran, the fund's manager, Arrash Zafari, told Reuters.

"It gives investors a second shot at a BRIC-like opportunity at a time when you're not early in getting to the BRIC story anymore," he said in an interview on Thursday.

"They do have the same fundamental drivers -- very large populations that are often still growing and getting richer and whose spending power will be increasingly integrated with the global economy." The launch comes amid positive returns from some of these 'Next-11' markets, even though the MSCI emerging markets index .MSCIEF is down 2 percent this year.

Iran's TEPIX index hit a record high this month, while Nigeria's all-share index .NGSEINDEX is up 16 percent this year despite recent falls. [ID:nLDE6711EA] Zafari said that, despite sanctions from the United States, Europe and the United Nations Security Council, Iran presented a "jaw-dropping opportunity" with a price/earnings ratio of 6 times and a dividend yield of 15 percent.

"(Iran) is completely overlooked. It's got many of the attractive secular drivers, such as a large growing middle class who are active consumers."

He played down concerns about the power wielded by Mexico's violent drug cartels, one of the factors that led hedge fund Onslow Capital to short the country's sovereign bonds.

Zafari believes bond market investors need to exercise caution, but sees avenues to avoid the risk in equities. He picks Mexican cable TV company Megacable (MEGACPO.MX) as operating in an area where the cartels have not encroached.

The fund will be domiciled in the British Virgin Islands and will have a capacity of around $200 million. Castlestone manages around $350 million in assets. (Editing by Michael Shields) (For the Funds Blog click blogs.reuters.com/fundshub. For Global Investing: here)

Investors Pull $7.1 Billion From Stock Funds Globally, Buy Emerging Bonds

2010-08-27T03:10:00.001-07:00

By Shiyin Chen and David Yong - Aug 27, 2010 Investors withdrew a net $7.1 billion from equity funds tracked worldwide in the week to Aug. 25 and put some $5.2 billion into bonds amid concern economies in the U.S. and Europe are losing momentum, EPFR Global said.

A net $5.4 billion was redeemed from U.S. stock funds, while inflows into emerging markets were the lowest in 13 weeks, EPFR said in an e-mailed statement. Developing-nation bond funds took in $1 billion, on course for a record-setting year, while U.S. bond funds drew $2.5 billion, according to the Cambridge, Massachusetts-based research firm.

The MSCI AC World Index, tracking developed and emerging markets, has dropped 4.2 percent this month after government data signaled a slowdown in the U.S., China and Japan and Standard & Poor’s lowered Ireland’s credit rating. Concern the global rebound will falter is driving investors to the relative safety of bonds, sending yields on two-year treasuries and German 30-year government securities to a record low this week.

“The weaker the numbers come in, particularly in housing, the higher the probability becomes” for a second recession in the U.S., David Wyss, S&P’s chief economist, said in a Bloomberg Television interview in Hong Kong. “While you’ve got stellar German growth, the rest of Europe is looking pretty sick.”

While withdrawals from funds investing in U.S. stocks were the most in dollar terms, redemptions from Japanese stock funds were the highest in terms of percentage of assets under management, according to EPFR. European equity funds also posted net outflows, taking year-to-date losses to $15.7 billion, the research firm said.

EPFR Global tracks funds with some $13 trillion in assets worldwide.

Emerging Markets

Global emerging-market funds took in $333 million for the week, while those investing in Latin America and emerging Europe, Middle East and Africa attracted less than $40 million each, according to the statement. Asia excluding Japan funds posted outflows of $289 million, EPFR also said.

“The biggest headwind for Asian markets was the weaker data emerging from key export markets, with the U.S., China and Japan all posting numbers that suggest their economies are slowing,” EPFR said.

Data released in the week ended Aug. 25 showed U.S. existing home sales slumped, orders for durable goods rose less than forecast and jobless claims jumped. Earlier this month, Japan reported that its gross domestic product grew an annualized 0.4 percent in the three months ended June 30. While that allowed China to overtake Japan as the world’s second- largest economy, Chinese growth is also cooling, with July industrial output rising the least in 11 months, retail sales growth easing and new loans increasing less than estimated.

Treasuries, Bunds

The U.S. economy grew at an annual rate of 1.4 percent in the second quarter, versus the 2.4 percent pace the government estimated last month, according to a Bloomberg survey before the release of Commerce Department figures today.

Inflows into emerging-market bond funds continued for a 13th consecutive week, taking this year’s total beyond 300 percent of the annual record set in 2005, EPFR said in today’s statement. The firm had previously said the 2005 high was $9.7 billion.

Dollar bonds in developing nations have returned 13 percent this year through yesterday, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index that tracks debt of 40 nations. The market has rallied every quarter since 2008, the longest winning streak since March 2004. An index tracking local- currency debt gained 18 percent this year.

Global bond funds were also poised to surpass last year’s record inflow of $47 billion, while inflows into U.S. bond funds stood at 70 percent of the total received last year, also a record high, according to EPFR.

Qatar, Saudi entities partner Credit Suisse fund

2010-08-12T22:57:00.000-07:00

Quartet to form $1b credit fund to pursue investments in global emerging markets

With inputs from Dow Jones Published: 00:00 August 13, 2010
Dubai: The Qatar Investment Authority and the Saudi Arabian Olayan Group will partner Israel's IDB Holdings and Swiss bank Credit Suisse in a $1 billion (Dh3.67 billion) credit fund targeted at emerging markets.

Each of the partners will contribute $250 million to seed the fund, people close to the transaction told Gulf News. QIA, Olayan and IDB all have a shareholding in Credit Suisse.

Credit Suisse said yesterday it plans to launch the fund through its asset management business, with committed capital from "a small group of Credit Suisse's key shareholders" to "opportunistically pursue credit investments in global emerging markets".

It did not name the partners.

Rob Shafir, chief executive of the asset management division, said: "Our shareholders' commitment to the fund is a testament to the strength of Credit Suisse's emerging markets franchise and the value that can be created for investors in these important markets."

In response to an e-mailed questionnaire, Credit Suisse told Gulf News: "To date, the fund is targeted at over $1 billion, which would make it the largest, first-time start-up fund in 2010 and one of the largest since the 2008 financial crisis.

"The fund's objective is to achieve superior risk-adjusted returns by investing in alternative assets in global emerging markets on an opportunistic basis. The fund expects to invest in a broad range of countries, industries and companies."

Qatar and Saudi Arabia are still technically part of the Arab League's boycott against Israel, launched in 1951, in support of Palestinian rights after the 1948 establishment of Israel. The boycott is not, however, legally binding.

"The Arab boycott is mainly on paper," said Doron Peskin, head of research at Info-Prod Research, a business consultancy specialising in the region. "There is a flow of Israeli know-how and products to the Arab world."

Peskin said some nations were exceptions to this.

World Bank Unit Leads Big Funds Into Africa

2010-08-10T22:33:00.000-07:00

Date: 10-Aug-2010

The private-sector lending arm of the World Bank is leading large government-owned wealth and state pension groups into frontier markets in Africa and elsewhere where few big investors have sought to venture.

The hope is that by investing money on behalf of these deep-pocketed funds in regions they would normally shun as too volatile, they will learn to appreciate the long-term profit potential. Over the past few months, the International Finance Corp's Asset Management Company has made investments using capital from the Korea Investment Corporation, Azerbaijan's state oil fund, Dutch pension fund manager PGGM, and an unnamed fund investor in Saudi Arabia.

The first investments by AMC's Africa, Latin America and Caribbean "ALAC" fund have gone into HeidelbergCement, the world's fourth largest cement maker, which has expansion plans in west and central Africa, and Ecobank Transnational, a leading pan-African bank group seeking to boost lending.

While the investors do not have a say in where the money is invested, the initial choices appear to be conservative, focusing on segments likely to be in hot demand. "The investments we have made so far show there is a strong pipeline out there," Gavin Wilson, AMC chief executive, said in a recent interview.

World Bank President Robert Zoellick first pitched the idea of using money from powerful sovereign wealth funds of Asia and the Middle East in 2008, challenging them to invest 1 percent of their assets in Africa. The funds have amassed nearly $3 trillion in assets, and a 1 percent investment of their assets could add up to $30 billion a year in private investment for Africa.

Frontier markets, which are one of the fastest-growing investment areas, offer high growth potential, an untapped consumer class and promising companies hamstrung by scarce capital.

SAFE PAIR OF HANDS
While most investors' attention has been on major emerging markets such as China, India, Brazil and Russia, the fund is hoping to showcase opportunities in other promising but untapped markets that have impressive economic growth.

"We are seen as a safe pair of hands by those who have previously not done much investing in emerging markets," said Wilson. "They recognize we're not going to take foolish risks, or try to invest the funds too quickly and move on to the next thing."

Persuading the pool of investors, who typically invest in fixed-income securities, property or public equity in advanced economies, to diversify into private equity in developing markets was at first a challenge. "Emerging markets are still unfamiliar territory for many investors," said Wilson.

To sell the concept, AMC showcased IFC's 20-year track record of investing in developing economies where its average rate of return on investments has exceeded 20 percent. Creating a fund that would mobilize and manage others' money is new territory for IFC, which traditionally has used its own resources to invest in developing markets.

Wilson said AMC's goal was to offer a new class of investors an opportunity to invest alongside IFC in markets that have significant potential for favorable returns but that may not have been accessible in the past. AMC's other fund, the $3 billion Capitalization Fund, emerged from the global financial crisis to help key banks in developing countries deal with liquidity constraints that arose from the global credit crunch. The fund has invested in banks in Paraguay, Papua New Guinea and the Philippines.

PROVING IT WORKS:
With the investments of the two funds, Wilson said there was enough critical mass to show investors that the concept of investing someone else's capital in frontier markets can work.

"There aren't many people out there looking to invest new equity in commercial banks in developing countries right now," he said.
"What we have in our Capitalization Fund is a pool of capital raised to do just that. We happen to think that if you select the right banks it is a pretty good time to be investing as well," Wilson added.

Ben Leo, a research fellow at the Center for Global Development in Washington, said it was appropriate for IFC to be at the forefront of taking on risk in frontier markets, not only as a direct financier of private companies but also by facilitating investment flows from other groups.

"If IFC is able to build the comfort level of sovereign wealth funds and their familiarity with some of the Africa frontier markets through this vehicle this is a good thing in the long run," said Leo, a former White House and U.S. Treasury official who worked on Africa affairs.

Source: B&FT

A Growing Consensus Regarding Investment Opportunities In Africa

2010-08-10T22:24:00.000-07:00

August 9, 2010 By Robert G. Roach, Jr.

The excellent business and investment prospects of Africa are being recognized publicly, finally! Larry Seruma and his investment team at Nile Capital Management recently published a White Paper (“A Time To Invest In Africa“) which discusses the prospects and underlying trends of the Africa investment thesis. In future blogs, I will delve into further detail of specifics underlying the Africa investment opportunity. However, I should note that Nile Capital Management offers one of the few pure Africa plays available to investors through its actively managed mutual fund. Mr. Seruma has also been featured in two articles discussing Africa including The Wall Street Transcript (“TWST Investment Strategies Report“) and Black Enterprise (“The First African-Focused Mutual Fund“).

I believe there are five compelling reasons why all investors should take a serious look at Africa:

A China play: China’s investments in Africa are facilitating a reduction in political risk by forcing governments to improve property rights, the foundation for a sound investment environment. China’s investments have included significant infrastructure projects including transportation, power generation and natural resources. As an example, China has recently funded development of ten major hydropower projects in Africa with an aggregate capacity of 6,000 megawatts. Infrastructure is not mobile and many African governments are learning that political stability will allow them to attract and negotiate better terms with foreign investors. In addition, China has increased its trade with Africa from $10 billion in 2000 to $90 billion in 2009.

Value: African markets are attractively valued from a P/E perspective relative to developed and developing economies. For example, the Sub-Saharan markets (as of June 2010) had an estimated price to earnings ratio of 12.8x compared to 18.6x in the US and 14.5x for the MSCI Emerging Markets Index.

Growth: According to the IMF, 12 of the 28 fastest growing economies (in terms of average real GDP growth 2010-11) are in Africa including Ghana (12.32%), Congo/Brazzaville (9.36%), Angola (7.65%), Liberia (7.46%), Ethiopia (7.31%), Nigeria (7.15%), Mozambique (7.0%), Tanzania (6.45%), Democratic Republic of Congo (6.22%), Malawi (6.13%), Uganda (6%), and Zambia (5.94%). Sub-Saharan Africa is projected to generate 5.9% real GDP growth in 2011 and MENA (Middle East North Africa) has a 4.8% growth estimate. This compares favorably to the US (2.6%), Europe (1.9%), Russia (3.3%) and South America/Mexico (4.0%). The only region showing more attractive growth is Asia driven by China (9.9%) and India (8.4%). Renaissance Capital developed an analysis based upon cumulative estimated GDP growth between 2010 and 2014. On that basis, nine of the fifteen fastest growing economies are in Africa (see Table 1 below).

Uncorrelated Returns: African assets have historically generated a low correlation of returns with other global asset classes. A composite of African markets including South Africa, Nigeria, Kenya, Mauritius, Ghana, Egypt, Morocco and Botswana, had a correlation of .59 with the S&P 500 from January 2002 through June 2009. During that same time frame, the MSCI EAFE (Europe, Asia, & Far East) and the MSCI Emerging Markets indices had correlations of .89 and .82 respectively with the S&P 500. For those who have happily forgotten their statistics, here is a link to a definition of correlation from Investopedia (correlation definition).

Money Flows: There has been significant growth of investor interest in emerging markets within the past decade. This has created an opportunity for Africa, which has quietly experienced impressive economic momentum. That momentum should be sustainable as Africa’s GDP growth is projected to be around 6% annually over the next few years (approximating its historical GDP growth over the past decade). Analysts expect a continued surge in money flows to emerging markets. The surge in money flows will be driven by investors’ perception that returns in the US and developed markets will not be very rewarding. In addition, investors are concerned about the continued economic issues facing developed economies due to over leverage, rising budget deficits, high unemployment and loose-money central bank policies. Money flows to emerging markets is a sustainable trend and Africa should be a long-term beneficiary.

Rank Country Cumulative Economic Growth 2010-2014, %
1 Liberia 67.7%

2 Turkmenistan 59.1%

3 China 58.0%

4 Mongolia 55.8%

5 Ghana 52.4%

6 Qatar 48.1%

7 Timor-Leste 44.7%

8 Ethiopia 43.7%

9 India 43.4%

10 Botswana 43.1%

11 Mauritania 42.9%

12 Angola 41.2%

13 Tanzania 40.0%

14 Congo, Democratic Republic of 39.7%

15 Uganda 38.6%

Source: Renaissance Capital

The investment opportunities in Africa were highlighted in a recent Barron’s cover story, “The Final Frontier.” The headline said it all: “Investors will lose a huge opportunity if they avoid vibrant and changing Africa. Fast growth in a continent of misconceptions.”

A main theme behind the Barron’s article is that misperceptions derived from Africa of the past are adversely obscuring investors’ ability to see the opportunity that Africa represents today, possibly to their own detriment. Some very interesting analogies were made:

During the recent financial crisis, the US and UK have effectively nationalized more companies (including firms like GM, Chrysler, AIG, Citigroup, Royal Bank of Scotland, and Northern Rock) than African nations have in the past nine years;

In Africa, banks have not needed to be bailed out, no large companies have folded, and there have been no accounting scandals;

With 5-8% annual growth in many African economies, “investors can find banks, brewers, supermarket outfits and mobile phone companies with good prospects, decent balance sheets and relatively low P/Es (especially compared to their growth potential).”

There has also been additional press and “smart money” sniffing out the Africa story. Some examples:

McKinsey & Company has released research touting the economic growth and business opportunities in Africa stating that “strong prospects await global companies that invest in the continent’s consumer, agricultural, natural-resource, and infrastructure sectors.” (click here for McKinsey Research).

Boston Consulting Group has recently released a report titled “The African Challengers: Global Competitors Emerge from the Overlooked Continent.” This report discusses “forty fast-growing and globalizing companies highlighting Africa’s economic awakening….ranging from $350 million to $80 billion in annual sales.”

David Rubenstein, co-Founder and Managing Director of the Carlyle Group was recently featured in a Wall Street Journal article discussing his “bullishness” on Africa (click here for WSJ article).

During these troubling economic times, wise investors are reassessing their portfolios while seeking strategies to generate risk adjusted return, portfolio diversification and low correlation of asset returns. If investors (or their advisors) are not considering Africa in their analysis, then the question should be asked, why not? There is a growing body of “smart money” that sees the opportunity created from strong GDP growth, a wealth of natural resources, an increase in political stability, a young demographic, and uncorrelated asset returns relative to developed and emerging markets. Investors should take the time to evaluate the Africa investment opportunity and the vehicles available to capitalize on the long-term trends. With 10-year US Treasury yields inching towards to 2.5% and commensurate single digit projected market returns, how can you not take a serious look at the last great investment frontier?

Gulf International Bank launches emerging markets fund

2010-08-05T03:25:00.000-07:00

Author: Joanne Harris

Source: Hedge Funds Review | 04 Aug 2010

The UK subsidiary of the Gulf International Bank has unveiled the multi-strategy Emerging Markets Opportunities Fund (EMOF) with seed capital of over $100 million.

The fund will focus on fixed income credit with equity and currency enhancement across global emerging markets taking long and short positions.

The Cayman-domiciled fund will be managed by a global investment team led by GIB's chief investment officer Uday Patnaik.

GIB UK's head of investor relations Anthony Chisnall said the seed capital had come from Middle Eastern investors, including GIB and its shareholders.

"The idea is that we will build the track record and then build our investor base," Chisnall said. The fund would eventually be marketed to institutional and high net worth investors worldwide.

The minimum investment is $1 million and the fund will charge a management fee of 1% with a 20% performance fee. Redemption is monthly with no lock-in.

Credit Suisse is the fund's prime broker and Citco is the administrator. Herbert Smith provided onshore legal advice with Ogier as the offshore legal counsel.

GIB UK currently manages around $15 billion in total client assets.

Emerging Capital Partners (ECP) boucle son fonds Africa Fund III

2010-07-26T14:30:00.001-07:00

Source : Les Afriques

ECP a annoncé aujourd’hui la clôture de son fonds ECP Africa Fund III PCC (Africa Fund III) avec un montant total d’engagements de plus de 613 millions de dollars. Africa Fund III, l’un des plus gros fonds levé à ce jour sur le continent africain, est le septième fonds géré par ECP ce qui porte à plus de 1.8 milliards de dollars le montant total de fonds sous gestion dont plus de 1 milliard est déjà investi.

La clôture ce lundi 26 juillet du troisième fonds ECP pour l’Afrique (Africa Fund III PCC (Africa Fund III) avec un montant total d’engagements de plus de 613 millions de dollars constitue un événement marquant dans le domaine du capital investissement. . Africa Fund III, l’un des plus gros fonds levé à ce jour sur le continent africain, est le septième fonds géré par ECP ce qui porte à plus de 1.8 milliards de dollars le montant total de fonds sous gestion dont plus de 1 milliard est déjà investi.

En ligne avec la stratégie d’investissement d’ECP, Africa Fund III vise à prendre des Participations majoritaires ou minoritaires mais significatives dans des entreprises en forte croissance par le biais de fonds propres ou quasi fonds propres notamment de la dette convertible. Le fonds cible des entreprises leaders dans leurs marchés avec un potentiel de croissance qui peuvent offrir des rendements supérieurs au marché du fait des perspectives de consolidation du secteur, des tendances macroéconomiques positives, de la libéralisation et d’une meilleure réglementation. Présent dans des secteurs variés tels que les télécommunications, les ressources naturelles, les services financiers, l’agriculture, le transport et les services aux collectivités, ECP s’oriente vers des entreprises ayant une stratégie de développement régionale.

« L’intérêt que nous avons reçu de la part des investisseurs pour Africa Fund III démontre une appréciation croissante des opportunités d’investissements qu’offre le continent africain », déclare Hurley Doddy, co-Directeur Général d’ECP. « Forte de plus de 10 ans d’expérience dans le capital investissement en Afrique, notre équipe dispose d’atouts complémentaires que sont une bonne connaissance du marché local ainsi qu’une expertise opérationnelle et financière qui nous permettent d’identifier des opportunités d’investissement attractives et de trouver de nouveaux débouchés pour nos sociétés en portefeuille au niveau régional et mondial et d’offrir ainsi à nos investisseurs des rendements compétitifs sur un portefeuille diversifié. ».
Africa Fund III a reçu un soutien marqué de la communauté financière mondiale qui s’est traduit par une levée de plus de 450 millions de dollars auprès d’investisseurs déjà présents dans les fonds gérés par ECP, parmi lesquels la Banque Africaine du Développement, l’International Financial Corporation (IFC), l’Overseas Private Investment Corporation, et la CDC, l’institution financière pour le développement du gouvernement britannique. Le reste provient de nouveaux investisseurs tels que le manager de fonds de fonds panafricain South Suez.

« Avec une longue expérience réussie et une présence établie via ses 6 bureaux régionaux, ECP s’imposait à nous comme le meilleur choix pour nos investissements sur le continent », déclare Matthew Hunt, Directeur de South Suez. « Les investisseurs peuvent observer les modèles de développement qui ont fait leurs succès en Inde, au Brésil et au Mexique et projeter ce modèle sur l’Afrique », déclare Vincent Le Guennou, co-Directeur Général d’ECP. « Nombre d’entre eux voient l’Afrique comme la prochaine région qui va émerger alors que les entreprises locales adoptent des modes de gestion efficaces, une discipline financière et les standards internationaux de gouvernance ».

En capitalisant sur son expérience du capital investissement en Afrique, ECP a d’ores et déjà commencé à investir le capital de son fonds Africa Fund III avec quatre participations totalisant 180 millions de dollars : Financial Bank qui propose des services bancaires dans 6 pays d’Afrique Centrale et de l’Ouest, Wananchi Group qui est le fournisseur Zuku de TV « à la demande » et d’internet Haut-débit en Afrique de l’Est, l’assureur d’Afrique Centrale et de l’Ouest NSIA et le groupe Thunnus Overseas basé à Madagascar et en Côte d’Ivoire qui fournit 25% du thon en conserve du marché français.

«Gare à l’habitude de payer trop cher les actions de pays émergents»

2010-07-25T22:30:00.001-07:00

Par Michael Godfrey*
Michael Godfrey, gérant du fond M & G Global Emerging Markets
La croissance des marchés émergents est sur toutes les lèvres. Les investisseurs raffolent de ces nouvelles sociétés dont ils garnissent de plus en plus leurs portefeuilles. Michael Godfrey, gérant chez M & G, tempère cet enthousiasme. Et constate que les titres les plus en vue sont souvent très chers. Il plaide pour une attention plus grande au retour sur investissement obtenu par les actionnaires, plutôt que sur la seule croissance de l’activité.

Le Temps: la croissance chinoise fait facilement rêver les investisseurs. Qu’en pensez-vous?

Michael Godfrey: Il faut être prudent car l’histoire nous enseigne que la croissance économique rime souvent avec des retours sur investissement plutôt faibles pour les actionnaires. Plusieurs études ont même montré qu’il existe une relation négative entre la croissance du PIB [produit intérieur brut] des pays émergents et la performance réelle des actions ces vingt dernières années. En Chine, nous tendons à réduire la pondération des titres financiers dans notre portefeuille. Nous pensons, par exemple, que les banques chinoises sont surévaluées. Pour le prix de la Bank of China, troisième banque du pays, il est possible d’acquérir toutes les banques indiennes cotées en bourse…

– Comment expliquer qu’une croissance élevée puisse se traduire en faible performance?

– Les investisseurs ont la mauvaise habitude de payer trop cher les valeurs de croissance. Il suffit de penser à l’explosion de la bulle Internet. Plus important encore reste la mauvaise interprétation de la croissance de l’activité d’une entreprise. Si une société investit chaque dollar du cash-flow qu’elle génère dans l’unique but d’accroître sa taille, le risque de mal allouer son capital augmente.

– Vous pensez aux sociétés asiatiques et leurs prodigieuses dépenses d’investissement?

– Absolument. En Asie, un tel «surinvestissement» est fréquent, les groupes appartenant souvent à de grandes familles cherchant à agrandir leur empire. Ceci conduit à de nombreux placements réduisant la rémunération moyenne du capital. Il ne faut pas acheter une société simplement parce que ses dirigeants promettent une croissance élevée de leur chiffre d’affaires.

– Il faut donc se focaliser sur la rentabilité du capital investi?

– C’est une mesure très importante. Mais, il faut également que la société ne se négocie pas en bourse à un multiple trop élevé de la valeur de ses actifs. Bref, sa valorisation doit être attractive.

– Qu’en est-il des sociétés des marchés émergents?

– Actuellement, elles se négocient, en moyenne, environ à 1,5 fois la valeur de leurs actifs; pour une rentabilité des capitaux investis proche de 8%. Ceci nous semble représenter des niveaux corrects de valorisation. Cela dit, notre travail consiste à fuir les valeurs affichant ces moyennes pour sélectionner celles présentant de meilleurs ratios.

– La rentabilité du capital investi reste donc l’indicateur que vous privilégiez?

– C’est une mesure très importante. Mais il faut également que la société ne se négocie pas à un multiple trop élevé de la valeur de ses actifs. Bref, sa valorisation boursière doit être attractive.

– Quels sont les titres que vous préférez en ce moment?

– Le Brésilien Vale, le plus grand producteur mondial de minerai de fer, nous semble bien placé pour bénéficier de la demande mondiale d’acier à long terme. De plus, cette entreprise jouit de coûts de production plutôt bas.

Bank of India est de son côté une ancienne entité gouvernementale transformée en un établissement profitable, ce qui s’est traduit par des restructurations et une amélioration de l’allocation de son capital. Un tel changement n’est traditionnellement n’est pas du goût des investisseurs asiatiques car il signifie que la société n’a pas connu d’expansion, mais a été, au contraire, redimensionnée. Cette modernisation crée pourtant beaucoup de valeur et la rentabilité des capitaux investis a déjà fortement progressé.

Taiwan Semiconductor est, quant à elle, une société dont la forte croissance est liée à d’importantes dépenses d’investissement dans la recherche et l’innovation. Dans ce cas précis, ces dépenses sont justifiées car elles seront source de croissance future et ont déjà provoqué une forte augmentation de la valeur des actifs.

Autre exemple, MTN, le leader en Afrique et Moyen-Orient de la téléphonie mobile; un groupe extrêmement bien géré dont les retours sur investissement très élevés apparaissent durables.

– Cette sélection de titres favorise systématiquement les sociétés de taille moyenne?

– Il est vrai que notre processus d’investissement a un biais envers les moyennes capitalisations et les sociétés dont la valorisation est attrayante, mais nous restons très attentifs à ce risque. Et nous tenons à ce que la sélection de titres demeure l’élément central de la performance de notre fonds.

*Gérant du fonds M & G Global Emerging Markets.

Asian Research Center : Trip to China

2010-07-18T23:02:00.000-07:00

China, the next financial superpower?

Very likely, China will play a major role in 21th century. However, most European financial professionals have rather fragmentary, possibly superficial, or worse, totally wrong ideas on this country. You might pay this ignorance dearly later in your professional life.

If you read articles on China all the time, but your confidence of understanding on China is not unshakable, you might want to know there is a 7 days in-situ program organized by the ARC of the University of St Gallen, in the course of the program, the participants will gain hand-on understanding on China’s financial market and its key drivers (e.g. government policy, local market psychologies), learn how to prosper opportunities, meet local specialists and Chinese institutional investors, complemented by the transfer of some essential communication guidelines required for doing business in this country.

The same program is offered twice a year, on November and on April. If you need more information, you can contact the program director at: pierre.huang@unisg.ch
This is not a public advertised program; it is open only for professionals.

About the ARC of University of St Gallen: The (ARC) is a leading European think-tank for Asia related business, founded 15 years ago; the ARC has been a pioneer in working closely with some Asian Sovereign wealth funds, and Asian institutional investors. The University of St Gallen (HSG) is a top European Business school based in Switzerland, a member of the CEMS network, it has Equis, AACSB accreditations.

Temasek focuses on emerging nations

2010-07-08T22:08:00.001-07:00

Temasek, the Singapore government's sovereign wealth fund, has seen the value of its portfolio jump by 42pc as it recovers from the damage inflicted by the financial crisis.

By Helia Ebrahimi, Senior City Correspondent
Published: 8:09PM BST 08 Jul 2010

The company's results for the year ending March 26 showed its assets had hit S$186bn (£89bn), surpassing pre-financial crisis levels.

Temasek's stakes in US-based assets such as Merrill Lynch took a heavy beating in the aftermath of Lehman Brothers' collapse.

Simon Israel, the fund's executive director, brushed off suggestions Temasek was in talks to take a stake in troubled oil company BP, instead insisting the fund had switched its strategy to one almost entirely based on emerging economies. Temasek's exposure to mature markets has dropped to just 20pc, with 46pc based in Asia excluding Japan and Singapore, 32pc in the Singapore, and 2pc elsewhere, mainly in Latin America.

Mr Israel lauded the strategy and said the Asian bias was likely to become more pronounced as the fund continues to shift resources to the region in search of higher returns.

Over eight years, Temesek's legacy portfolio - bought before 2002 - made an annual compound return of 12pc, according to the annual report. However, post-2002 investments doubled that return, hitting 23pc a year.

Temasek, which means "sea town" in Javanese, made a series of sales this year pushing net profits down to S$4.6bn from S$6.2bn as income from portfolio assets fell.

Gramercy Snags JP Morgan Vets To Run New Emerging Markets Debt Strategies

2010-06-29T11:34:00.001-07:00

Jun 29 2010 | 9:47am ET

Emerging markets investment management firm Gramercy has added two former JP Morgan executives its ranks in preparation for the upcoming launch of three new debt strategies.

Jeffrey Grills and Gunter Heiland join Gramercy from JP Morgan Asset Management where they served as portfolio managers and co-heads of the emerging markets debt group where assets under management peaked at $12 billion under their leadership.

On July 1, the new team will launch three emerging markets debt strategies: emerging markets U.S. dollar sovereign debt, emerging markets local currency sovereign debt, and emerging markets corporate debt. Grills and Heiland will work closely with Robert Rauch, a partner at and head of research at Gramercy, to co-manage the emerging markets corporate debt strategy.

"Gramercy now has a significant presence in the performing sovereign and corporate debt markets that complements our current capabilities in the distressed debt areas of emerging markets, where we have been the market leader for over 12 years," said Robert Koenigsberger, founder and chief investment officer of Greenwich, Conn.-based Gramercy. "We are uniquely positioned to enable our clients to seamlessly asset allocate across all emerging markets debt, spanning performing and distressed credits.”

“Investor demand for emerging markets debt exposure continues to grow given this market’s $2 trillion size, broad diversity of credit issuers, geographies and currencies, and a return profile that produced better results with significantly less volatility than other markets over the past decade,” said Heiland. “We know investors will benefit from Gramercy’s ability to access multiple segments of emerging markets investments via a single platform.”

Gramercy was founded in 1998 and now manages over $2.6 billion in a number of emerging markets investment strategies—both alternative and long-only. The firm has 62 employees, 31 of whom are dedicated investment professionals.

Gramercy Snags JP Morgan Vets To Run New Emerging Markets Debt Strategies

2010-06-29T11:34:00.000-07:00

Emerging Markets Corporate Debt to Rival U.S. High Yield

2010-06-28T22:28:00.001-07:00

Written by caroline.cakebread@rogers.com on Monday, May 10th, 2010 at 10:57 am
As emerging countries see buoyant growth, improved fiscal policies, and increasingly more affluent populations, fundamentals, local and frontier markets, and corporate debt are transforming. Prudent fiscal policies and global demand for commodities have driven strong growth and allowed emerging countries to improve their balance sheets over the last economic cycle. Thus, we believe the asset allocation according to historical investing norms in emerging market debt relative to developed markets requires some discussion. The change in composition of government debt issuance and the rise of corporate debt issuance are reshaping the emerging debt opportunity set.

One driver of emerging debt opportunities is an increase in locally issued debt. Emerging debt investors traditionally have invested in the more abundant U.S. dollar-denominated government bonds when compared with locally issued debt. However, emerging countries, having survived a few downturns, have learned that borrowing in local currency gives governments greater monetary control without foreign intervention. Hence the increase in supply of local currency-issued debt instruments provides a greater selection for emerging debt investors. As these markets are expected to grow faster than developed markets, the self-reinforcing local issuance should continue to offer an increasing array of investment possibilities that may be funded by reducing allocation to the rapidly deteriorating debt inventory of developed markets.

From a dollar-denominated or hard currency sovereign investment standpoint, frontier markets offer another opportunity in what will likely be the future source of alpha for emerging market investors—especially those with the analytical capabilities and capacity to enter into these markets—as these relatively less liquid markets have correlation benefits to an emerging debt portfolio. As such, we foresee assets shifting through incremental investments into frontier countries, currently the only growth area of hard currency issuance.

Inflation-linked securities versus nominal securities also provide opportunities for return in the emerging markets. To help attract international investors, favourable changes in maturing tax codes welcome foreign investment directly into local bond markets. With expectations of significant rate hikes in select emerging local markets, there is an opening to capture appreciation in inflation-linked instruments.

Most interesting, in Mike Conelius’s opinion, are the opportunities resulting from the evolution and expansion of corporate debt in emerging markets. For years, governments borrowed far too much at high interest rates, crowding out the private sector. The local corporate sector today is relatively under-levered, and in fact, many of these corporations are considered investment grade. Investments in corporate debt can be an excellent way to capture domestic growth in these markets. Emerging banks, for example, have fairly high capital ratios and are relatively attractive; although they tend to be rated lower than their developed peers, they are much less stressed by leverage. Banks aside, emerging market corporations are raising more capital locally to fund moves into the turf of developed market corporations. Mike believes, to benefit from the evolution of these corporations emerging investors should consider fixed income investments in select emerging market corporations.

Emerging debt markets rival the size of the U.S. high yield market, albeit not in liquidity (though liquidity is improving). Emerging market portfolio managers now able to focus investment decisions on sectors, names, and company managements can lend directly to a company and dis-intermediate local banks. Even though emerging debt, both sovereign and corporate are extremely highly correlated, over time this is expected to change and emerging market investing likely will receive even greater attention from institutional investors this year.

Mike Conelius is portfolio manager, Emerging Markets Bond Strategy with T. Rowe Price.

Emerging Market Debt

2010-06-28T22:20:00.000-07:00

Date: 01/04/2010 Source: www.shorex.com

The Global Financial Crisis has impacted the way in which we interpret sovereign risk. Many developed countries are in unchartered waters with respect to unconventional monetary policies, extended balance sheets and public debt. With households and corporates in the developed world undergoing a painful de-leveraging process, emerging market countries in a lot of cases have shrugged off the crisis and are well above pre-crisis levels of output.

According to the IMF, emerging economies are predicted to grow at between 6-8% over the next 5 years, whilst advanced economies will have sub-par growth between 1-3%. In this environment, we don’t believe that the emerging country business model of pegging interest rates to the US Federal Reserve is sustainable in the future. We are predicting an era of currency appreciation in a number of emerging market countries.

Consider China, although introducing some policies to try and curtail credit expansion such as their major bank’s lending ratio requirements, the incentive to borrow money at low rates and invest in other asset classes is intense. This combined with an artificially high demand for exports due to their interest rate pegging policy is overheating the Chinese economy. As things stand, we believe the Chinese policy makers will need to make a choice between inflation or currency appreciation. We believe a methodical approach to allowing currency appreciation will be the most likely outcome.

The challenges ahead for advanced economies are substantial. Government debt is at its highest level in peace times, muted growth is expected as households de-leverage and then there is the demographic challenge related to the retirement of the baby boomers. This ageing of the population will lead to a substantial increase in the ratio of 65 plus year olds compared to those of working age. In terms of orders of magnitude, the IMF have calculated that the net present value related to the government costs of counteracting the Global Crisis are a mere 8.5% of the costs attributed to the ageing of the population. It is difficult to assess how prepared governments are for these costs, but we can determine that the impact of the Financial Crisis has made the starting point more difficult.

Challenges exist for emerging countries as well, but a lot was learned from the Asian Crisis in 1997/1998. Emerging countries, particularly in Asia have built substantial foreign currency reserves over the last 10-15 years and in many ways could be described as the world’s creditors. Developed countries on the other hand, could be described as the world’s debtors if we could perceive of a global balance sheet. Emerging countries are exhibiting far more promising economic fundamentals with improved growth prospects. It is these economic fundamentals that form the basis for our Local Currency Emerging Debt Strategy at Lombard Odier.

Emerging countries local debt capital markets have been growing substantially over the last 10 years and now represent USD 6.7 trillion. Together with USD 1.2 trillion of emerging hard currency debt, it is estimated that emerging markets now represent approximately 20% of the global bond market.

In our view, a number of balanced portfolios have a structural under allocation to local emerging market debt and their currencies.

Author:

Stephane Monier, CFA
Head of Fixed Income and Currencies
Lombard Odier Investment Managers

Emerging market debt fundamentals attractive for schemes

2010-06-28T22:17:00.001-07:00

Professional Pensions | 03 Jun 2010 | 15:27

By Emma Dunkley

Emerging market debt fundamentals are attractive for pension funds seeking portfolio growth and diversification, J.P. Morgan Asset Management says.
Client portfolio manager for emerging market debt and currency Robert Stewart said the fundamentals are supportive for the emerging economies and the corporates within them, compared with developed countries.

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He said yields are more attractive in emerging market debt compared to developed countries, and emerging market debt returns have lower correlation.

The developed markets are also expected to experience lower GDP growth rates over the next year, at around one-three percent. Commodity economies such as Canada and Australia are the exception to this, and are expecting to see three to five percent of growth.

Emerging markets will lead the growth rates, with Asia expected to increase 5% this year.

Stewart said solvency questions within the eurozone means there is likely to be slower growth than expected and could also lead to a double dip recession.

"There is a structural shift in the way emerging markets are constructed; domestic consumption is increasing in the emerging market economies, especially in Brazil, China and India. So even with a double dip recession, emerging markets should still see good growth."

Browder Eyes Commodity Play in Forex Crisis

2010-06-18T01:01:00.001-07:00

MONACO (Reuters)—Veteran hedge fund manager Bill Browder is buying commodities and the companies that produce them in emerging markets to profit from what he said is a looming crisis in the world's major currencies.
He said he believes that burgeoning debt and budget deficits in Europe and the United States will lead to the debasement of these currencies, shifting economic power to the better-positioned emerging economies.

"The enormous debt burdens and deficits are the elephants in the room. Emerging markets generally don't have them," he said, speaking to Reuters at the GAIM International hedge fund conference here.

He said governments had few available options to deal with these problems, since raising taxes or cutting expenditure were politically risky and borrowing money would only worsen the long-term problem.

"Printing money is the easiest way, but everyone is debased. There will be a decline in the value of paper currency against real assets," Mr. Browder said.

He said his Hermitage Global fund, which manages $1 billion for foundations and wealthy families, was buying shares in the cheapest companies producing hard assets and would take direct exposure to gold via exchange traded funds and mining companies.

One of his picks is Sesa Goa, an Indian iron ore producer trading at a discount to other producers.

"It's one of the closest producers to China, the world's biggest consumer, and it's closer to that market than Brazil, less expensive in terms of transport costs than Australia and has a lower cost structure," said Mr. Browder.

One short-term problem with the strategy was that some major governments could have what he called "moments of lucid responsibility" when they try to cut their deficits to defend their balance sheets.

However, Mr. Browder said if developed markets made serious attempts to curb their debt and budget deficits, the result could be the sort of political unrest already seen in countries that have initiated austerity programs.

Mr. Browder's asset management company Hermitage Capital once managed the largest hedge fund in Russia prior to Mr. Browder being denied entry to the country in 2005 in a long-running confrontation with the authorities which saw the firm's lawyer die while in jail in November last year Previous Reuters Story.

Mr. Browder has given up investing in Russia, which he has described as a "criminal state," but the experience has not crushed his enthusiasm for other emerging markets, even if there are limits to where he will invest.

"I can deal with a certain amount of corruption, it offers opportunities if you can get countries to make some changes. But without a well-rehearsed and clearly developed rule of law, valuations have to be sufficiently low [to be attractive]."

By Martin de Sa'Pinto

Former Citadel Manager Leversha to Start Asia Event-Driven Fund

2010-05-26T04:20:00.000-07:00

May 26 (Bloomberg) -- Simon Leversha, a former managing director of Citadel Investment Group LLC, is starting his own hedge fund this week to trade securities affected by events such as mergers, spinoffs, litigation and regulation.

Imperia Asia Offshore Fund will start investments initially with less than $10 million of partners’ money, Leversha said in an interview in Shanghai yesterday. It will target Asian stocks whose prices will be affected by corporate events over three to six months, Melbourne-based Leversha said.

Event-driven funds drew more than half of new investors in the global hedge fund industry in the fourth quarter, Chicago- based data provider Hedge Fund Research Inc. said in January. Asian event-driven hedge fund startups are trying to profit from regional political events, regulatory changes and mergers as some companies were weakened by the credit crisis.

“You have 12, 13 different markets with different events going on, such as Australia’s resources tax, Thailand’s political instability, and antagonist behavior by North Korea,” Leversha said. “Spreads have widened significantly in the last two weeks because of market volatility. And there has been indiscriminate selling, yet a lot of the deals are uncorrelated with each other.”

Forty-two percent of investors in a Deutsche Bank AG survey in January said they would invest in event-driven funds, quadrupling the percentage from a year earlier.

Hirings

Nick Taylor, a former executive of Citadel Investment, last year drew $150 million backing from Blackstone Group LP for a $208 million Asian event fund, three people told Bloomberg then. Sanjiv Bhatia, who led Deephaven’s Asia investments, and an ex- Polygon team led by Anthony Correa and Hani Abuali, also started similar funds.

Leversha, 41, who worked for Citadel in Chicago and Tokyo for nine years, set up and ran the Asian event-driven team for the hedge fund manager founded by Ken Griffin, before leaving in 2006.

Amy Zhang, a former managing director at Blackstone, will help manage greater China investments for Imperia, Leversha said. Zhang was on the Blackstone A.M.N. Advisors team which aimed to raise as much as $1 billion for an Asian event-driven fund before Blackstone shelved the plan in May last year as the financial crisis affected hedge fund returns and fundraising.

Vernon van Eck, former chief operating officer of Sydney- based Ellerston Capital Ltd., will be COO of Imperia Investment Group Pty, the fund’s manager.

Hector Colon, formerly with Citadel, will oversee Imperia’s trading and technology. Colon joins from Magnetar Capital LLC, the Evanston, Illinois-based hedge fund manager that profited from a 2007 bet that subprime housing debt will tumble in value.

Imperia’s market-neutral fund targets an annual return in the “mid-teens” without having to bet on general market conditions, said Leversha. The fund will hold 30 to 40 “core investments,” he added.

Rising Africa puts South Africa on the spot

2010-05-26T02:29:00.001-07:00

By Ed Cropley

JOHANNESBURG (Reuters) - Even by the extended outlook of emerging market investors, a century is a very long time. By that measurement, though, South Africa, the continent's biggest economy, has been a staggering success.

A punter who took a slice of the then British colony 100 years ago would have enjoyed annual returns of 7.6 percent, easily surpassing the United States, Germany and Japan and behind only Sweden and Australia, according to Credit Suisse research.

The 21st century looks less enticing. Stagnating population growth and dwindling deposits of the gold and other minerals that fueled such dramatic expansion are likely to crimp South Africa's growth.

The rest of the region is likely to fare much better.

"Frontier Africa", loosely defined as anywhere south of the Sahara excluding South Africa, remains a mish-mash of impoverished small and medium-sized states with shoddy infrastructure and erratic governments.

But beneath its soil and seas lie huge deposits of oil, gas and other minerals coveted in particular by Asia's booming economies.

Over the past decade, that demand has spurred growth of 5 percent a year, and with the continued benefits of debt relief, market liberalization and the spread of new technologies such as mobile phones, the trend looks set to continue.

By the middle of this century, South Africa is unlikely to be a sole economic giant among dwarves. To stay competitive it needs to profit from the new "Scramble for Africa" by positioning itself as a springboard into the rest of the continent, analysts say.

"We are playing on a big stage now," said Paul Runge, Johannesburg-based head of Africa Project Access, a consultancy helping South African firms invest in other sub-Saharan African countries.

"Africa is becoming an increasingly international arena. If we as South Africans are going to play on this stage, we had better get very worldly very quickly."

HEADING SOUTH?

Nearly all the indicators point to a long-term decline in South Africa's status and clout relative to the rest of Africa.

In 2000, the "Rainbow Nation" that had emerged from decades of white-minority rule and isolation accounted for nearly 40 percent of all economic output in the sub-Saharan region, according to International Monetary Fund figures.

That share will drop to 28 percent this year, in part because South Africa's economy was caught in the global recession, and will shrink further as countries such as Nigeria, Ghana and Uganda notch up growth of 7 percent or more compared to the 2.3 percent expansion forecast for South Africa in 2010.

With a heavy HIV/AIDS burden and high levels of urbanization by African standards, its population will grow by only 7 million people to 57 million by 2050, according to the United Nations Population Fund.

By contrast, Nigeria and Ethiopia's populations will double to nearly 300 million people and 175 million people respectively, while Democratic Republic of Congo, currently home to 68 million people, will boast 150 million.

If African policy makers play their cards right, those booming populations should help drive economic growth by creating vast pools of young labor in economies increasingly geared toward manufacturing for export -- similar to China 30 years ago.

LOOKING NORTH, SLOWLY

It is gold mining that most starkly illustrates South Africa's waning fortunes.

Annual production of the precious metal in 1990, the year Nelson Mandela was released after nearly three decades in an apartheid jail, stood at 600 tonnes.

By 2009, it had fallen to just 160 tonnes, making the country the world's fourth biggest gold producer behind the United States, China and Australia.

Such statistics are not lost on policy makers and politicians in Pretoria, who constantly talk of the need to restructure the economy away from mining and raw material exports toward higher value manufacturing and service industries such as specialist engineering, banking and media.

That's slowly beginning to happen. Mobile firm MTN, supermarket operator Shoprite and Standard Bank are cited as the main success stories, having expanded aggressively into Africa to become its biggest operators in their respective fields.

A KPMG survey in February of South African private equity managers showed the investment industry slowly shifting its sights, with 46 percent of respondents saying Frontier Africa was the "next meaningful opportunity".

"If you had asked that question five years ago you would have got 90-10," said Warren Watkins, the accountancy firm's South African head.

Exports of manufactured goods to the rest of Africa also increased nearly four-fold from 2000-8 to $16 billion, helped by the likes of Johannesburg-based packaging firm Nampak, which makes everything from beer-bottle tops to plastic milk cartons in 10 African countries beyond its core domestic market.

Nampak is about to add an 11th export market, Angola, where revenues from offshore oil are beginning to build a big-spending middle class in an economy less than a decade out of civil war.

"Demand for packaging is closely allied to demand for packaged consumer goods such as food and beverages and if these grow then Nampak will clearly benefit," Nampak spokesman Graham Hayward said.

However, many South African companies have yet to realize where the future lies.

"Too many companies are sitting with decision-makers that view Africa through the prism of the 1980s and the early 1990s, where it was considered to be ludicrously risky," said Duncan Bonnett, of consultancy Whitehouse and Associates.

In the copper mines of central Zambia, just 1,200 km (750 miles) north of Johannesburg, South Africa is visible only in the form of Johannesburg-registered trucks carrying engineering kit.

The mines themselves are run by Indian, Chinese and Canadian companies, a telling example of the stiff international competition South Africa faces for contracts and concessions in what should be its back yard.

"South African companies need to wake up. A lot of opportunities are already being stolen from under our noses, and not just by the Chinese -- it's the Indians, the Brazilians, the Russians, the Canadians, Australians," Bonnett said. (Editing by Simon Robinson)

Silk Invest Launches Into Frontier Markets

2010-05-26T00:34:00.001-07:00

May 24 2010 | 7:05pm ET

London-based Silk Invest has launch a fourth emerging markets hedge fund, this one focusing on frontier markets.

The Silk Road Equity Fund will invest in such economies in Africa, the Middle East and Southwest Asia, Fund Strategy reports. The UCITS III-compliant vehicle is expected to become available in September, pending regulatory approval.

The fund’s model portfolio offers a glimpse at where the fund aims to invest. The two largest allocations in the model are to Saudi Arabia and Nigeria.

“We are very excited about the investment opportunities in Saudi Arabia,” Daniel Broby, chief investment officer, told Fund Strategy. “We find a broad range of interesting businesses across sectors: industrials, chemicals, banking and insurance.”

The model also has a large allocation to Qatar and smaller investments in Azerbaijan, Egypt, Kazakhstan and Morocco. The firm is also looking into investing in Pakistan.

Silk Invest warned that the fund’s country allocations could change before its launch. It will charge a 20% performance fee on all returns about 8%.

Morgan Stanley Sees ‘Value’ in Emerging-Market Stocks

2010-05-21T05:06:00.000-07:00

May 20 (Bloomberg) -- Emerging-market and Asian shares are offering “significant value” after Europe’s sovereign-debt crisis prompted a selloff, Morgan Stanley said.

The MSCI Emerging Markets Index’s forward price-earnings ratio is 15 percent below the “long-run” average, Jonathan Garner, Morgan Stanley’s chief Asian and emerging-market strategist, wrote in a report yesterday. He upgraded Turkish shares to “equal-weight” from “underweight” and downgraded Malaysia and Thailand to “equal-weight” from “overweight.”

The MSCI gauge has dropped 13 percent from this year’s high set on April 15 on concern austerity measures from debt-laden European nations such as Greece will hurt the global economic recovery. The index is valued at about 11.5 times estimated earnings, compared with a high of as much as 16.7 times in December, according to data tracked by Bloomberg.

“The travails of the Eurozone have led to significant value reappearing in Asian and emerging-market equities,” Garner wrote. “The second half will be characterized by a resumption in the bull trend in Asia and emerging markets and, in particular, by a stronger performance from Chinese equities.”

He initiated coverage of Colombia with an “equal-weight” recommendation.

Chinese stocks are the world’s fourth-worst performers this year, with the Shanghai Composite Index having dropped 21 percent as the People’s Bank of China raised lenders’ reserve requirements three times and the government stepped up curbs on property speculation. The MSCI China Index, tracking mostly Hong Kong-traded stocks, has lost 11 percent.

‘Evident’ Value

“Value is evident, in our view, in both China A shares and MSCI China as the pressure of the tightening measures and concerns over inflation caused a de-rating of the P/E multiple,” Garner wrote. He maintained his “overweight” rating on Chinese shares, citing expectations of “a soft landing in the economy in the second half.”

China can wait until the second half of 2010 or next year to raise interest rates as the nation’s economic growth is expected to slow, the Beijing-based China Securities Journal said today in an editorial on its front page. Economic growth may slow to 10 percent in the second quarter, 9 percent in the third and 8 percent in the fourth, the newspaper said, citing unidentified economists.

Less Attractive

Malaysian shares are less attractive, based on both the dividend yield and historical price-to-earnings multiple, Morgan Stanley said. The benchmark FTSE Bursa Malaysia KLCI Index has gained 2.5 percent this year, compared with the 7.9 percent decline in MSCI’s index of 22 developing nations.

Thai shares were downgraded because of their valuations the highest political risk ranking within the brokerage’s emerging- market model, as clashes between anti-government protestors and troops escalated over the past six weeks, according to the report. Even after a forced surrender of the demonstrators yesterday, mobs continued to burn banks, shopping malls and the stock exchange.

Emerging Markets Hedge Funds Navigate Sovereign Crisis

2010-05-21T01:17:00.000-07:00

Tactical use of CDS and currency derivatives widespread in EM funds; Investors shift capital from Emerging Asia to Latin America, Multi-EM

CHICAGO, (May 20, 2010) – Emerging Markets (EM) hedge funds gained +4.7 percent YTD through April, suggesting that many EM managers have strategically navigated through much of the still-unfolding EU-centric sovereign debt crisis, according to Hedge Fund Research (HFR), the leading provider of hedge fund industry data. In addition to the significant weakness in the sovereign credit market, funds also encountered volatility in currency, commodity and underlying equity markets, with this volatility accelerating through 2Q10.

Risk-conscious investors repositioned capital in 1Q10, paring investments in Emerging Asia while adding to exposure in Latin America and Multi-EM as total capital invested in EM hedge funds increased to $98 Billion. Strong first quarter performance resulted in a $5.3 Billion increase in EM AUM, which easily offset a small investor net capital outflow of $560 million; this marked the sixth quarter out of the last seven in which investors withdrew capital from EM hedge funds. Some geographic rotation was evident in the most recent data, as redemptions from Asia (ex-Japan) and Russia/Eastern Europe-focused funds exceeded $1 billion combined, while investors added over $500 million to Latin America and funds investing in Multiple Emerging Markets.

Hedge fund managers used a variety of tools to generate gains through the first four months of the year, including not only tactical exposure adjustment but effective use of protection from credit default swaps (CDS) and various currency hedging techniques. While sovereign weakness is presently concentrated in EU countries, many EM managers began to deal with an escalation of EM sovereign credit risk over six months ago (when risk was focused in the Middle East) by using CDS protection to insulate their portfolios from these losses and produce gains if the sovereign credit risks increased.

Additional findings from HFR include:

Middle East/North Africa: The HFRX MENA Index posted a gain of +7.9 percent in 1Q10, including a record gain of +9.3 percent in March, the highest monthly gain since index inception in 2005. Despite recent increases volatility in GCC sovereign credit, total MENA-focused capital has been steady and reflects a ten-fold increase since 2003.
Russia/Eastern Europe: Since the Rouble devaluation and Russian sovereign debt restructuring in 1998, funds investing in Russia have gained an annualized +23.5 percent, the top performance region for the hedge fund industry. Despite annualized volatility exceeding 22 percent, capital invested in Russia/Eastern Europe now represents over 35 percent of all EM hedge funds.
Latin America: Investors allocated new capital to funds investing in Latin America while paring exposure to other regions, suggesting that investors expect Latin America to be insulated from the existing sovereign credit crisis. Over 8 percent of EM funds are located in Latin America, fourth most geographically after US, UK and China.
Emerging Asia: Investors pared exposure to hedge funds investing in Emerging Asia, withdrawing over $850M in 1Q10, despite these funds significantly outperforming Chinese equity markets for the period. The HFRX China Index declined by -0.75 percent in 1Q10, a period in which Chinese equity markets fell by over five percent.
“Throughout the ongoing EU-centric sovereign debt crisis, Emerging Markets hedge funds have continued to demonstrate strategic sophistication and performance resilience,” said Kenneth Heinz, President of Hedge Fund Research, Inc. “These qualities are likely to solidify and enhance the appeal of EM hedge funds to global investors in the current environment.”

HFR coming to Asia, announces Industry Summit: Asia 2010 Hedge Fund Research has also announced that it will host its HFR Industry Summit: Asia 2010 in Hong Kong on September 16th & 17th at The Four Seasons Hong Kong. The HFR Industry Summit is the hedge fund industry’s premier private investor engagement, hosted annually in Chicago and London, and this will mark the event’s inaugural appearance in Asia.

About HFR

Chicago-based HFR Group L.L.C., founded in 1993, is a global leader in the provision of hedge fund data, research, indexation and asset management. The HFR Group of companies includes Hedge Fund Research, Inc., and HFR Asset Management L.L.C. Hedge Fund Research produces the HFR Database, considered to be the definitive source of hedge fund performance and information. HFR also distributes the HFRI and HFRX Indices – the premier benchmarks for hedge fund industry performance.

Sloane Robinson To Run UCITS Fund On Schroders Platform

2010-05-19T22:09:00.001-07:00

May 19 2010 | 10:40am ET FinALternatives

Schroders will add a second fund to its UCITS III platform, tapping hedge fund Sloane Robinson to manage it.

The new Schroder GAIA Sloane Robinson Emerging Markets fund will debut at the end of next month. It will be manned by the London-based firm’s emerging markets team, headed by chief investment officer Richard Chenevix-Trench.

“It is great news to have been selected by Schroders and NFC to join the Schroder GAIA platform for our capabilities in investing in emerging markets,” Chenevix-Trench said. “These platforms are increasingly popular amongst investors looking to combine the return profile of hedge fund strategies with the liquidity, transparency and regulatory stability of UCITS.”

The Schroder’s platform launched its first fund in November, managed by Egerton Capital.

Finisterre To Refocus Special Situations Fund On Emerging Markets Debt

2010-05-17T22:35:00.000-07:00

May 17 2010 | 1:16pm _ FinAlternatives

Despite its posting one of the best returns in the whole of the hedge fund industry last year, Finisterre Capital is doing away with its special situations strategy.

The London-based firm will restructure its Special Situations Fund, transforming it into an emerging markets corporate debt vehicle. The newly-renamed Finisterre Credit Fund aims to take advantage of the “unprecedented” opportunities in emerging markets debt, the Financial Times reports.

The move, however, was not solely motivated by those opportunities, according to the FT. Finisterre’s largest investor, the New York State Common Retirement Fund, reportedly pushed for the change following its US$250 million investment with Finisterre in January.

The US$1.1 billion firm certainly didn’t appear to need a change of course. The Special Situations fund soared 45.3% last year, trading less-liquid securities not listed on exchanges. The rechristened Credit fund will continue to make such investments, but they will not account for more than 5% of its total portfolio.

As part of the restructuring, Finisterre is making another change likely to make its public pension fund patron happy. The Credit Fund will now feature monthly liquidity, as opposed to quarterly.

Asian Hedge Funds Struggle for Assets as Investors Remain Wary

2010-05-06T01:17:00.001-07:00

By Netty Ismail
May 6 (Bloomberg) -- Asian hedge fund managers, especially startups and those overseeing smaller amounts, are finding it tough to raise money as investors remain wary of the industry after the financial crisis, consultants and asset managers said.
The average size of a fund launched last year fell to $40 million, half the amount in 2007, according to Singapore-based Peter Douglas, the principal of GFIA Pte, which advises investors seeking to allocate money to hedge funds and runs a wealth management business. About 70 percent of the funds launched in the past two years had $50 million or less as of the end of March, he said at the Bloomberg Alternative Investment Forum in Singapore yesterday.
“The seeders have the upper hand these days,” said Albert Ee, founder of Singapore-based Pilgrim Partners Asia Pte, which started a macro hedge fund this week. “I had to go to family and friends. The dynamics are different now; relationships are getting more important.”
Asian hedge funds had net redemptions in the three months to March, snapping two straight quarterly inflows, as investors such as family offices became less inclined to back new funds.
“There’s an absolute sclerosis of allocation to smaller and newer managers,” Douglas said.
Global hedge-fund investors pulled their research teams out of the region during the crisis in 2008 and 2009, leaving Asia with “less decision-making capacity,” he said.
Redemptions
“In Asia, the problem is compounded because it’s too far away from the big pools of allocators,” Douglas added. “It’s tougher for Asian hedge funds to raise capital.”
Asia’s hedge-fund industry had net redemptions of about $700 million in the first quarter because of “continued concerns about strategic and regulatory risks,” Hedge Fund Research Inc. said in a report dated May 4. The global industry attracted inflows of $13.7 billion, according to the Chicago- based firm.
A performance-based increase of $1.5 billion offset investor withdrawals as Asian hedge funds continued to outperform equity benchmarks, resulting in an increase in assets invested in the funds to more than $77 billion, according to HFR.
Investors are performing “more intensive due diligence” following Bernard Madoff’s $65 billion fraud, even with more established managers, Douglas said.
Family Offices
“There’s a massive premium on liquidity, track record and scale,” said Michael Coleman, managing director of Singapore- based Aisling Analytics Pte, which manages the $1.6 billion Merchant Commodity Fund. “A big part of the seeding world was European family offices and they’re probably the most traumatized group of investors.”
Aisling Analytics is seeking to raise $300 million for an equity long-short fund investing in commodities and natural resources companies.
“It has not gotten noticeably better since the depths of the crisis,” Coleman said. “It’s a really tough environment.”
Hedge-fund managers are turning to Asian investors, including wealthy individuals and companies in Korea and Taiwan, for money, Ee said.
Pilgrim Partners manages about $28 million, of which half are assets in the macro hedge fund and the remainder are managed accounts for institutions, Ee said.
“There’s a subtle change in the kind of investors in your fund,” he said. “Asians are beginning to invest in hedge funds.”

Brazil Hedge Funds Lure $1.9 Billion in April as Returns Climb

2010-05-06T01:16:00.001-07:00

May 6 (Bloomberg) -- Brazilian investors poured 3.4 billion reais ($1.9 billion) into hedge funds last month, the most since December, as their investments funds rebounded from the first monthly loss in a year in January.

The inflows halted three months of redemptions, cutting net outflows this year to 2.3 billion in April, according to data released yesterday by Anbima, the nation’s capital markets association. Hedge funds posted a return of 8.8 percent in the past three months, erasing a loss of 6.8 percent in January that was sparked in part by a 4.7 percent tumble in the Bovespa stock index, according to the Bloomberg Alternative Brazil index.

Returns for “more aggressive” hedge fund recovered as the Brazilian real rallied to its strongest in three months, stocks climbed to a two-year high and volatility jumped, said Guilherme Sand, who helps manage the equivalent of $400 million at Solidus Brokerage in Porto Alegre, Brazil.

“Brazil’s local market follows performance very quickly,” said Fabio Spinola, equity strategist at Sao Paulo-based Quest Investimentos Ltda., which manages the equivalent of $2 billion in assets.

Hedge funds recorded 5.7 billion reais in redemptions in the first three months of the year after posting inflows in every quarter in 2009, Anbima said. Two categories of funds worth 2.3 billion reais were reclassified, meaning the more accurate value of redemptions was 3.5 billion reais, said Hudson Bessa, information manager for Anbima. The investments, known as multimercados, attracted 36.5 billion reais in inflows in 2009 after a record 56.4 billion reais in redemptions in 2008.

Exiting Funds

Investors early this year exited hedge funds, where managers speculate on asset prices rising or falling and participate in fund profits, and moved to fixed-income funds on the prospect of higher interest rates.

Bond funds have attracted 22.9 billion reais since Jan. 1, according to Anbima estimates. The nation’s central bank became the first in Latin America to raise interest rates on April 28, increasing its target rate 0.75 percentage point to 9.5 percent.

“Fixed income got a lot of money because they were the only asset that’s done well and hedge fund returns have been so bad,” said Otavio Vieira, who helps manage 1 billion reais ($557 million) at Safdie Private Banking in Sao Paulo.

Brazilian local government bonds have returned 2.8 percent this year, topping the 1.1 percent gain for emerging-market debt overall, according to JPMorgan Chase & Co.’s ELMI+ index. In contrast, the currency has dropped 2.8 percent against the dollar and the Bovespa is down 5.4 percent.

Volatility

Hedge funds failed to profit from short-term trading earlier this year because market swings narrowed, said Wagner Murgel, who manages about $680 million at Neo Gestao de Recursos Ltds.

The iShares MSCI Brazil Index Fund’s implied volatility, a gauge of future market fluctuations, dropped to 25.509 on April 1, the lowest level since August 2006, according to Bloomberg data for options expiring in 30 days. Implied volatility on the fund, which tracks Brazilian shares and trades in New York like a stock, rose as high as 144.31 in October 2008 as the biggest financial crisis since the Great Depression intensified and stocks tumbled.

“It’s more complicated to find good ideas with declining volatility,” said Eric Conrads, a hedge manager at Mexico City- based Armada Capital SA.

Implied volatility surged on April 27 after Standard & Poor’s cut the credit ratings of Greece and Portugal. The iShares MSCI Brazil Index Fund’s implied volatility rose 21 percent from 26.55 on April 26 to 32.22 by April 30, according to data compiled by Bloomberg.

The low volatility demonstrated the complacency of investors, Murgel said.

“With higher volatility there, the good manager will get higher returns, Murgel said.

Ashmore positive on Brazil after strong performance in 2009

2010-02-16T07:22:00.000-08:00

posted on Tuesday 16 Feb 2010 11:32 GMT

London, 16th February, 2010 - Brazil is expected to be a major investment destination for global investors over the next decade according to Ashmore Investment Management Limited, the leading specialist emerging markets asset manager. A largely closed economy with strong domestic demand, Brazil has weathered the credit crunch, is a net creditor country lending money to the IMF and should see benefits from global rebalancing.

Commenting on Brazil's investment culture Eduardo Camara Lopes, Chief Executive Officer of Ashmore Brasil, said: "Over the next ten years, and as domestic investors become more accustomed to lower interest rates than a decade ago, we will see more allocation outside money markets. A growing number of companies are looking for financing via the stock exchange. Credit availability is also growing and this has had a strong impact on the economy as a whole". An established local team based in São Paulo has enabled Ashmore Brasil to pursue the domestic opportunities in the region, where returns have been strong across both equities and debt. This is reflected in outperformance for the Ashmore Brasil Equity Fund Limited (ABEF)[1], up 137.42% versus 104.74% for the index. Similarly, Ashmore Brasil Fund Limited (ABFL)[2], which invests in local debt markets, was up 49.89%. Eduardo continues; "Our equity approach combines top down and bottom up analysis, is long only, and has at least 80% highly liquid stocks. This compares to a number of more complicated hedge fund type strategies. The benefit of this approach is that it enables strong performance without the same liquidity and other downside risks of some competitor funds. "We're also seeing strong opportunities in the fixed income market with high rates and a steep curve plus the likelihood of currency appreciation due to strong foreign direct investment and portfolio investments over the next 10 years. Money will follow growth". Jerome Booth, Head of Research at Ashmore, believes that Brazil remains attractive for international investors as the region should benefit from the impending global economic and political rebalancing. He comments: "After many years of constitutional and structural reforms, inflation has been decisively beaten and political risk has reduced. Whilst there is still a political cycle, as in most countries, there is a broad consensus on economic policy. Basic and sustainable fiscal prudence and macro-economic stability have been established. "As this new reality of global risks changes, so asset allocators are starting to realise they are massively under-weight Brazil and other emerging markets. Moreover, global investors who previously thought the US and Europe as safe-havens are having to reassess their own asset allocations, whilst institutional investors in Brazil are going to have to invest more in managed funds as the country moves to a permanently lower inflation growth path.”

The Story of the BRICs

2010-01-28T01:27:00.000-08:00

Jim O’Neill at his desk

By Gillian Tett

Published: January 15 2010 17:01 | Last updated: January 15 2010 17:01

On the desk of Jim O’Neill, chief economist for Goldman Sachs, stand four flimsy flags. They look out of place among the expensive computer terminals of the investment bank’s plush London office, like leftovers of a child’s geography homework or cheap mementos from backpacking trips to exotic parts of the world. But these flags hint at a more interesting story – of the latest way in which money and ideas are reshaping the world. The small scraps of fabric are pennants for big countries: Brazil, Russia, India and China. And almost a decade ago, O’Neill decided to start thinking of them as a group – which he gave the acronym Bric.

It was a simple mental prop. The bolder move was to predict – publicly, and in Goldman’s name – that by 2041 (later revised to 2039, then 2032) the Brics would overtake the six largest western economies in terms of economic might. The four flags would come to represent the pillars of the 21st-century economy.

At the time, many scoffed at this idea. The predictions turned conventional western wisdom on its head; and O’Neill hardly seemed an obvious champion of the concept. A large man with working-class Manchester roots, he does not exude the aura of any globetrotting elite. His office is decorated with splashes of cherry red memorabilia from Manchester United Football Club, and he still speaks with the thick, flattened vowels of his childhood. Indeed, when O’Neill coined the term Bric in 2001, he had never properly visited three of the four countries (the exception was China), and spoke none of their languages. Yet, notwithstanding those unlikely beginnings, in the past decade, Bric has become a near ubiquitous financial term, shaping how a generation of investors, financiers and policymakers view the emerging markets: companies ranging from Nissan to media group WPP have developed Brics business strategies; several dozen financial institutions now run Brics funds; business schools have launched Brics courses; and this April Phillips de Pury will be holding a Brics-themed auction. “The Brics concept … that O’Neill created … has become such a strong brand,” says Felipe Góes, adviser to the mayor of Rio de Janeiro, who is organising the first Brics think-tank.

O’Neill speaks in smaller spheres for a moment: “It has transformed my life,” he says.

To some critics, the fuss about Brics is overblown. The term is hype, spin, from a bank and banking industry accustomed to disguising such guff as genuinely new ideas and concepts – the better to profit from them. “Brics is really just marketing – it’s nonsense!” says Charles Dumas, a London-based economist who disputes many elements of the Brics concept, such as the idea that these countries will keep growing inexorably into the future. Others are more cynical still, arguing that Goldmans Sachs has used the concept to extend its global power, and thus turbo-charge its formidable profit-making machine. O’Neill denies this latter accusation. “I really believe in this idea of Brics, that this idea can make the world a better place – it’s what drives me,” he says.

But even if Brics is self-interested spin, such spin – an idea in itself, really – can sometimes take on a life of its own, beyond what its creators expect or even hope for. By creating the word Brics, O’Neill has redrawn powerbrokers’ cognitive map, helping them to articulate a fundamental shift of influence away from the western world. And if you believe that the way humans think and speak not only reflects reality, but can shape its future path too, then this Brics tag has itself come both to reflect and drive the change – albeit from some unlikely beginnings.

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The rise of the non-western world

The way O’Neill, 52, tells the tale of how he developed the Brics – and he is a born raconteur – starts, a touch melodramatically, on the day terrorists flew aircraft into the World Trade Centre and Pentagon, killing thousands of people.

The son of a postman, O’Neill grew up in south Manchester, where he studied at the local comprehensive (Oasis’s Noel and Liam Gallagher were pupils there too, albeit later) and spent much of his time playing football. After school, he decided to study at Sheffield University, partly because it offered easy access to watch Manchester United. (Today, he has a season tickets at Old Trafford, and leaves spare tickets behind the bar at a local pub, for childhood friends to use.) During his time there, between “getting drunk and playing football”, O’Neill discovered a passion for economics. And after completing a doctorate in the subject, he worked as a foreign exchange analyst at a series of City banks, eventually joining Goldman in 1995 as co-head of economics. In the summer of 2001, Gavyn Davies, O’Neill’s highly respected co-chief, announced his departure – leaving O’Neill the sole leader, and under huge pressure to perform. “I thought: “Oh my god, I have got to put my imprint on this department,” he recalls. “I was searching for a theme and a new idea.”

“What 9/11 told me was that there was no way that globalisation was going to be Americanisation in the future – nor should it be. In order for globalisation to advance, it had to be accepted by more people ... but not by imposing the dominant American social and philosophical beliefs and structures”
Inspiration came – a bittersweet gift. On September 11, as the first aircraft approached the Twin Towers, where he had delivered a lecture a few days earlier, O’Neill was hosting a global video conference call. Halfway through, the New York faces vanished from the screen. O’Neill later learnt the staff had been safely evacuated from their offices, but he still reeled in shock at the events. In the days that followed, his mind began to whir. As a foreign exchange analyst, O’Neill had always been a passionate advocate of globalisation, and was fascinated by the rising power of Asia. And to him, the horror in Manhattan was a powerful demonstration of exactly why the non-western world was starting to matter more and more – albeit in a negative way. However, O’Neill also believed – or hoped – that this shift in power could be seen in a more positive sense, too. “What 9/11 told me was that there was no way that globalisation was going to be Americanisation in the future – nor should it be,” he says. “In order for globalisation to advance, it had to be accepted by more people … but not by imposing the dominant American social and philosophical beliefs and structures.”

In practical terms, O’Neill decided, that meant economists had to look more closely at how non-western economies could wield more power in the future. As he scoured the globe, he became increasingly fascinated by four countries: Brazil, India, Russia and China. In one sense, the four seemed disparate, separated geographically and culturally; they had never acted as a bloc in any way, never conceived of themselves as a unit. Yet what they all shared in 2001 were large populations, underdeveloped economies and governments that appeared willing to embrace global markets and some elements of globalisation. To O’Neill, these characteristics made them natural sisters: they all had the potential for rapid future growth.

Excited, he tried to work out how to label this bunch. Since China was easily the largest, it made sense to put its name first. “Lloyd Blankfein [Goldman Sachs’s chief executive] always teases me about it – he says I should have called the group the Cribs,” O’Neill recalls. But O’Neill thought that a word linked to babies would seem patronising. So on November 30 2001, he launched his Big Idea: Goldman Sachs’s Global Economic Paper #66, “Building Better Global Economic Brics”. He predicted, soberly, that “over the next 10 years, the weight of the Brics and especially China in world GDP will grow” – and warned, perhaps a little less soberly, that “in line with these prospects, world policymaking forums should be reorganised” to give more power to the group he had now dubbed Brics.

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Welcome to Briclife

The paper immediately sparked interest among Goldman Sachs’s corporate clients, particularly those already selling – or trying to sell – consumer products to the emerging markets. “I found the Bric thing fascinating right from the start,” says Martin Sorrell, chief executive of WPP. “It tapped into what we had been already discussing.” But to many investors and bankers – including some inside Goldman Sachs – it all seemed rather fanciful, particularly given that countries such as Brazil had recently experienced hyperinflation. “When I first spoke at a big group in Rio [after the paper was published], it was to around 1,000 investors from all of Latin America,” recalls O’Neill. “The guy who was introducing me whispered in my ear as he went to the podium, ‘we all know that the only reason the B is there is because without it there is no acronym.’”

But O’Neill kept discussing the concept with colleagues and in 2003 his team produced the next offering: a paper called “Dreaming with Brics: The Path to 2050”. It boldly declared that by 2039 the Brics group could overtake the largest western economies in scale. “The list of the world’s 10 largest economies may look quite different in 2050,” it said. That prediction launched O’Neill’s team into what he calls Briclife. Within days, Goldman economists were flooded with e-mails from executives at companies ranging from mobile telecoms group Vodafone to miner BHP Billiton to Ikea and Nissan. By luck – or insight – O’Neill had produced this tag just as many western businesses were trying to hone their strategies to sell products to the non-western world, or to use regions such as China as a manufacturing base. And in a world where corporate boards face information overload, Brics suddenly provided executives with a snappy way of discussing strategy. Better still, unlike phrases such as “emerging markets” or “developing world”, Brics did not sound patronising, or unpromising; it was neutral, strong, politically correct.

Soon rivals, such as HSBC and Deutsche Bank fund unit DWS, were launching dedicated investment funds marketed under the label of Brics. “We asked our lawyers if we could trademark the word Brics, but they said not – apparently it’s not a product,” O’Neill recalls. Steadily, the brand spread, taking on a life beyond Goldman. Initially, most hedge funds ignored the concept as marketing hype. But as investors began to purchase assets specifically linked to the rise of Brics, the hedge-funders recognised that the way that China, say, was making cars could affect demand for Brazilian copper. New correlations were developing in asset prices, amid strong investment flows (since 2003, the Brics stock markets have risen from 2 to 9 per cent of global market capitalisation, and O’Neill forecasts they will represent almost 50 per cent of global market capitalisation in 2050).

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Who’s in, who’s out?

Unsurprisingly, O’Neill’s rivals started to snipe. Some economists said it was ridiculous to make forecasts as far out as 2050, particularly since many of O’Neill’s projections seemed to involve extrapolating current growth on a straight line. Others took issue with the idea that the four Bric countries could – or should – be described as a group. “Economically, financially and politically, China overshadows and will continue to overshadow the other Brics,” analysts at Deutsche Bank argued. Some banks tried to ban their employees from using the B word. “Why the hell should we do Goldman’s marketing for it?” says the chief executive of one of the world’s biggest investment banks. Meanwhile, out in the market, some investors suggested it would be better to talk about Bricks (with Korea included), or Brimck (with Mexico as well) or even Abrimcks (chucking in the Arab region and South Africa). One market wag joked that somebody should start trading the Cement bloc (Countries Excluded from the Emerging New Terminology).

O’Neill fought back. The Goldman team started to crank out Bric research, looking at everything from the future size of the Indian middle class to car use in Brazil. In an effort to soothe some ruffled feathers, in 2005 O’Neill tried to explain why Korea and Mexico had not been included in his big idea (the rather arbitrary-sounding reason was that they were members of the Organisation for Economic Co-operation and Development). He also tried to placate some of the non-Brics by offering a new term: the “N-11”, or Next Eleven nations on the list to emerge as powers. This was a confusingly broad club, encompassing Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam, but within months companies such as Nissan and WPP were bandying “N-11” around their boardrooms. Another marketing tag – or boundary on a cognitive map – had been born.

Nor was it just the corporate world getting excited. O’Neill heard that politicians in Nigeria were slapping the term on their internal propaganda campaigns, redefining some of the slogans for their own ends; it was uncannily reminiscent of how 19th-century Nigerians once transposed the language of the Anglican Church to their own cultural traditions.

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The Teflon term

Perhaps the most remarkable aspect of O’Neill’s golden child is what it didn’t do: collapse under scrutiny as the credit crisis hit. Over the past two years, many of Wall Street’s big ideas have been exposed as woefully ill-conceived at best, utterly fallacious at worst. However, during the great re-reckoning, the Brics concept has flourished. Most of the Brics and N-11 emerged from the crisis well, relative to the economies of the western world. Their banking systems are intact, and their economies are growing at breakneck speed. “As a result,” wrote O’Neill in a recent paper, “we think our long-term 2050 Bric ‘dream’ projections are more, rather than less, likely to materialise.” More specifically, Goldman now predicts that China’s economy will become as big as the US’s by 2027, while the total Brics group will eclipse the big western economies by 2032 – almost a decade sooner than first thought.

That, O’Neill argues, will overturn many western assumptions about how the world works. These days, Goldman aggressively recommends that investors decide which western companies to invest in based on whether they are selling to the Brics and N-11, rather than just western consumers. (In another piece of neat cultural transposition, Goldman recently dubbed this strategy “investment in the Brics Nifty 50” [companies which sell to the Brics region] – a reference to the “nifty 50” of big western companies that were beloved by investors back in the 1970s, when it was presumed that the US and Europe would provide the engines of growth.) “We estimate that two billion people could join the global middle-class by 2030, mainly from Brics,” Goldman’s latest research note trills.

The argument is beloved by some investors. “Had you heeded O’Neill’s work and gotten invested in the stock markets of those four nations [back in 2001], you’d have made more money this past decade than by doing virtually anything else conceivable,” declared Joshua Brown, an influential investment commentator, on his Wall Street blog last month. (O’Neill brushes off the praise as “somewhat embarrassing”.) Others fear it is the next big bubble. To some, the exclusion of countries such as South Africa – or even Indonesia – looks increasingly odd. And the inclusion of Russia is presenting an ever-greater headache, given that the Russian economy was the one Bric to take a real fall in the credit crisis – so severe, in fact, that some investors (and even a few bankers inside Goldman) suspect it is now time to kick Russia out of the group.

Unsurprisingly, O’Neill is reluctant to undermine Goldman’s relations with Moscow by doing that. Although he admits that Russia has “disappointed”, he also insists that if the country “recovers strongly and quickly in 2010 and 2011, as we expect, we believe it will deserve its Bric status”.

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Back to reality

In the early years of Bric-dom, the four countries chosen by O’Neill had reactions ranging from bafflement to indifference. But soon the countries began to embrace the designation, and use it to get their voices heard on the world stage
But now another Brics-related phenomenon is emerging. In the early years of Bric-dom, the four countries chosen by O’Neill had different reactions to the designation. There was delight in Russia, bafflement in China, cynicism in Brazil and indifference in India. Now, the countries are using the idea to forge tentative links in reality – not just the world of investment ideas. In May 2008, Russia hosted the first formal Bric summit, a meeting of Bric foreign ministers in Yekaterinburg. In July 2009, it followed this with a formal gathering of all four Bric heads of state.

As meetings go, these were symbolic, not substantive. Although the four countries discussed how they could better co-ordinate their affairs to gain greater influence – and seek alternatives to the dollar – they did not agree any tangible steps. But this year in the early summer, the four countries will meet again, this time in Brazil. In anticipation, the Brazilian authorities are establishing a group of academics and a formal think-tank to brainstorm how to develop the Brics agenda. As part of that, they plan to host a conference next month in Rio – with the participation of O’Neill himself. McKinsey, which has used a version of the Brics concept in its consulting strategy, will also be involved.

It might seem ironic that the four countries would choose a term created by an American bank to define themselves but it is not unprecedented. When countries such as India first developed their sense of national identity and rebelled against the British – or when Soviet republics such as Uzbekistan developed a similar nationalism – they did so using the borders that had also been imposed, artificially and arbitrarily, by an outside power. When the cognitive map is redrawn by a dominant power – even in the world of marketing and investment bank “spin” – it tends not to be erased so much as appropriated.

“Is there much evidence that the Brics countries are collaborating today in practical terms?” O’Neill asks. “Not really, no. But that could change in the future – you look at how Brazil supplies commodities which China needs … or the fact that they all have quite similar ideas about how to manage their economies.”

Or as Felipe Góes, the Brazilian official in Rio charged with setting up the world’s first Brics think-tank, says: “It is somewhat ironic [that we use the word Brics] … but that reflects the fact that in the modern world it is people like Goldman Sachs and McKinsey who have the resources and minds to develop ideas.” Indeed, what makes a large institution such as Goldman so influential these days is not simply its trading acumen and political connections, but also its ability to invest heavily in what bankers sometimes call “thought-leadership”, by funding analysis and ensuring it is read around the world.

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At home abroad

Back in New York, some of Goldman’s older managers are aware of the cultural ironies of the Brics boom. During the first 120 years of its history, Goldman made most of its profits from American markets, and today the firm is often viewed as the most politically well-connected of the US banks. If you step into the office of its headquarters at 85 Broad Street, in downtown Manhattan, the first thing that you see is a vast American flag, looming over the dull brown marble lobby. Yet appearances can deceive. While O’Neill has spent the past decade trying to carve out his own intellectual niche by promoting the Brics, so too – far more discreetly – Goldman has been remaking itself, building activities outside the American heartland to capture the growth that O’Neill forecasts. In the past decade, the bank has opened more offices across the world than in the whole of its previous history, and while revenues from the Americas accounted for 60 per cent of its earnings 10 years ago, they now represent about half (and far less if Latin America is excluded). Indeed, senior Goldman executives expect that within a few years, profits that are “made in America” will be a minority of total earnings.

That pattern is certainly not unique to Goldman Sachs: most other western banks have also been expanding across the globe in the past few years. Deutsche Bank, for example, has been deftly building an emerging markets derivatives franchise, while HSBC is now so convinced that its future lies in Asia that Michael Geoghegan, chief executive, recently relocated to Hong Kong from London.

Still, the swing is particularly striking at Goldman, given its all-American past. These days, one of the buzzwords at 85 Broad Street is “domestification”, or the idea that the bank must build businesses around the world that provide local clients not simply with international services, but also with services in their local markets. Rather than treating non-western countries as far-flung frontiers or pawns in a trading game, the new corporate rhetoric insists that the Brics (and other non-western countries) are markets in their own rights. Thus in Brazil, Goldman recently started selling Brazilian investment funds to Brazilians. In Japan, there are staff who speak barely speak a word of English. And in China – where Goldman Sachs most certainly does not fly a big US flag – the bank is sponsoring a Chinese business school, to ensure access to a stream of authentically local Chinese students.

This drive is going hand in hand with a complex process of cultural engineering. As the bank acquires more non-western staff, it is devising programmes to rotate its locally hired employees through headquarters, to ensure that they learn “Goldman values”. It also takes care to send staff from New York and London out to the regions, and to shuffle different ethnic groups between different regions.

As its sponsorship of Chinese business schools shows, Goldman is trying to raise a new generation of local leaders. “If you look at the history of the London office of Goldman, you can see how over a decade or two, you can have locals rise to the top,” says one top executive. “That is our goal across the world. The idea is to get embedded, to show that we are there for the long term … but also to ensure that our Goldman values are everywhere in the world.”

It all might sound reminiscent of the way the British empire operated in the 19th century – or the way the Russian Communist party once tried to knit the diverse peoples of the Soviet Union into a single ideologically based nation. Only this time, it is MBA programmes and Goldman training courses, rather than British public schools or communist training camps, that provide the cultural glue. And – perhaps most important of all – Goldman Sachs (unlike earlier empires) is not overtly acting with a nationalist or political agenda; insofar as it has a real loyalty, it is to its own bottom line and its ability to make profits.

Put it another way: Goldman will keep flying Old Glory only as long as it believes that there is profit to be made under that banner. No wonder a senior member of the US government remarked a couple of years ago, partly in jest, that sooner or later, Goldman “is going to have to choose whether it wants to really be American or not”. If O’Neill is even half-right in his predictions, it may not be a straightforward choice.

Gillian Tett is the FT’s capital markets editor

Her last piece for the magazine was about the JP Morgan bankers who invented the credit derivative’ – and their reactions to the derivatives-induced financial crisis. Read it at www.ft.com/foolsgold

On Monday, the FT begins a five-part series on Bric consumers – who they are, what they buy, who is selling to them and what their rise means for the global economy

Copyright The Financial Times Limited 2010. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.

Shifting Fortunes in Davos

2010-01-28T01:26:00.001-08:00

by Tom Buerkle, International Editor, Institutional Investor Magazine

January 26, 2010 - If there is a face of this year’s World Economic Forum, it may well be that of Rui Chenggang. Rui is a director and anchor of China Central Television and presenter of Economic 30 Minutes, the country’s leading business news program. He has been coming to Davos for the past decade, but this year he is one of the most sought-after participants.

CCTV has rented a villa adjacent to the Congress Centre, the sort of splash normally associated with CNBC or the BBC, and Rui will be interviewing a host of top corporate executives here for the annual business and political jamboree. Few CEOs are likely to turn down the opportunity to appear live on the world’s biggest television station.

“I don’t care if he’s got 400 million viewers or 200 million, I’ll take it,” says Sir Martin Sorrell, the CEO of global advertising giant WPP Group.

Rui is just one example of the clout and swagger of emerging market participants in Davos this year, and not without cause. At a time when recovery seems fragile in the West, most executives here are hoping that countries like Brazil, China and India will pick up the slack and give the global economy a boost with their dynamism. Azim Premji, chairman of Indian software maker Wipro, expresses confidence that India will grow by 7 percent this year and by 8 to 9 percent in 2011 and beyond.

The Institute of International Finance, an association of major banks, underscored the optimism on Tuesday by predicting that captial flows to emerging markets would soar to $722 billion this year from a crisis-constrained $435 billion in 2009. The dramatically better economic and growth prospects in emerging markets relative to developed markets is “a situation that in my more than 50 years in banking is without precedent,” says William Rhodes, first vice chairman of the IIF and senior vice chairman of Citigroup.

In contrast to the optimism of emerging markets players, executives here are subdued about growth prospects in the U.S. and Western Europe and concerned about regulatory uncertainty and a growing backlash against big banks.

Western economies have bounced back from the worst of the crisis, but with consumers and governments heavily indebted, they lack the dynamics for a vigorous, self-sustained recovery, in the eyes of CEOs. Indeed, it seems that the restraint of corporate chieftains is a leading factor holding back the recovery. Although bosses are decidedly more confident about the outlook than they were a year ago, the biggest single investment priority of CEOs is increasing cost efficiencies, not expanding capacity, according to a survey of nearly 1,200 CEOs by Pricewaterhouse Coopers. Chief executives expect to add the most jobs this year in Brazil, India and China; the U.K. and U.S. slightly exceed the global average for job-growth expections, while Western Europe lags behind.

The sluggish economy explains the toughening stance toward banks taken by several governments recently, including President Barack Obama’s pledge last week to crack down on banks too big to fail and bar them from proprietary trading and investment in hedge funds. Regulatory reform, therefore, is the other big theme of this year’s meeting. Big banks are back in force in Davos after several notable absences in 2009, and among top CEOs only Jamie Dimon of JP Morgan Chase & Co. and Lloyd Blankfein of Goldman Sachs & Co. aren’t scheduled to appear. In addition to wooing clients, the bankers are expected to press their case for less draconian regulation and new taxes with the likes of French President Nicolas Sarkozy, the chairman of the U.K.’s Financial Services Authority, Adair Turner, and Lawrence Summers, head of Obama’s National Economic Council.

The banks get little overt sympathy, even in the corporate playground that is Davos. “I don’t think there’s any question that there need to be fundamental changes” in financial regulation, says Dennis Nally, global chairman of PwC. But participants are worried that domestic political pressures will prompt governments to strike out on their own, fracturing the G-20 consensus on bank bailouts and stimulus programs that stanched the financial crisis a year ago.

The worst of the downturn may be behind us, but until politicians and regulators establish clear rules for the future, the recovery is likely to leave everyone unhappy.