Death of hedge funds... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Death of hedge funds... 

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In this issue:
» Hedge funds down the drain?
» Madoff, the great
» Taj opens within a month
» Gujarat claims the top spot
» ...and more!

A message from The 5 Minute Wrapup Team: Don't miss our Special Issue of The 5 Minute WrapUp tomorrow.

Hedge fund managers were the one group of people that made the most during the last bull-run. Now they are facing unprecedented redemption pressure on the back of volatile markets and shrinking credit. As per Hedge Fund Research, 344 hedge funds wound up in 3QCY08. That's more than 3 times the number in 3QCY07, which was 105. The previous record was 267, in 4QCY06. In fact, the number of hedge funds shutting shop has exceeded those launched in 3QCY08, for the first time since the data has been tracked. As they say, those who live by the sword, die by the sword.

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Poor Tata Motors. Barely a few months back it acquired the iconic British brands, Jaguar and Land Rover in a deal that was believed to be a steal. It had reportedly paid less than half of what their erstwhile owner Ford shelled out for them few years back. Little did the Tatas know that their purchase would almost coincide with an unprecedented collapse in the global auto markets. This collapse has left the British company so strapped for cash that it has appealed to the UK government for financial assistance to the tune of one billion pounds. This has created an uproar among policymakers, who are asserting that any responsibility for a bail out should lie with Tata Motors. But Tata Motors is hounded by its own demand problems at home. Further, the assistance that Jaguar is seeking is only in the form of guarantees as banks have become reluctant to lend to auto companies despite the fact that it is still a profitable company. Whether policy makers like it or not, the markets seemed to have surely liked it as Tata Motors was trading 6% higher on the Indian bourses when this write up was being finalized.

Although Jaguar is still profit making, the same cannot be said of US majors GM and Chrysler who are struggling and struggling big time. In fact, the two companies are believed to be reconsidering the possibilities of a merger. GM's spokesman though has denied such reports.

"Everyone is howling for Bernie Madoff's head...but we think he just showed how the system actually operates," says the Daily Reckoning newsletter. "He's a hero to us - showing us how the system really works. He's opened a window on the financial us all a remarkable and vivid pyramid the markets...and in Wall Street," continues Mr. Bill Bonner, the author. So true!

Banco Santander can be called the SBI of Spain. It was awarded the Best Bank in the World trophy in 2008. The chairman of the bank emphasised on the need for 'better bankers' during his acceptance speech for the award. In a recent meet organised by the Confederation of Indian Industry (CII), the RBI governor cited the bank as a 'mentor' for Indian banks.

Banco Santander reportedly has lost US$ 3.3 bn for its clients, thanks to the Madoff scam. And it is not alone. Several other respected banks like BNP Paribas (US$ 450 m), Fortis Bank Netherlands (US$ 1.4 bn), HSBC Holdings (US$ 1 bn) are also in the list of losers.

And the reason for these for the said 'respected' banks is - poor banking practices. Ability to judge risks and manage the same for clients is at the core of banking. The spread that banks make is the reward for the same.

But bankers seem to have forgotten the essence of risk in their greed for thicker spread. Indian bankers probably need to look for inspiration elsewhere and get rid of their own baggage first.

Indian television (TV) news channels had provided extensive coverage of the Mumbai attacks. However, they came in for criticism from many quarters for improper handling of the situation. Yesterday, the News Broadcasters Association, an industry body of TV news channels, has announced a set of guidelines to address the concern. These six point guidelines will form a part of a larger code of conduct announced earlier. It remains to be seen if this self-regulation will provide to be sufficient to convince the government from probing further into the issue.

The Trident and Taj Mahal Palace and Tower (new wing) are reopening on December 21, within a month of the Mumbai terror attacks. And they have already been flooded with requests for reservations. This is the power of their hospitality and branding. Both these hotels have well known food and beverage outlets, which account for more than half the revenues. Occupancy level of 25% to 30% is expected on the reopening day. Both Taj and Trident are also offering discounts on room tariffs in an effort to attract guests. Both these properties are the prime locations for EIH and Indian Hotels (IHCL) and their opening will bring some cheer to the troubled Indian hospitality sector.

To add, one of our colleagues met the management of IHCL this week. As per the management, the Taj Mahal Palace and Tower is fully insured for the damage caused and loss of business profit though the total loss is not yet known. While the new wing is opening this month, the heritage wing is expected to open by mid 2009. Further, while the current quarter is expected to be dull, the management expects the occupancy levels to rise going forward.

The Bank of Japan has cut its benchmark rate to 0.1%. This decision comes after the US Fed cut its target rate as low as zero this week. We are all moving towards zero!


Source: The Economist
It has been 30 years since China embarked on its path to phenomenal growth led by reforms which converted it into a global force to be reckoned with. But the very model that led to this growth is now causing the dragon heartaches. In the past years, exports were the main force which propelled China's growth trajectory. Now that engine has started sputtering. With exports falling for the first time in seven years, Chinese authorities are restoring tax breaks for exporters and pushing down the value of the yuan to bolster exports. Further, the focus is also shifting towards domestic growth. But this is just one slice of China's problems pie. The other issues that it has to deal with are strikes, mass layoffs, pollution, income inequality and official corruption. China finds itself in a tricky situation. While it has announced a massive infrastructure plan to boost demand, keeping pollution levels under control will prove to be a herculean task. Just goes to show how things can just change in a span of one year. This dragon whose amazing growth was mistakenly believed to cushion the global slowdown has become a victim of the meltdown itself.

So, how do you think the response of the global world has been to tackle the financial crisis? Not good enough according to the economist and Nobel laureate Amartya Sen. He stresses on the need for an 'intelligent' response and though he is of the opinion that the current response has not been adequately well thought of, there is hope that it will be better. He further stressed that the measures to tackle the problems should not lead to further problems. That is going to be very tricky indeed! But we are with Mr. Sen in hoping that the situation improves soon.

ICICI Bank, which has lost a lot more than its market capitalisation (down 65% from the beginning of 2008) in the past few months, has got a new leader. The bank has of late been severely criticized for what it was earlier renowned - its aggressiveness. Investors who loved the fastest growing private sector bank shunned it when the aggressive lending threw up NPAs and risky investments. Rumours about the bank defaulting on depositors' funds only made matters worse. Ms. Chanda Kochhar, who will be succeeding Mr. K V Kamath, as the CEO of the bank, will have an important role to play in terms of reposing investor confidence in the bank.

Another round of stimulus that is expected to flow from the government is expected to be to the tune of Rs 200 bn (0.4% of GDP). This one specifically directed at bailing out small manufacturing and non-banking finance companies (NBFCs) will be routed through the Stressed Asset Stabilisation Fund (SASF) that was earlier entrusted with the task of taking over the bad and doubtful debts of IDBI before the DFI was transformed into a banking entity. The SASF trust which was created in FY05 as a special purpose vehicle to acquire Rs 90 bn worth of stressed assets of IDBI, will now borrow funds from the government to lend it to the manufacturing companies that have defaulted or face repayment pressures.

The benchmark BSE-Sensex saw a volatile trading session today, witnessing alternate bouts of buying and selling throughout the day. The yield on the 8.24% Indian treasury note due April 2018 dropped by 0.78% to 5.44% today morning. Ten-year yields have dropped by 4.61% from a seven-year high of 9.55% reached in July. This incidentally is the first annual decline since 2003.

While most other Asian markets have closed in the red, the European indices too are currently trading in the red. Oil prices fell below US$ 37 a barrel yesterday, reaching levels not seen since June 2004. The fall in oil prices, along with a recovery by the dollar has meant a second straight day of decline in the prices of gold. Gold fell 0.9% to touch US$ 845.55 an ounce.

04:55 Today's investing mantra
"In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen." - Warren Buffett
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