Research watch

With Russia’s invasion of its former Georgian satellite and an Olympic opening ceremony complete with goose-stepping soldiers, this week’s headlines have shown that history has a scary way of repeating itself. Behind the headlines, however, in the backrooms of the world’s finance houses, history repeating may not be such a bad thing as it provides something of a ready-made investing template. Old hedge fund masters are returning to their craft, private equity is seeing something of a comeback and data is showing that the capital shift to emerging markets may not be all it cracks up to be. Even banks in Europe appear to be financing each other!

Hedgie has another go '¦ “A City trader who formerly worked at Long-Term Capital Management, the hedge fund that spectacularly blew up a decade ago forcing the Federal Reserve to step in with a rescue package, has teamed up with a former colleague to launch a new fund in London '¦ David Ko, whose background is in quantum physics '¦ is to set up a hedge fund called Kurtosis Capital Partners '¦ Kurtosis, in the simplest terms, is the departure of a curve or trend away from normality. Kurtosis risk, then, in trading terms, being the occurrence of “extreme” datapoints outside a normal – gaussian – distribution curve. What you might in the financial vulgate call fat tails. The interesting point then, being that Ko’s alma mater, LTCM, ignored kurtosis risk to its extreme detriment. The unlikely occurrence of a Russian default and the subsequent generalised flight to quality in fixed-income markets wrought havoc on LTCM’s highly leveraged convergence trades.” (The Independent and Financial Times, August 12)

And another hedgie has another go '¦ “In trading, there are many second acts, but few are as dramatic as that of Brian Hunter, the natural-gas trader whose more than $US6 billion in losses caused hedge fund Amaranth Advisors to implode two summers ago. The 34-year-old trader, whose effort to start his own hedge fund has been stalled by a legal fight with federal regulators, has been advising Peak Ridge Commodity Volatility Fund in Boston. In July, Peak had a return of about 24%, leaving it up 230% on the year '¦ Commodities, of course, have had an extraordinary run-up until July, when prices began to fall, and are now in a bear market. July caught other commodities-focused funds wrong-footed, so Pike's timing on its trades and its huge return are nothing short of spectacular.” (Conde Naste Portfolio, August 12)

US market guru calls the bottom '¦ “In a conference call hosted by WisdomTree Investments... [Wharton Professor of Finance] Jeremy Siegel opened with a bold prediction, effectively stating that we've seen the market bottom, particularly in financials. In his view, the market reached a "selling climax" on July 15, the day he thinks will be noted as the low point of this cycle. Referencing what many believed to be signs of a "bottom" in mid-March with the whole Bear Stearns debacle, Siegel made what seems to be a very dangerous claim (given the high-level of uncertainty in the markets): "This time around will be different." To refresh your memories, July 15 was the day that the SEC issued an emergency order aimed at protecting investors against "naked" short selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks (a total of 19 companies).” (Morningstar, August 12)

And good news for some in the second hand market '¦ “ABN-Amro’s former private equity arm has won a new lease of life by raising almost €1 billion from the Dutch lender’s three new owners and a Goldman Sachs-led consortium that is buying ABN’s old buyout portfolio. AAC Capital Partners, formerly called ABN-Amro Capital, has secured its future with the deal, which is expected to be announced in September, marking one of the biggest transactions in the private equity secondaries market '¦ The sale of ABN’s buyout assets underlines how the secondaries market is expected to be a rare beneficiary of the credit crunch as institutional investors sell off their interests in buyout funds to raise cash or diversify their holdings. By buying a second hand private equity portfolio, investors can acquire a diversified and established portfolio at discounted prices, without paying the heavy upfront fees of a typical buyout fund.” (Financial Times, August 12)

A retreat from Moscow '¦ “Russia's RTS stock index is turning into the world's worst performer this quarter as tumbling oil, a war in Georgia and the probe of a steel company remind investors owning shares in the former communist nation can be perilous. The RTS fell 22% since June 30, even after President Dmitry Medvedev halted the invasion of Georgia yesterday, sending the index up 3.5%. The retreat this quarter is the steepest among indexes in the world's 20 biggest stock markets '¦ Russia's annual inflation rate was 15.1% in both May and June, matching the highest level in five years, data from the Federal Statistics Service show. The International Monetary Fund estimates the country's economic growth will slow to 6.8% this year from 8.1% in 2007.” (Bloomberg, August 13)

Or a Sino ascension '¦ “With Chinese growth and prosperity displayed on our TV sets each night throughout the Olympics, it's hard to imagine that China's stockmarket could be doing so poorly. But in a classic bubble pattern, China's Shanghai Composite is now down 60% since just last October. It is now just 9% above its highs from 2001, and it is on the verge of giving up nearly all of its parabolic gains following its breakout in 2006. Anyone hoping that the Olympics would give ailing Chinese stocks a boost have gotten a rude awakening. Since the opening ceremony on lucky 8/8/08, the Shanghai Composite has had three straight daily declines of 4.47%, 5.21% and 0.52%.” (Bespoke Investment Group, August 12)

Indeed old habits die hard '¦ Enjoying a cup of coffee remains a strong consumer habit, even amid current economic worries. In fact, global consumption continues to rise by 1.7% to 2% annually. Combine this with a delicately balanced supply, and a long-term coffee rally seems to be brewing '¦ and even if visits to the local coffee shop decline, the home and office are where the bulk of the world's java is consumed. Even in Great Britain's traditional tea-drinking society, purchases of coffee for home use were up 4% year-over-year in terms of volume and 5% in value through mid-July, according to TNS Worldpanel, a retail researcher. Eugen Weinberg, a commodity analyst for Commerzbank, says that coffee will write "a very bullish story" over the next two to three years, as consumption growth stays constant and as production fluctuates greatly.” (Barron’s, August 11)