Today's Post

    Financing For Knights in Shining, or in Sooty, Armor There are certain deals that banks don't want to touch with the longest lance in a joust. That doesn't mean the deals don't get done: it means they go by default to the non-bank financiers. We look at the divide.

    What will the market for acquisition financing look like in another five years? I submit (as a best guess) that this market, especially though not uniquely in the U.S., continues to split in two. The traditional powerhouse banks continue to finance their share of acquisitions, but political and regulatory pressures from Washington, Brussels, and Basel press them toward a great deal of selectivity here. The banks will only want the safest business available. There exist lots of non-bank financiers – Guggenheim Partners comes to mind – and they’re in a position to step up and take those deals. “Old news,” you say. But the divergence of bank-type-business from non-bank business in this space is a continuing trend, and the logical culmination will be a situation in which auctions or other corporate-control contests will typically straddle the divide. We’ll see the establishment banks line up with their establishment corporate-management buddies (and with the white knights thereof) on the one side, and we’ll see the funkier alternative crowd lending to the greenmailers, the activists, and the ...

Featured Post

The Skorina Report: Another try at herding Gotham’s five-headed fund

Guest columnist Charles Skorina looks at the five-headed NYC pension system with its new leader, Scott Evans.

By Charles Skorina In July, Scott Evans reported for duty as Chief Investment Officer in New York City's Bureau of Asset Management, where he'll manage $160 billion in employee pension funds. Traditionally the city's CIO is replaced when the political wheel turns, which it did last fall. Retiring Mayor Michael Bloomberg was succeeded by William De Blasio; and Comptroller John Liu, the independently-elected custodian of the city's pension funds, was replaced by Scott Stringer. Mr. Stringer beat back a last-minute primary challenge from disgraced ...

One Ordinary Week in the Life of Climate Change

We thought it would be instructive to share with you links and the odd quote from recent press reports on the subject of climate change.  As a professional investor,  you no doubt want to be ahead of trends in the investment world.   Investment opportunities arise when there is a divergence of opinion, as is uniquely the case in the United States (unlike the other nations on Earth) on the subject of climate change.  The headlines of a few days tell ...

Guest Posts

Swiss National Bank Abandons Its Commitment to Support the Euro
John Brynjolfsson on Switzerland's slightly less than neutral stand on the Euro.

By John Brynjolfsson 1)      This morning's surprise announcement the Swiss National Bank (SNB) is first and foremost a SNB declaration of independence. Renounces ties to Euro explicitly. Implicitly renounces ties to ECB, Eurozone, European Court of Justice (which Rule yesterday in support of the ECB’s OMT, that is buying, of periphery debt), and Greek elections. Obviously Switzerland has a long history of remaining fiercely independent, whereas the 2 year old announcement of a floor had unwittingly become an unwelcome alliance of the country’s central ...

Institutional Investing

Pension Funds as Alternative Investors Get Some Advice
As the CEO of AIMA, Jack Inglis, said: Many pension-fund trustees "are asking questions about their existing or prospective hedge fund allocations. Rarely has there been such demand for a realistic assessment of the benefits – and also the risks – associated with hedge fund investing.” The AIMA and CAIA are working together to meet that demand in a series of papers.

The Alternative Investment Management Association and the CAIA Association have together published an educational paper offering pension fund trustees practical guidance on hedge fund investments, their advantages, and the associated challenges. This paper, “The Way Ahead: Helping trustees navigate the hedge fund sector,” is the first in a projected series to be prepared by AIMA and CAIA for the benefit of such trustees and other institutional-investor fiduciaries. The other papers will involve alpha strategies, transparency, and governance. But What About This One? The first paper in the series makes the point that ...

Alpha Strategies

Prize to Sannikov: Scholar of Friction and Moral Hazard
In a fascinating review article, Sannikov and his co-authors distinguished among the sorts of liquidity, and thus identified the precise sort of liquidity mismatch likely to lead to market shocks. In a working paper last year, Sannikov took on the issue of executive pay, incentives, and claw-backs.

The American Finance Association has awarded its 2015 Fischer Black Prize to Yuliy Sannikov, of the Princeton University Benheim Center for Finance. Fischer Black, of course, was one of the founders of modern finance theory, and a namesake of the Black-Scholes Theorem. The AFA says that their Black Prize is for work in Black’s spirit, that is, original research relevant to finance practitioners, from an individual under 40. So … what has Sannikov done? Among much else, he has studied the macroeconomic significance of financial frictions, that is, of the fact that ...

Real Estate

How Bad is the Cash Drag on Open-End Private Equity Real Estate Funds?
Guest columnist Brad Case, Ph.D., CFA, CAIA, examines the effects of cash drag on open-end private equity funds.

By Brad Case, Ph.D., CFA, CAIA More than 46 basis points per year on average. That’s a pretty hefty drag, nearly 7% of the average net total return on equity. Here’s how to estimate the drag from cash reserves:           Since 2000Q1 the National Council of Real Estate Investment Fiduciaries (NCREIF, as part of its ODCE data base) has published quarterly data on three of the four items necessary to estimate the effect of leverage on gross total returns of an open-end core private real estate fund: Cash Reserves (%) Total Leverage (%) Return on Equity (%) The ...

Risk management

Explaining Why the Portfolio-Barbell Works
Most efforts to introduce "entropy" into finance have seen it as a quantity to be minimized. A new paper, which begins as an effort to explain barbell portfolios, uses entropy in a different manner. Unfortunately, it doesn't really end up clarifying those barbells.

One classic (liability-driven) portfolio strategy, known for obvious reasons as the “barbell,” entails a lot of very defensive low-beta assets on the one side, and a lot of aggressive high-beta assets on the other. Practitioners follow the advice of Mr. Bing Crosby: they don’t “mess with Mr. In-between.” For the most part, this is a practitioners’ strategy, not a theorists’ strategy. There’s been little reason in theory to think that it should work. After all. if you want diversification, why not include some assets in between those extremes? And if you ...


Who Is Yanis Varoufakis? And Does it Matter?
Varoufakis believes in the single Eurozone currency. It is unlikely that the government that just appointed him Finance Minister plans to pull out of that zone and bring back the drachma.

According to his twitter account, Yanis Varoufakis has been “quietly writing obscure academic texts for years, until thrust onto the public scene by Europe’s inane handling of an inevitable crisis.” He is on the scene because the coalition government emerging from the Greek elections has named him that country’s new finance minister. The announcement of this name for this office seems to have taken some observers by surprise. The Telegraph’s correspondent, Peter Spence, marvels that this ...

Private Equity

Competing Bankruptcy Filings for Caesar’s: Third-Party Releases
A legal donnybrook has begun for control of Caesar's assets. An important side issue involves bankruptcy court treatment of non-debtors seeking release from alleged liabilities of their own, and a split amongst the appeals court circuits over such treatment.

On Monday, January 12th, second lien noteholders, notably including David Tepper’s hedge fund Appaloosa, filed an involuntary bankruptcy petition in Delaware bankruptcy court targeting Caesars Entertainment Operating Company, a subsidiary of Caesars Entertainment. On Tuesday, Appaloosa asked Delaware’s bankruptcy court to prevent that subsidiary from filing for bankruptcy anywhere else while the involuntary proceeding was pending. On Thursday, January 15th, two things happened: a larger group of Caesar’s entities, inclusive of the operating company, jointly filed a ...


Low Energy Prices: Crude and Refined Consequences
Eurekahedge tells us that hedge funds were in the black 4.57% in 2014. That's hardly cause for celebration, since the MSCI World Index returned 6.79% over the same year. But all eyes now turn to the still-sliding price of oil.

A recent statement by the energy minister of the UAE suggests ‘more of the same.’ Oil prices in early 2015 seem likely to continue the story they were telling in late 2015. On Tuesday, January 13, the minister, Suhail bin Mohammed al-Mazrouei said that the Organization of the Petroleum Exporting Countries isn’t going to shore up “a certain price” by cutting production. Crude oil slides on and on and is now (mid-January 2015) below $50 a barrel. ...


ECB Beats SNB in race for the Bottom
An SNB announcement caused wild market moves Jan. 15th, not only in Forex but in commodity and equity prices as well. In the wake of the commotion, one key question has to be: why the announcement? Why this sudden change in the policy of Switzerland's central bankers?

It must be something in the water, or maybe in the chocolate. The Swiss National Bank shocked markets on January 15th, suddenly lifting a cap on the value of that country’s currency vis-à-vis the euro, a cap it had defended since September 2011. Indeed, this seemed to some to be a rare case when a central bank’s interventionist policy worked. The cap, imposed originally after an alarming fall in the value of the Euro versus the CHF ...