Alpha Hedge West Conference Notes 2013

We're posting up notes from the 2013 Alpha Hedge West Conference that just took place in San Francisco.  There were numerous panels discussing various topics and summaries are available by clicking each link below:


Notes From the Alpha Hedge West Conference

- Macro Discussion: John Burbank & Kyle Bass on China, Europe, Japan, Argentina & More

- Navigating the Macro & Interest Rate Environment:  Bruce Richards (Marathon Asset)

- Best Ideas Panel:  Kurt Billick (Bocage Capital), Peter Lupoff (Grayco Alternative), Worth Gibson (Forest Hill Capital), Paul Twitchell (Whitebox)

- State of the Hedge Fund Union: Jason Huemer (Visium), Bruce Richards (Marathon), Philip Weingord (Seer Capital) 

- Condition of the Consumer & Challenges for Investors as Economy Expands: Joseph Brusuelas, Senior Economist, Bloomberg & Kristin Bentz, PMG Venture Group 

- On Hedge Fund Seeding: Rachel Minard, Jeffrey Cozad, Basil Williams, Jonathan Miles

- Opportunistic Credit Roundtable: Emanuel Friedman (EJF Capital), Andrew Springer (Marathon Asset), Ronnie Jaber (Carlyle Group), Avery Kiser (Neuberger Berman Alt)

- The Role of Volatility: Michael Schmanske (Glenshaw Capital), Christopher Cole (Artemis Capital), Zem Sternberg (Lake Hill Capital), Joe Reynoso (Reynoso Asset)

- Structured Credit: Richard d'Albert, Christopher Hentemann, Amin Majidi, Rajesh Agarwal

- Dynamic Investment Panel:  John Claisse, Joy Xu, Andrew Karsh

- Next Generation of Hedge Fund Managers: Michael Sedoy, Neal Shah, Valtura Capital, Mike Keough, John Rende

- Venture Capital Panel: Where Are They Investing And Why? Pat Grady, Chris Schultz, Ron Suber, David Girouard

John Burbank & Kyle Bass Macro Discussion at Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel featuring a macro discussion between John Burbank of Passport Capital and Kyle Bass of Hayman Capital.  They touched on China, Argentina, Japan, and many other topics.  Below is their dialogue and JB = Burbank's comments and KB = Bass' comments.


John Burbank & Kyle Bass' Macro Discussion: Alpha Hedge West

KB> First part of taper will be easy.  Fiscal drag of moving Fed Funds from 0% to 3% will be large. 

JB> Does not think Fed policy changes unemployment.  Labor in China first, now technology have a great impact on unemployment.  Firms don't want to hire.  Structural unemployment issues will persist most of our lifetimes.  JB is shifting into equities.  Likes equities with good governance and high quality business.  Not bullish on GDP or global economy or US economy.  Credit got crowded last year.  Equity just getting started.  Companies have gotten very lean and efficient.  Emerging Markets (EM) have been struggling.  That was due.  Development Markets (DM) will outperform EM.  Not that US economy is great, just that US is quality.  As EM people grow, they will want more DM goods, not EM goods.

China

KB> Not investing in China now.  "Univestible" due to banks and shadow banking systems.  Staying away from India too.  Branded luxury and quality did well post crisis.  China has not adjusted from command and control.  Appears Chinal will work, but he think it won't (success is illusory at this point).  Sees restructuring.

JB> His portfolio has turned on its head since 2000 with the exception of internet companies.  Everything in China is rising.  EM and most commodities went up on the industrialization of China.  Won't happen again.  Short the mining companies.  Those businesses have bad economics except when times are really good. Chinese internet companies are winning over US internet companies in China because the Chinese government won't let the Chinese companies lose to US ones.  Internet companies in China at new highs are the ones you probably want to own.  Short EM and Mining.

Why does Bass like Argentina?

KB> People don't understand what is happening there.  Lots of things there are fixable.  Leadership in control has "issues" :).  Energy has been an issue, but recently there have been major energy findings that will change that.  2 years from now, he thinks there will be a new President in October 2015 and pro business people will be running things to take advantage of vast prairies of nature resources.  Argentina's problems can be fixed in 2 years.  Now is the time to start investing.  Sees 50% upside in the sovereign debt.

JB> Would not play Argentina's equities.  Tough betting on turnarounds.  Does not believe in value.  Believes in mispriced growth.  Kyle might be right about Argentina.

KB> "When I'm Right."

Burbank: Long Saudi / Short Russia 

JB> Likes Saudi...though their neighbors are a problem.  He is one of the best informed US investors re: Saudi.  95% of investors in Saudi are local traders. 

Moderator> Is there an opportunity for a paired trade with Saudi?

JB> Short Russia.  Saudi has been crushed.  Instead of easing, they tightened.  They've lagged.  No one wants to invest there.  Aramco would be the largest company in the world by a factor of 10 if it were a public company.  Saudi is like a 1990s EM story in a time capsule.  Dollar rally would crush EM.  Mining gets crushed without rise in commodities.  In '03 and '04 most wouldn't invest in EM.  Now they can't be talked out of investing in EM.  San Francisco is the opposite of EM.  EM has high volumes of low skilled labor.  SF has relatively high concentrations of high skilled labor.  Most people don't understand tech.  Transformational tech requires less capital than ever.  This means lower margins for others.  EM not capable of embracing technology.  SF is impervious to risks like weak GDP, interest rates, etc.  Tech has been camoflauged by rising prices everywhere.  New tech is where you want to be.  Those are "safe" strangely enough.  Investors don't even like to travel to SF.  That will change in the next 3-5 years.

Moderator> Are early stage private companies better investments for tech?

JB>Want to own "Venture Debt".  Low risk.  Even low tech does well.  Innovation premium starting to be revealed.  Want to just be in top 5 or 6 venture funds.  Look for services.  Google is 300B market cap.  Facebook & Twitter.  Not that many tech hedge funds.

Japan

KB> US Recapped.  EU is 3.5x more leveraged than the US.  At some point, debt will matter.  Has always eventually mattered the last 2000 years.  When debts are 24 times revenues you are finished, it is just a matter of when.  Hopes he is wrong.  More he looks, the more he thinks it will happen.  Sees it happening the next few years.  Avoid Europe.  US is 4.5x debts to revs.  Japan is 24.

JB> Dollar is better than Yen or Euro.  Better chance for dollar to rally than market is pricing in.  Chart of S&P to EM tracks closely to dollar chart.  Similar to US in late 90s.  Not because of strength, but due to quanlity and governance in US compared to elsewhere.  Likes Quality in US then betting on low quality of EM.  Believes in multi-year trends until something reaches consensus.  Then you have reversion to mean.

How should mutual funds feel about Macro risks?

KB> If I were long only, I would not be able to sleep at night.  A Japan crisi could not be contained.  It would have huge impacts.

JB> Joke: mutual fund managers happy as long as they beat the benchmark.  This is an era where you want to own the best.  In Silicon Valley it is like winner take all.  Not enough premium on best of breed.

KB> During the Tequilla crisis, Mexican equities down 90%, even with 10x appreciation, you just break even.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Bruce Richards on Navigating the Macro & Interest Rates: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is a talk by Bruce Richards of Marathon Asset Management.  He focused on navigating the macro & interest rate environment.


Bruce Richards' Talk at Alpha Hedge West 

 If Yellen is nominated, she'll be a shoe-in.  Very Dove-ish.  QE is worth 150 BPS.  10 year was 4% 5 years ago.  Most of rate exposure likely is over.  Can get to 3.25% or 3.5%.  Thinks Fed won't sell Bond Portfolio.  They'll hold and let it roll off.  Maybe reverse repo.  

Where do you invest?  Invest in equity, deeply discounted assets.  Events and special situations.  Short duration, high yield.  

Avoid long dated fixed income, treasuries, agencies, high grade debt, leveraged fixed income, interest rate sensitive sectors.  If floating rate, still need credit story.  

Macro risk factors:  Interest rate risk, fiscal/ debt ceiling, Syria and Middle East, sluggish growth in emerging markets, US, Euro, China, Japan, Flow of Funds.  

Best Opportunities: Europe, Distressed Corporate, Special Situations / Distressed Bank Asset Sales (NPLs), US Special Situation and Distressed Credit Investments, Structured Credit, Liquid Seasoned Burned Out & Illiquid High Yield, Europe Debt Oppys today like RTC oppy back in 80's.  Will be available next few years.  

Bought a $1.2B pack from a UK bank made of German debt.  84 cents on dollar.  TXU may be biggest non-financial bankruptcy ever.  $48B.  Expect announcement later this year.  Emerging markets are overreacting.  They are at an interim low.  Good hedge funds managers make LIBOR plus 500 BPS.


Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Best Ideas Panel From Alpha Hedge West Conference: Billick, Gibson & Twitchell

Next up in our series of notes from the Alpha Hedge West Conference is the best ideas panel featuring Kurt Billick (Bocage Capital, Peter Lupoff (Grayco Alternative Investments, Worth Gibson (Forest Hill Capital), and Paul Twitchell (Whitebox Advisors).


Best Ideas Panel at the Alpha Hedge West Conference

Kurt Billick: Best idea is companies owning US Refining assets.  Advantage over peers.  US growing production significantly.  By Mid 2014 more gas at gulf than refining capacity.  Input cost will go down.  Also, natgas used to refine oil provides another cost advantage.  Finally, refiners can use MLP's to reduce cost.  Likes Marathon, Holly, Tesoro and Northern Tier.

Peter Lupoff:  Seismic Shift Towards A New Social Contract, Quantitative Strategy.  Div paying stocks outperform in down market.  Divs add fixed income component to equities.  Social contract is trend now.  Social contract looks at ROIC and FCF.  Shareholder friendly behaviors and events, dividends and increases, special dividends, buybacks, spinoffs, etc.  Social contract not altruistic.  Done for survival.  Div rate not good enough.  Key is sustainability of div vs debt financed divs.  Governance is key.

Worth Gibson: Long/Short Equity.  Over $700M in AUM.  Based in Little Rock, Arkansas.  Focused on community and regional banks.  Best idea is CenterState Banks (CSFL).  Like good geographic economies, seasoned management, strong capital, strong shareholder value enhancement strategy, expanding market share profits and tangible BV, heavily discounted valuation.  Center State Banks:  Assets up 125% vs 4.1% for index from 12/31/08 to present.  Will grow earnings.  Sees stock up 90% over next 2 years with 20% growth in BV each year and BV multiple growing to 2 to 1.

Paul Twitchell:  View biggest risk to investors is rapid increase in rates.  Originally was just short on rates.  Now with some rise in rates, they've found complicated sub prime investment with positive carry of 7% to 9% with no rate change.  With shock from higher rates investment still does well.  Investment basically has coupon payment but no return of principle.

How concerned is everyone about the interest rate environment?

WG> When they've run sensitivity analysis to rates, their banks perform favorably.

PL> Companies that have opposite of social contract are good potential shorts.

KB> Lots of companies will get hurt by taking advantage of low rates... i.e. unsustained large dividends.

 

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

State of the Hedge Fund Union Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the State of the Hedge Fund Union with a talk featuring Jason Huemer (Visium), Bruce Richards (Marathon Asset), and Philip Weingord (Seer Capital).

Comments below: JH = Jason Huemer, BR = Bruce Richards, PW = Philip Weingord


State of the Hedge Fund Union 

Investors as shock absorbers.  Most investors want hurdle rate.  Funds haven't had "rogue" trader issues.  Big funds had inflows, small individual funds had outflows.  Cult of personality.

BR> Only need to get past cult of personality if you want to grow after founder passes.  Institutional key to growing.  Marathon manages over $11B in AUM.  Team of partners together over 18 years.  All that history makes for a strong team with collective wisdom.  

JH> Have tried to move from one star.  Investors looking for and want something beyond "one" guy.  Worked for Jamie Dimon and Steve Cohen.  They have 50 risk takers.  They have over $5B in AUM.  No one controls P&L.  5 years ago known only as health care...had to move model to multi-strategy.  It took 5 years of beating market by 1000 bps to convince people.

CH> Agrees with Joseph Brusuelas that we are in a structural break.  Means old trends + stats not reliable.

PW> Fed tightening will equal outflows from bond funds...probably for 2 years.  History says credit spreads normally come in during fed tightening.  Oppys are floating rate...swap fixed rate for floating rate.  Prefers stronger credit vs. High Yield Bonds.

JH> Has created alt mutual fund.  Brick Lake was early proponent of Alt Mutual Funds.  Log jam reason for delay.  So many funds did not want to move down value map... other folks missing tools to move up.  Sub-advisor in a couple mutual funds.  Big funds saw move from fees to like 50 BPS from 110 BPS.  Sees folks moving to multiple manager products and single manager products.  In time, 25% of fees from mutual funds will be Alt Mutual Funds.

BR> How do liquidity needs of Alt Funds impact types of strategies?  For example, can't offer liquidity in/out for say distressed debt funds.  Excited about JOBS Act.

PW> Closed end funds can address some issues of liquidity caused by open end Alt Mutual Funds.

CH> Regulation?

PW> Hedge funds least to blame for financial crisis.  If regulation increases confidence, then it is ok.  Increases some cost and takes time.  Form PF.  Lots of it is silly questions, not know what is meant by some questions.  Not al funds should have same questions.  Overall, ok.

BR> Been registered with SEC over a decade now.  Registered with numerous regulatory bodies.  Would prefer to have one strong regulator.  Look at JPM and recent announcement of hiring like 5,000 employees.  If there were consolidated regulation, it could be better and more efficient.

JH> Regulators have been unfair to hedge funds with high profile and heavy handed tactics.

PW> Market not overreacting to speculation of Bernanke replacement.

BR> If Yellen gets job, she'll be more Bernanke than Bernanke.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Condition of the Consumer & Investor Challenges: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is a panel called Condition of the Consumer & Challenges for the Investor as the Economy Expands.  It featured Joseph Brusuelas, Senior Economist at Bloomberg and Kristin Bentz, Executive Director at PMG Venture Group.

Condition of the Consumer & Investor Challenges 

"It is worse than you think"

Economic outlook is historically weak.  Economy is sluggish.  No escape velocity. Output gap of 6%.  For years pattern of unemployment rate similar to employment divided population.  Correlation broke down with recession.  

Low wage bias.  Student loan disbursement up a lot.  Q1 2003 roughly $250B, now almost $1T.  Student debt being used for study of subjects that don't pay much.  

Middle class disappearing.  People moving down to dollar stores from JCP, Sears, Walmart, etc.  Loss is real wages driving trend.  Trading down.  

Economy appears to be getting better, but really, the 1% is driving growth.  Recovery not broad based.  Wealth effect of Fed is benefiting top, but not trickling down.  

Spending has recently moved up in an unsustainable way.  "Layaway is back."  If deleveraging is over, the economy is going to come back.  Actually, deleveraging is coming from housing defaults.  Drivers of capital spending are autos and student debt.  

Lots of underbanked.  Amex & Walmart team up for underbanked ("Bluebird" product).  25% not banked.  Pawn shops thriving.  

Worldwide, US doing ok compared to Europe and Asia.  Asia is struggling.  Weak to poor outlook 12 to 18 months out.  

Yellen likely to replace Bernanke as the first female Fed Chief.  $140B tax hike at start of year.  Budget gap is closing now, but set to spread again in 2018.


Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Hedge Fund Seeding Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel on hedge fund seeding and it featured Rachel Minard (Minard Capital), Jeffrey Cozad (Stonerise Capital), Basil Williams (Mariner Investment Group), and Jonathan Miles (Wilshire Associates).


Hedge Fund Seeding Panel: Alpha Hedge West Conference

RM> Need for infrastructure.  Allows managers to get started.

BW> Incubation model.  Lots of regulatory requirements.  Has changed paradigm.  Take away business risks so manager can focus on investment risks.  Last 12 months 340 teams have applied, 140 made second round, 50 made 3rd round 10 made 4th round and 3 were funded.  After 1 to 18 month period, they will be funded at $100M and Co-Branded.

JC> Seeding experience:  Started with $50M in capital.  $15M from partners and $35M from others.  Different types of seed opportunities.  Some own GP, some just want rev share.  Some come with money others come with marketing.  Types of demands seeds have include Governance.  Buyout.  Keyman, Position Transparency.  Decided to bring in $100M partner.  No single right answer.  Partner remains great partner.

JM> Do you want to invest in a seeded firm or seed a firm?  A $4M dollar manager would need both an investment plan and a business plan.  Investment with seeded firm with $150M is good because of vetting and because seeder is stuck where investor can leave.

BW> Looking for firm with strong investing process.  Strategies need Billion dollar potential.  How marketable are the managers?  Exudes confidence and poise and communicates clearly.

JM> Biggest change in industry is "Institutionalization".

JC> Days of raising $50M to $100M and then going from there is gone.  Seed is no panacea.

RM>Proof is needed now.  Track record not enough.  Now have to show how you got that and have to show it is replicable.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Opportunistic Credit Roundtable: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the Opportunistic Credit Roundtable featuring Emanuel Friedman of EJF Capital, Andrew Springer of Marathon Asset, Ronnie Jaber of Carlyle Group, and Avery Kiser of Neuberger Berman Alternatives.


Opportunistic Credit Roundtable

EF> Banking going through greatest changes since the 1930's.  Financials are being turned into utilities by turning them 100% capital requirements.  

AS> Regulation is creating dislocations in markets.  GSEs responsible for 90% of mortgage originations.

RJ> Direct lending is an area of opportunity.

EF> Change with Fannie and Freddie will be greatest change ever in mortgage market.

Moderator Mark Okada (Highland Capital) > How are people addressing rising rates?

AS> Hard to predict long end of curve.  Focusing on trends less impacted by long end of curve like distressed debt.  Likes credit.  Stay away from duration.

EF> Sees all as regulatory trade. Wants bank or insurance companies to buy it from them.

RJ> Technicals bad on high yield.  Likes floating and credit.  Munis are largely retail driven.  Lots of volatility and lack of strong bid.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

The Role of Volatility Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the Role of Volatility with a panel featuring Michael Schmanske of Glenshaw Capital, Christopher Cole of Artemis Capital, Zem Sternberg of Lake Hill Capital, and Joe Reynoso of Reynoso Asset Management.


The Role of Volatility

JC> Volatility is the new asset class.

JR> Used to be that the dumbest guy bought options, now that's not the case.  Options now efficient for hedging.  

ZS> Think of not as an asset class, but as a specialization.

JC> Government is the elephant in the room.

CF> Volatility has normalized.  QE has impacted pricing of tail risk.  Some think Fed can suppress volatility, thinks that is a myth.

JR> Seems like volatility is moving similar among asset classes.  Fed won't let market crash.

CC> Financial repression.

ZS> Brokers & Liquidity providers make money in options, those are the proven models.  Don't ignore the info the options market give, even if you don't trade it.

CC> Key is valuing the expectation of volatility.  Game theory is key.  Life is decay.  The more people short VOL, the more risk for a spike.

ZS> Think of options as insurance.  Move from Newtonian world to quantum mechanics.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Structured Credit Panel at Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel on structured credit featuring Richard d'Albert (Seer Capital, Christopher Hentemann (400 Capital), Amin Majidi (Premium Point Investments), and Rajesh Agarwal (Napier Park Global Capital).


Structured Credit Panel: Alpha Hedge West Conference

RD> Structured Credit now a sector in its own right for fixed income.  Usually accessed through private equity or co-mingled.

CH> Multi Sector structured finance.  RMBS, CMBS, CLOs, CDOs both US and Non-US.  Hedge fund and PE Style.  Looks for optionality and asymmetric risk.  More top down thematic.

AM> Residential only.  Over $2B in AUM.  Hedge and PE Style.  Fundamental analysis.  Credit risk and prepayment.  Mix of distress and new issue.  Beneficiaries of deleveraging on legacy side.  Before they had tactical investors looking for beaten stocks, now it is more strategic long term institutional investors.

RA> $6B in AUM.  Look at mortgage, Auto and credit card loan level data.  Have had a good run in mortgage.  Crash lead to short opportunity.  '09 and '10 long opportunity, '10, '11, and '12 refi opportunity.  IO's interest only mortgages.  Thinks IOs hedged for duration can be double digit.

DS> Impact of rise in rates?

AM> June was kick off of rate rise.  Rising rates has created opportunity in credit bonds.  Rising rates good for credit bonds at top of structure.  Must do homework.

CH> Markets are cyclical.  Going from low rates to high rates.  Rates will rise.  Will create volatility.  Need volatility sensitive structure.  Want Vega.  Be short duration.  Here you don't have to just shorten duration, can actually go short duration.  Overall tone is positive.  GDP is up.  Housing up.  Credit spreads likely to contract.  Assets that benefit from steeper yield curve.

RD> Banks no longer buyers in space.  Less liquidity, but more opportunity.

AM> New environment very good for improving credit quality in underwriting.  Only like hedge investors can buy.  Rating agencies also very conservative now.  Regulation hurting bank balance sheets.  Opportunity to buy mortgages is sustained.

RA> Not enough capital available for subordinated structure.  Newly issued debt easier to understand.

What keeps you up at night?

AM> Home prices.  Buy protection with out of the money puts.

RA> Affordability stands around 150.  Number was 200.  Further backup in rates will hurt prices.  Lots of cash buyers have been in, giving run up in home prices.  They may not be around going forward.

DS> Private Label MBS

CH> Loans more than $417K for Fannie and Freddie.  Market mostly has been closed.  Over 90% of loans are Fannie and Freddie.  Low home prices have also reduced need for jumbos.

AM> Freddie now releasing loan level data on loan performance.  Great for doing analysis.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.