GAIM USA, Boca Raton: A Summary
GAIM USA: A Summary
Despite being a one hour drive north of Miami, the ambience of Boca Raton could not be further apart from that of Florida’s biggest city. “Bars on South Beach, Miami open at midnight. Bars in Boca Raton shut at 10pm,” mused one delegate. Predictably, the tranquillity of Boca makes it popular among golfers and wealthy retirees with one GAIM USA attendee comparing it to Seahaven, the fictional town featured in The Truman Show, the 1998 Jim Carrey satire. GAIM USA’s sleepy venue should not distract though from some of the key points discussed over the three day conference. Here is a summary of some of them.
Macro issues (Europe and US)
The general mood on the macro environment has improved somewhat since the second half of 2012 when a eurozone break-up and the perennial inability of US lawmakers to agree on the fiscal cliff seemed all but inevitable. However, the situation is far from rosy and delegates warned against complacency. One speaker said the GDP impact of the US failing to agree on the fiscal cliff would not be that significant, adding any shutdown of government by the Republicans was likely to be a symbolic gesture and not last more than one or two days. However, the US is facing longer-term debt issues and all sides agreed politicians needed to resolve this. Divisions over Europe remained strong. While some speakers were reassured by Mario Monti’s (“whatever it takes”) determination to protect the single bloc, others fretted it was merely band aid masking longer-term problems. “Europe is a disaster and it has negative GDP growth. It is an illusion that politicians believe future growth will be able to handle their debt crisis. When will this growth happen? The EU needs to tackle structural reform,” said one panellist. These very same issues will more than likely rear their ugly heads at GAIM USA 2014.
Emerging markets overrated?
The viability of emerging markets, particularly China, featured highly. Patrick Woolf, founder of Grandmaster Capital, a San Francisco-based hedge fund, predicted China would suffer a hard landing citing its Ponzi economy was wholly dependent on government intervention and lavish infrastructure spending. Woolf compared the misplaced excitement about China today to that of investors’ love affair with the US housing market in the early 2000s. “Eight years ago, people warned that the US housing market was in a bubble and overleveraged – and that is how one should look at China,” he said. Frontier markets or “emerging markets 2.0”, according to Marko Dimitrijevic, founder and CIO at Everest Capital, a $2 billion hedge fund, are an attractive investment opportunity going forward. He highlighted these frontier economies comprised 15% of the world’s GDP compared with China’s 13%, adding they rarely displayed correlation. “These small, emerging markets are where Brazil, India, China and Indonesia were 10 years ago,” he said.
Most hedge funds seem somewhat unperturbed about the marketing and advertising opportunities presented by the JOBS Act. Several panellists, while quietly optimistic about the liberalisation, said they were unlikely to change their marketing efforts, although one acknowledged he might consider cold calling potential investors. Most people expect the legislation will be initiated at some point in 2013 despite widespread opposition and foot-dragging among SEC officials. A random poll of the audience by a regulatory panel revealed a shocker. Asked whether they had heard of Form PF, barely one third (of the mainly investor audience) put up their hands. Whether there were an unusually high number of shy individuals in the room is open to debate but if the figure is representative, it displays a shocking indictment of the lack of education and awareness among some investors. Another major concern is whether the SEC will actually manage to digest all of this Form PF data. “I did an audit of what the SEC does with its filings. They collect the information and say they do not have the resources to do anything with it and it ends up lying in the drawers,” said one former SEC commissioner on a panel. Panellists said the costs of new regulations, of which Form PF is just a minor component, will drive would-be hedge fund managers away from the business.
Industry associations lack bite
Hedge fund industry associations also came in for tough criticism with one panellist from the Cato Institute disparaging their lack of aggression when dealing with regulators. Another pointed out industry associations’ were wholly dependent on dues, often paid not only by hedge funds but banks and insurers – many of whom are reluctant to pick unnecessary fights with regulators and politicians. This often meant comment letters were heavily censored or toned down and not wholly reflective of industry concerns. Some audience members jumped to the defence of industry associations, pointing out their job was to build constructive relationships with regulators and politicians, something which would be unachievable if they acted belligerently the whole time.
Despite consistently outperforming their larger peers, smaller managers continue to struggle to raise assets, a point reinforced by Jane Amanda Halsey, founder and president of Roundtable Forum, an independent cap intro service. “Small managers are important as they are the future of the industry. If investors do not support smaller managers, then the industry will be in trouble going forward,” she said. Family offices and HNWIs, the original seeders of the hedge fund industry, are not allocating at levels like anywhere they used to while pension funds, insurance companies and sovereign wealth funds are loathe to take the risk and rarely consider sub $1 billion managers. This was evidenced in a J.P. Morgan survey which revealed 67% of pension funds only look at funds running more than $250 million. The rising barrier to entry coupled with the growing operational and regulatory costs means small hedge funds and even more worryingly future star managers might become a thing of the past.
A crude, unscientific survey of delegates revealed Marcus Luttrell, Tuesday’s keynote speaker and former Navy Seal, generated the most plaudits among attendees. Luttrell, who served in Afghanistan and Iraq, and is also author of New York Times bestseller Lone Survivor, recalled in vivid detail an ill-fated expedition that cost the lives of all of his fellow squad in the notoriously inhospitable Hindu Kush mountains of eastern Afghanistan. The team came under heavy fire from Taliban insurgents and Luttrell, against all odds, managed to get out alive although his team tragically did not. His team leader was posthumously awarded the Medal of Honour and the rest of the squad including Luttrell received the Navy Cross. Delegates said the story was unbelievable as was Luttrell’s endurance and determination to survive against all odds given the horrendous injuries he sustained during the battle. One hedge fund manager acknowledged the session gave him a reality check.
Determined not to have a repeat of 2012 when Occupy Wall Street invaded the conference, GAIM 2013 organisers made sure security was tight, while there were unsubstantiated reports of undercover police patrolling the vicinity. “It was like going to a political party conference with all that security,” said one attendee. However, delegates broadly welcomed the enhanced precautions. “In 2012, I had glitter thrown at me by Occupy Wall Street protestors,” commented one.
While delegate numbers were down from 2012, the turn-out was respectable and the conference pulled in between 400 and 450 attendees. GAIM Ops Cayman will take place between April 21 and 24 at the Ritz Carlton Hotel in Grand Cayman.