Markets gloom looms large over Milken

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Investment titans dance until music stops under California sun

The mood in the first few hours of last week’s Milken Conference was almost giddy. Covid was a distant memory as financiers, chief executives and chief investment officers crowded every hallway, elevator and swimming pool cabana at a cluster of Beverly Hills luxury hotels. For many in asset management, it was the first time they had been able to catch up in person for more than two years. No wonder the cheap tickets — $25,000 a pop — sold out.

But rising fear that the US Federal Reserve will mismanage inflation and dump the economy into a recession soon cast a pall, reports my colleague Brooke Masters from the conference. It was reminiscent of the unease in 2008 when attendees felt the music was about to stop.

Guggenheim Partners chief investment officer Scott Minerd called an end to the bull market in bonds and Apollo chief executive Marc Rowan warned: “There is more of a correction to come.” Gene Ludwig, founder of consulting firm Promontory Financial, went even further, saying, “most leaders in America don’t understand how bad things are for the poor and middle class . . . If we don’t make changes we are headed for civil unrest.”

As the mood turned — following a month in which the Nasdaq Composite stock index suffered its heaviest one-month sell-off since the depths of the global financial crisis — hedge funds and private equity managers trolling for investors touted their ability to outperform the market amid volatility and pick the best distressed assets. The consensus on the “megatrends in asset management” panel was that choppy markets would drive more investors, particularly among wealth management clients, into alternative investments and customisation.

“We’ve just scratched the surface on mass market alts,” said Julian Salisbury, co-head of Goldman Sachs Asset Management.

“If you look at the highest performing endowments and foundations, they own more alternatives than any one,” added Joe Dowling, who heads Blackstone’s alternative business.

But Kim Lew, who runs Columbia University’s endowment, was having none of it. She opined that managers seeking more assets were overstretching themselves beyond their areas of expertise. She said:

“There is a risk that there is so much capacity going into that space . . . that people are going to lose money and it will bring down the returns of the asset class. The average performance of alternatives is not great. It’s awfully hard to push bad players out of the market when you have locked up funds . . . We pay fees to bad managers for 10 years.”

Lew said she was particularly worried that retail investors would become “the dumb money” and get stuck with the worst returns. As if to make her point, the panel on the “private market outlook” was by invitation only.

Crypto bros on the beach feel a cold wind at their necks

The irony of entering a cryptocurrency conference through a casino was clearly lost on the organisers of Crypto Bahamas.

But if, late last month, you turned left past the slot machines, under the blue glass chandeliers, at the Baha Mar resort in Nassau, down the bright yellow promenade to the convention centre, you found a collection of crypto magnates way past caring about the jibes of critics who see their industry as akin to gambling.

At the beachside gathering, crypto’s self-confidence was on display, writes Joshua Oliver in this dispatch from the Bahamas. The message of the event? Crypto’s disruption of the financial sector can’t be stopped, so it’s time to get with the programme. “This is happening whether you like it or not,” said Anthony Scaramucci, briefly White House communications director in the early days of the Trump administration, and co-host of the conference.

The sheer star power the conference’s promoters were able to lure attests to crypto’s growing acceptance. FTX founder and co-host Sam Bankman-Fried sat on stage alongside Gisele Bündchen, the model with whom he will feature in a Vogue magazine advertising campaign, her husband, NFL quarterback Tom Brady, and former US president Bill Clinton.

The audience — ranging from a 14-year-old decentralised finance developer to representatives of Wall Street investment banks and public pension funds — heard repeated sermons to the effect that regulators need to catch up with the pace of crypto, and that countries which fail to see the light will watch digital asset innovation flee elsewhere.

But the event’s bravado easily tipped over into excess. German businessman Christian Angermayer joined Scaramucci for an interview entitled “Elevating Crypto Consciousness”, which turned out to be a discussion of how people could use hallucinogens to stop worrying and love crypto.

Many of the visitors to the Bahamas could find themselves with a hangover after last year’s binge of crypto trading and speculation. Total crypto market capitalisation dipped a further 5 per cent during the four-day gathering, down 40 per cent from its high last autumn.

And in private conversations, participants admitted that leaner times were coming. One executive predicted that the vast majority of extant crypto projects would go to the wall. Among those guests who are old enough to remember, many saw echoes of the dotcom boom. Even Scaramucci admitted that markets were heading into a “messy period”.

The gamble the true believers are taking is that enthusiasm for digital assets will survive any market slump, or a prolonged period of lacklustre trading.

Just as delegates to the conference strolled by blackjack tables and slot machines to reach the symposium, millions of people have also entered the crypto world through the casino, during the past 18 months of pandemic-induced trading frenzy. The question now is: if losses begin to mount, will the punters stick around?

Chart of the week

Purchases of exchange traded funds have fallen to the lowest level since the depths of the Covid crisis as the war in Ukraine and spiralling global inflation sapped demand, writes Steve Johnson for the FT’s ETF Hub.

Net inflows to ETFs and exchange traded products globally slipped to $27.4bn in April, according to data from BlackRock, down from $117.4bn in March and the lowest figure since March 2020. Equity funds were particularly badly hit, with inflows slowing to a trickle of just $2.8bn, compared to $76.2bn a month earlier.

The near-standstill coincided with turbulence in equity markets, with the FTSE All-World index slumping 8.1 per cent in April, taking its year-to-date losses to 13.2 per cent, amid the growing threat of stagflation. Markets have faced further volatility this month as major central banks including the US Federal Reserve and Bank of England have tightened monetary policy.

The big slowdown in ETF purchases marks a significant setback for an industry that has boomed in recent years as investors have shifted to using ETFs in their portfolios rather than more traditional types of products like mutual funds. The industry had garnered record inflows in both 2021 and 2020.

“We have seen a significant drop-off in headline equity flows,” said Karim Chedid, head of investment strategy for BlackRock’s iShares ETF arm in the Emea region.

10 unmissable stories this week

Chase Coleman’s investment firm Tiger Global is suffering one of the biggest hedge fund drawdowns in history. Its hedge fund slumped more than 40 per cent in the first four months of 2022, the latest sign of how star investors who rode the big rally in tech stocks have been wrongfooted by a sharp pullback.

Fund managers including Danske, Nordea and Jupiter have taken steps to permanently shut down funds heavily exposed to Russia, in the latest sign that investors do not expect the country to rejoin global markets for many years to come.

The market for outsourcing investment mandates has nearly doubled since 2016, and the pace looks unlikely to let up anytime soon. BlackRock and Schroders are among those to have won OCIO mandates this year.

Sanity appears to be returning to central bank policymaking. Years of overblown asset prices and mispricing of risk may be giving way to more normal conditions, writes John Plender in this opinion piece.

AQR Capital Management, the investment group led by Cliff Asness, appears to have turned things around. AQR’s Absolute Return fund — its longest-running and broadest strategy that wraps together a lot of other funds — is up around 30 per cent this year.

UK asset manager Jupiter has “lost its way” and must change its management and overhaul its strategy to preserve its independence, according to a shareholder and former board director. Fund industry dealmaker Jon Little outlined the scathing critique in an open letter to Jupiter chair Nichola Pease.

Given the battering markets have delivered so far this year to tech stocks, led by the FAANGs, it is worth stepping back and recognising what is coming apart: the whole concept of acronym investing. The unbundling of the FAANGs is much like the fall of the big emerging markets known as the Brics, a decade ago.

France has warmly welcomed Binance’s bid to put down roots in one of Europe’s top financial centres, drawing a deep divide with watchdogs in the UK who rejected the crypto giant. Crypto exchange chief Changpeng Zhao said he met president Emmanuel Macron in an effort to court French support.

Elon Musk has raised $7.14bn of funding for his $44bn buyout of Twitter, from investors including Oracle co-founder Larry Ellison, crypto exchange Binance and asset management firms Fidelity, Brookfield and Sequoia Capital.

Two decades ago, HSBC made a bold gamble to recapitalise an ailing Chinese insurance firm, Ping An. Now Ping An has become the bank’s largest shareholder and is calling for what would be the biggest shake-up in its 157-year history — a split of its Asian and western operations.

And finally

Walter Richard Sickert Little Dot Hetherington at the Bedford Music Hall 1888—89 Private Collection © Photo: James Mann

Tate Britain has the first major retrospective of Walter Sickert in more than 60 years and explores how he had an often radical, distinctive approach to setting and subject matter.

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