MUTUAL FUNDS
• Actively managed exchange-traded funds have attracted big-name mutual fund players in recent months, with Legg Mason and T. Rowe Price Group the latest to add their names to the roster. But active ETFs have failed thus far to garner substantial investor assets or trading volume — and many registered investment advisers remain wary of using them.
“As a general statement, I don’t think it’s a bad thing to have active management in anything,” says James Holtzman, an adviser at Pittsburgh-based Legend Financial Advisors. Still, he doesn’t use actively managed ETFs in client portfolios because he hasn’t been able to find “a good fit” for his clients among the limited number of actively trading ETFs. “Especially for an advisory firm, if you’re moving a lot of money, you have to be very careful how much volume is trading; if you’re buying for a lot of clients, you could move the market,” Holtzman says.
The first actively managed ETFs were launched about two years ago by Invesco PowerShares Capital Management, but most have been trading for less than six months, according to Morningstar. There is about $280 million in assets in the market and funds have an average expense ratio of 70 basis points — compared with 55 for ETFs in general.
— Fund Action
DERIVATIVES
• Members of the European Parliament have admitted that a push by officials to ban naked sovereign credit default swap trading in the region may have been premature, given there is little U.S. support for such a ban.
Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, testified in Brussels recently that he would prefer to see position limits and repositories tracking positions, rather than an outright ban.
Wolf Klinz, member of the European Parliament for Germany, whose Chancellor Angela Merkel has called for a crackdown on naked sovereign CDS, told Derivatives Week that without U.S. action, European regulation would be unwise. “You have to have very similar or identical regulation between both [regions] and if you don’t do that you automatically end up with regulatory arbitrage,” he says.
Last week Werner Langen, another MEP for Germany and author of a Parliamentary derivatives legislative report, came out in favor of banning these CDS, as did Nikolaos Chountis, a member of the European Parliament for Greece. They argue, along with a number of European politicians including Greek Prime Minister George Papandreou, that speculators worsened Greece’s debt crisis.
— Derivatives Week
WALL STREET
• The London Stock Exchange plans to amend its rules in order to more effectively handle defaults. The LSE stated in a notice to members that it would begin to include unsettled transactions in its process for determining the net amount a defaulter will owe to each counterparty, or vice versa. Defaulting firms or their counterparties will be required to notify the LSE within a specified amount of time. “If such details are provided, the exchange will determine whether the relevant unsettled claim qualifies for inclusion in its default procedures,” the notice stated. The exchange had not previously codified its treatment of claims for unsettled transactions in past defaults.
The LSE will also begin to use wholesale spot rates of exchange to determine amounts owed in foreign currencies. It has traditionally relied on the end-of-day exchange rates calculated by the Bank of England, but the wholesale rate would be more appropriate to the time of default, the LSE stated.
— Wall Street Letter
MONEY MANAGEMENT
• The $129 billion New York State Common Retirement Fund has launched a $200 million emerging manager program for hedge funds and plans to develop the same kind of program for real estate in the near future. The initiatives follow the fund’s recently announced intentions to allocate up to $450 million more under its emerging manager private equity program.
Thomas DiNapoli, state comptroller and sole fiduciary of the fund, wrote in a publicly released letter: “We’re looking to replicate the success we’ve had in private equity by creating an emerging manager program in our hedge fund portfolio, with plans to do the same in real estate.”
Robert Whalen, a spokesperson for the fund, says that it is too early to discuss types of strategies the hedge fund emerging manager program would pursue. The pension fund has a target allocation of $1.5 billion each to private equity and public equity emerging managers. The pension fund initiated its emerging manager private equity program in 2005 with an initial $500 million allocation.
— Money Management Letter
