On Thursday, January 21, 2010, US President Barack Obama vowed American taxpayers would never again foot the bill for the risky activities of commercial banks. At a White House press conference, flanked by a council of high-powered economic advisers, Obama unveiled the Volcker Rule, named after the former chairman of the US Federal Reserve, Paul Volcker, who was towering over the President's right shoulder."

Banks will no longer be able to own, invest, or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers," Obama said.

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At UBS's Australian office, one of local head Matthew Grounds's most trusted lieutenants, Gerard Satur, who ran the Sydney dealing desk at the ripe age of 29, had assembled a team of macro traders in 2011. The unit, housed within UBS, aimed to profit from trading opportunities thrown up by the exit of US banks from prop trading. But after the Adoboli trading blow-up, UBS issued a global directive banning prop trading. Satur's fund was forced out, leading to the formation of MST Capital.

While the banks are no longer taking proprietary risks onto their own balance sheets, they can still back their former stars with seed capital. None have done so yet. With the new Basel III capital requirements, the economics hardly stack up. There are, however, other ways to support their former traders. MST is on the UBS Australia wealth management platform, so UBS financial advisers can direct their clients to invest in the fund.

MST is off to a good start. Since setting out on their own in July, the fund has returned 3.17 per cent net of fees in a soft market, and it has already secured a $100 million investment from a superannuation fund. The challenge for MST - and the other hedge funds run by former prop traders - is reproducing the goods outside of the banking system. Working inside a bank is vastly different to managing capital for third parties, which involves fund raising and client pressures, and a less fluid flow of information.

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Bill Gross who runs the world's biggest bond fund at Pacific Investment Management Co., said structural headwinds may reduce real economic growth below 2 percent in the U.S. and other developed nations.

"The biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world's growth binge has been decades in the making," Gross wrote in his monthly investment outlook posted on the Newport Beach, California-based company's website today. "We may need at least a decade for the healing."

With globalization, technological and demographic changes restricting growth, investors should seek returns from commodities such as oil and gas, U.S. inflation-protected bonds, high-quality municipal debt and non-dollar emerging market stocks, Gross said, reiterating earlier recommendations.

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An Ernst and Young survey of 100 hedge fund managers has revealed industry consolidation and increasing costs related to greater regulatory oversight are the major challenges facing the industry in the next one to two years. In the year to date over 70 funds in Asia have closed despite an annualised return of 9% since 2008 in the Asian hedge fund sector. A number of funds have remained below their high water mark since 2008 and have therefore received no performance fees despite generating positive returns.

Increased risk aversion driven by concerns over the US 'Fiscal Cliff' and Eurozone debt concerns have seen asset flows slow with funds under management estimated to have fallen 30% on 2007 levels.   

Read the entire article here. www.channelnewsasia.com

Hedge funds increased bullish bets on commodities by the most since August as evidence that China is accelerating outweighed concern that U.S. lawmakers have yet to resolve an impasse over automatic spending cuts and tax rises.

Speculators and money managers increased net-long positions across 18 U.S. futures and options by 9.8 percent to 929,588 contracts in the week ended Nov. 27, the biggest gain since Aug. 21, U.S. Commodity Futures Trading Commission data show. Gold holdings reached a six-week high, and wagers on a wheat rally jumped the most since June. Cattle bets more than doubled. The Standard & Poor's GSCI Spot Index of 24 raw materials rose 1.9 percent in November, the first monthly gain since August.

The world economy is in its best shape in 18 months because of the acceleration in China, the biggest consumer of everything from cotton to copper to coal, according to the Bloomberg Global Poll of 862 investors last week. The U.S. probably will avoid the so-called fiscal cliff that the Congressional Budget Office has warned risks sending the country back into recession, even as Europe remains mired in a debt crisis, the poll showed. 

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The volume of Asian institutional assets accessible to external managers is expected to rise by $700 billion by 2016 according to Boston-based Cerulli Associates. However managers face greater hurdles securing mandates and a profitability squeeze from the Asian institutional client segment. Zero management fees are increasingly appearing in the markets of China, South Korea and Thailand rather than the typical 2% management fee and 20% performance fee structure due to increasing competition over mandates. AFM's view has always been that if performance is good enough fees should not be a deterrent to investment, rather if performance has been insufficient investors should redeem and reinvest with better performing managers.

The growth in Asian institutional assets is set to be mirrored in Australia with Superannuation funds to reach $3.5 trillion by 2025 and possibly $7-8 trillion by 2035 according to The Hon. Nick Sherry (former Assistant Treasurer now a consultant at Ernst & Young). The growth in Superannuation assets is likely to result in increasing offshore investment as local investment opportunities are insufficient to handle the increasing Superannuation pool.

Read the entire article here. by Rita Raagas De Ramos, Financial Times.

We have noticed a focus in recent weeks on the expansion of the SMSF sector, with comments regarding the risks and potential lack of controls in the sector, and concerns from the major super funds that with over one third of all superannuation now in the hands of SMSF Trustees the industry was seeing fee opportunities slip out the door.

With that of course have been a range of strategies from various parties designed either to stem the flow, or get a part of the action.

Industry, corporate and retail super funds should all have concerns, but the Hon Nick Sherry, former Assistant Treasurer, indicated his view was that the expansion of the SMSF sector would start to slow as a proportion of the total $1.54 trillion superannuation pool, even though this total is forecast to grow to $3.5 trillion by 2025, and potentially $7 or $8 trillion by 2035.

It is worth bearing in mind that although the SMSF sector controls 35% of total funds, it is estimated that only 3% of the population are the beneficiaries. Most of the funds with larger balances were probably set up under previous governments, and this supports Sherry's view that while the gross amount will grow, the proportion may not.

Sherry also predicted, as have a number of others, that there will be a significant decline in the number of APRA regulated funds as My Super comes into effect and the focus on the low cost default option drives a focus on size and fees. Meanwhile the SMSF sector will continue to focus on performance and value.

Former PM Paul Keating also weighed into the Super debate this week, calling for the Super Guarantee Levy to be increased from the current 9% to 15%, with 3% of that to be allocated directly to the aging population, while taking a swipe at the SMSF sector and the overly high allocation to equities.

Expect to hear more of probably the same arguments going forward. Australia's much vaunted system for funding the retirement of an ageing population may be the envy of much of the world, but perfect it certainly isn't. Meanwhile everyone in the financial services industry here and abroad are after their slice of it, including Treasurer Swan who'd love to tap it to fund the looming budget deficit.

Meanwhile AFM's Equity Index performance for October stands at 1.53% and 8.72% year to date. The market may have rallied but there are plenty of managers who still remain cautious with some finding returns hard to come by. Over the past 12 months 60% may have outperformed the ASX200, but a further 20% have failed to produce a positive return.

Have a good week-end.

Regards,

Chris.

Of the many Dec. 31 deadlines facing Washington, at least one is getting pushed out, according to regulatory officials: The final draft of the Volcker Rule. 

Industry commentators have tried to outline an approach by which the boutique funds industry can avoid being sidelined by the rise in self-managed super funds (SMSFs) and the independent investor market.

Pengana Capital portfolio manager Steve Black said affected asset managers must come up with innovative structures that allow for the flexibility and tax advantages that can be found in the managed account structures popular among independent investors.

While that would increase administrative costs, fund managers should investigate using technology to lower those costs, he said.

Technology was already improving systems to help fund managers come up with structures that weren't too expensive or onerous for investors, Black said.

At the same time, Bennelong chief executive Jarrod Brown urged fund managers to focus more on increasing their market presence and branding if they hoped to capture the attention of the SMSF and independent investor market. 

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