December 2023

With investor confidence increasing and participants pricing in 2024 Fed rate cuts, most equity markets had a very good November while commodity markets struggled. The HFRI Fund Weighted Composite Index was up 2.2%, although the Asset Weighted Composite fell 0.6% as poor macro performances from some of the larger managers weighed. Equity Hedge led at 4.1%.

It is December with winter approaching on the East Coast, which means focus turns south and often to Florida, a one time snowbird haven for Wall Street. The migration from New York continues but at a slower pace. According to the Business Development Board of Palm Beach County, the area now has some 150 finance companies supporting nearly 74,000 jobs in finance.

In a joint White Paper with the World Economic Forum released for COP28, we look at how the implementation of Article 6 is improving global carbon markets. Article 6 of the Paris Agreement provides flexibility for countries to meet their climate commitments, often collaborating in pursuit of lower cost emission reductions. The Article 6 market will be compliance grade.

As corporations navigate the journey to net zero, the final step can only be taken with the use of offsets, since gross zero is a scientific impossibility. Recent high profile issues with offset verification mechanisms have opened a debate around transparency and regulatory oversight. Better technology for verification must be a priority because the tools already exist.

Carbon markets are one of the most important tools available for mitigating greenhouse gas emissions, and as 2030 approaches both public scrutiny and opportunity are intensifying. Offsets are effectively a security issued to a climate positive project, quantifying its impact in tonnes of emissions avoided or removed. The 2022 offset market was estimated at $2 billion.

Returning from COP28 in Dubai, the announcement of the ALTÉRRA $30 billion fund set the tone, followed by more pledges at a scale previously unseen, now totalling almost $100 billion. The next phase is about action: how to convert pledged capital into carbon sequestration with a sustainable business model. Sustainable forestry remains the core building block.

With Cop28 just ending, the big financial services story has been the UAE announcing a $30 billion climate related fund. ALTÉRRA is the largest private investment fund for climate change action, with BlackRock, Brookfield and TPG each partnering with the UAE to manage it. Over its lifetime the fund aims to mobilise investments totalling $250 billion by 2030.

Brookfield has hard capped its latest infrastructure fund at $28 billion, another record fundraise showing healthy appetite for infrastructure investments. The chief executive of the firm's infrastructure business told the Financial Times that the deglobalising world has increased the number of opportunities as countries seek to reshore vital infrastructure.

Pantheon has raised $3.3 billion for Pantheon Global Secondaries Fund VII, above its $2.0 billion target and the firm's largest ever raise for a private equity secondaries programme, with significant flows from its private wealth platform. Blackstone closed its secondaries real estate fund and related vehicles at $2.6 billion.

Ten months into the new chief executive's tenure at Carlyle Group and Harvey Schwartz is wielding the axe to get the firm back on course. Carlyle failed to hit its $22 billion target for flagship Fund VIII, closing at around $14.8 billion after two years of fundraising, and has lowered its Asia fund target by 30% to $6 billion.

Bain Capital has raised $7.1 billion for its largest Asian focused buyout fund, Bain Capital Asia Fund V, the largest regional fundraise this year and 40% more than target. Asia accounts for a large part of the business, with 110 regional investment professionals operating out of 14 offices. Bain committed a further $750 million of its own capital.

The Norway Government Pension Fund Global, the world's largest sovereign wealth fund, is pushing to invest $70 billion in private equity and co-investments over the next ten years. The fund has historically avoided private equity but its size and diversification requirements are forcing it to look further afield. The decision rests with the Ministry of Finance.

Hot on the heels of the real estate edition last month, it was encouraging to hear Blackstone's Steve Schwarzman discussing the merits of this market. Real estate is firmly back on his agenda as we appear to be at peak rates and the market prices in Fed rate cuts. Speaking on Bloomberg TV he flagged East European warehouses, data centres and student accommodation.

Short seller Carson Block is less enamoured about the near term future of real estate, having taken a short position against Blackstone Mortgage Trust. In a report titled Here Comes the Cliff, Block writes that the REIT is facing a perfect macro storm and is at risk of being completely wiped out, with borrowers unable to refinance and repay.

New York based KPS Capital Partners has raised $9.7 billion for two special situations strategy funds. KPS Special Situations Fund V1 and Mid Cap Fund II were both oversubscribed and will invest in corporate carve-outs, turnarounds, restructurings and other special situation investments.

Having released its private credit report on Asia Pacific, KKR has highlighted what it sees as an under penetrated and under allocated market lacking the same access to private credit channels as Europe and the US. Citing Preqin data, the report puts the ratio of private equity to private debt assets under management at 30.8x for APAC against 5.2x in the US.

TCI is the latest big name hedge fund to set up an office in the UAE. According to a Financial Times report there are now around 500 funds with a physical presence in the region, including Millennium, Balyasny, King Street and Brevan Howard. The firm's head of investor relations is moving to Abu Dhabi from New York to head up the new office.

A premature story last month was the imminent move by Schonfield Strategic Advisers to join Millennium Management, which had looked virtually signed and sealed but has now fallen through. Schonfield pulled out after receiving verbal commitments of $3 billion from new and existing investors, and has since announced it is cutting around 150 employees.

A big UK story of the past month in hedge land has been the announced sale of the CQS credit platform and brand to Manulife, the Toronto based financial services firm. This includes $13.5 billion of assets under management, with Michael Hintze keeping his Directional Opportunities fund and other mandates, which will move to a new company and brand.

One of the most challenging jobs in running a private asset management firm is a successful handover to the next generation, and remarkably few achieve it cleanly. Unlike Michael Hintze, who has chosen to sell CQS to Manulife, Jim Chanos has opted for the most straightforward method, closing the shop door after 38 years in business.

Inclusive Capital Partners, once lauded as a ground breaking manager set to drive environmental and societal change, has closed after only a few short and unsuccessful years. From an investor perspective the proposition had looked solid, with a crack team using an environment and social investing lens to actively push for change.

One of this year's biggest hedge fund launches is Todd Barker's Freestone Grove Partners, which has raised $3.5 billion and is set to start trading in January. Barker has a quality pedigree, having spent five years heading Citadel Surveyor Capital, the fundamental equities arm. Compared to most new multimanagers, Freestone has fewer investing pods.

Long/Short Equity is about to lose its position as the largest hedge fund strategy in the coming months, according to eVestment data, as assets continue to flow to the multi-strategy managers. In the October flow report Long/Short Equity saw outflows of $5 billion, taking sector assets to $678 billion against $677 billion for multi-strategy funds as at 31 October.

Remuneration has always been a contentious subject and the fast growing multimanager siloed businesses have taken this up a notch. Marshall Wace's Paul Marshall said that some of the numbers he saw were just plain silly, on par with signing Cristiano Ronaldo. A former Bridgewater executive followed, saying the performance generated did not match the compensation.

Marex continues to build out its prime broking capabilities, having completed the acquisition of the Cowen prime brokerage business. This has added 160 employees to Marex Capital Markets, with the Cowen business continuing to be led by the team that has run it since its inception in the mid-1990s. Marex Prime Services operates a direct and introduced business.

With bitcoin once more closing on $45,000, crypto funds are again the best performing in the sector. Earlier this year this was a difficult sector to be in, with August data from 21e6 Capital showing 13% of crypto funds had shut down year to date. Since then most have benefited handsomely from the rise, with bitcoin up more than 160% and ether 100%.

The FCA has published a Policy Statement containing the final rules and guidance on sustainability disclosures, investment labels and the anti-greenwashing rule. Commonly known as SDR, the regime will directly impact asset managers, life insurers and pension providers. The anti-greenwashing rule takes effect on 31 May 2024 and the four labels from 31 July 2024.

In advance of the final SDR rules, the FCA published a multi-firm review of authorised fund managers to assess their embedding of the Guiding Principles in ESG and sustainable investment funds. The review found that while most worked hard to meet expectations on the design, delivery and disclosure of those funds, further improvement was needed.

The FCA has published its final report on how firms are implementing requirements of the Investment Firms Prudential Regime, including the internal capital adequacy and risk assessment process. Areas for improvement include insufficient consideration of cashflows and liquidity stresses, internal intervention points, wind-down assessments and operational risk capital models.

Recent developments, including clarifying the parameters of non-financial misconduct, expanding the range of individuals caught by corporate financial crimes, and an enforcement action against a former Barclays chief executive, bring into sharper focus the UK conduct and accountability regime for financial services personnel.

The SEC and CFTC have each released their enforcement findings for financial year 2023. The SEC filed 784 enforcement actions and distributed nearly $1 billion to harmed investors, covering Marketing Rule violations, misstatements, market abuse, crypto and cybersecurity. The CFTC filed 96 actions resulting in over $4.3 billion in penalties and disgorgement.

The SEC announced charges against the president and chief compliance officer of registered investment adviser Prophecy Asset Management for a multi-year scheme that concealed hundreds of millions of dollars in investor losses. Most of the fund's capital was directed to one sub-adviser investing in highly illiquid investments, with losses in excess of $350 million.