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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Investors poured hundreds of millions of pounds into equity funds last month, making stocks the leading asset class for the second month in a row, according to the UK's Investment Management Association.

The IMA said net retail sales of £550m in October were the highest since April, in contrast with an average outflow of £9m over the past 12 months. It said the shift suggested that the tide was turning in favour of equities.

Some of the world's largest investors have increased their exposure to stocks because of cheap valuations and growing confidence over earnings.

Aberdeen Asset Management, Schroders and Henderson Global Investors are all backing equities as many of their funds increase exposure to stocks.

Martin Gilbert, chief executive of Aberdeen, which enjoyed strong results this week because of its equity inflows, said: "I do not believe equities are dead. We are seeing strong demand for equities."

Didier Duret, chief investment officer of ABN Amro private bank, said: "We went overweight in emerging market equities and European equities in September as we like the valuations and the prospects for strong earnings."

David Coombs, head of research at Rathbones Investment Management, said equities were helped because bonds were expensive. "We have been reducing exposure to bonds and increasing equities. When we talk to clients we say that the risk/reward on corporate bonds does not look very attractive now," he said.

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Hedge funds' glory days seem a long way off as they head into a tricky 2013, with bumper profits likely to remain elusive in markets now dominated by political and central bank action.

Speakers at the Reuters Global Investment 2013 Outlook Summit said the $2 trillion industry, which has disappointed investors with below-market returns this year and losses last year, faces a headache making money in an environment where markets are choppy and not as buoyant.

"We're now (in) a world where we recognize that the ability to make money is a lot more difficult and there aren't that many people who can do it. There simply aren't enough, it just doesn't exist," said Saker Nusseibeh, CEO of Hermes Fund Managers.

"Lots of hedge funds are not making even a positive return. They should be doing 4-5 percent. And they're not ... Suppose it's the smartest people with the smartest models, and they've had 10 years' practice. If you give me 10 years I'm sure I can come back and play the piano badly."

Hedge funds made double-digit returns in seven out of nine years between 1991 and 1999, according to Hedge Fund Research's HFRI index, and made returns of more than 9 percent every year between 2003 and 2007 inclusive amid rising markets.

However, their secret sauce of 'alpha' - profits due to a manager's skill rather than overall market moves - has been hard to find in the 'risk-on, risk-off' environment where markets can be more influenced by the words of euro zone politicians and central bankers than companies' fundamentals.

Funds have lost money in two of the four calendar years prior to 2012, according to HFRI. This year the average fund is up just 2.24 percent to November 23, according to the HFRX index, well behind a 12.1 percent gain in the S&P 500 index .SPX.

Some star managers have been able to thrive in this environment, betting on anything from Greek debt to rising stocks to asset-backed securities.

CQS Chief Executive Michael Hintze, one of the industry's most influential managers, has returned 29 percent from his Directional Opportunities fund in the first 10 months of the year and told the summit he sees a "target-rich environment" in 2013 with opportunities shorting bonds using credit default swaps.

However, fund executives say there may be fewer opportunities for the industry - which has ballooned in size over the past 10 years - as a whole to exploit.

"Alpha delivery can be very difficult. If you have risk-on, risk-off it can be more difficult," William De Vijlder, CIO of BNP Paribas Investment Partners, said.

"There are less big valuation discrepancies around," he added. "You think of 2006 or 2007 and then you think of early 2009 and huge valuation gaps. So perhaps now this is a more difficult (environment) ... When you have something that is very much central bank-led it's much more difficult."

However, De Vijlder said long-short funds, which bet on rising and falling prices but which have struggled as their bets often move in the same direction - may profit as correlations between stocks in an index come down.

Meanwhile regulation such as curbs on naked credit default swaps, short-selling bans and greater reporting requirements could all make life tougher for the sector.

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Two traders from Goldman Sachs's now defunct proprietary trading desk have started up their own fund, Auscap Asset Management, in Sydney.

Tim Carleton, 31, and Matthew Parker, 36, were forced out of the bank in November last year after the Australian business, Goldman Sachs & Partners, was acquired by its US parent.

The change in ownership subjected the Australian operations to US Dodd-Frank regulatory reforms aimed at making banks safer. One of the provisions of the bill, the Volcker Rule, prohibits commercial banks from making proprietary trades with their own capital.

The pair are not allowed to use their performance numbers at Goldman to market the new venture, but sources estimate the proprietary strategies team, of which they were a part, accounted for one-third to one-half of profits at Goldman Sachs & Partners.

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The Australian market has too many domestic and international fund managers and is heading for a major "structural shift", according to chief executive of Bennelong Funds Management, Jarrod Brown.

In an interview with I&T News, Brown said that while his boutique - which manages around $3 billion for a range of Australian institutions - had experienced a "good run, without pumping up our own tyres," the overall funds industry was overcrowded and not all managers would stay in the market.

"I feel we are at full competition in Australia as an asset management community," said Brown.

"There are probably 400 locally domiciled investment managers and another 400 who try and participate. It's a ridiculous situation and they can't all survive. Everyone is after the superannuation dollar, but I don't think we can continue to incubate our own boutiques and also support so many fly-in-fly-out global managers."

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Pacific Investment Management Co.'s Bill Gross said structural headwinds will dominate the economic debate no matter who wins the U.S. presidential election.

"The structural headwinds in terms of economic growth, the budget deficit, the fiscal cliff" will dominate political discourse, Gross, who runs the world's biggest bond fund, said in an interview on Bloomberg Television's "In the Loop" with Betty Liu. "It means lower growth. The structural issues are really related to an excessive amount of debt, an excessive amount of leverage that's been built up over 10 or 20 years."

Markets suggest that a victory by Mitt Romney will be better for equities because taxes on dividends and capital gains won't be going up as much as under a second Barack Obama administration, Gross said. Marketable U.S. government debt has grown to $10.75 trillion from $4.3 trillion in 2006.

Stocks will likely gain about 4 percent to 5 percent annually going forward, while bonds may return about 2 percent to 3 percent, he said. The Standard & Poor's 500 Index of stocks has appreciated 15 percent this year. Treasuries have risen 1.66 percent during that span, according to Bank of America Merrill Lynch index data.

Fund Holdings

Gross reduced his holdings of Treasuries for a third consecutive month in September to the lowest level since last October on concern record U.S. debt will lead to inflation.

The proportion of U.S. government and Treasury debt in the $278 billion Total Return Fund (PTTRX) dropped to 20 percent of assets from 21 percent in August, according to latest available data on the Newport Beach, California-based company's website. Mortgages remained his largest holding at 49 percent.

The fund gained 12 percent over the past year, beating 96 percent of rival funds, according to data compiled by Bloomberg. It has returned 8.5 percent over five years, topping 96 percent of comparable funds.

Republican nominee Romney has said he disagrees with the Federal Reserve's unprecedented measures to stimulate the economy and would replace Chairmen Ben S. Bernanke. Suggestions that Republicans would pursue "tight money" policies is likely little more than political rhetoric, Gross said.

"Republican have never really been a tight-money party," he said. "To think that Republicans would be favoring tight money, I think is an election-year type of proposition."

Quantitative Easing

Democrat President Jimmy Carter appointed Paul Volcker, known for taming inflation in the 1980s, as Fed chairman, while Republican President Richard Nixon abandoned the gold standard in the 1970s, Gross noted. Bernanke was appointed by Republican President George W. Bush.

The Fed has sought to drive down unemployment by keeping its target rate for overnight loans between banks between zero and 0.25 percent since December 2008 and purchasing $2.3 trillion of securities in two rounds of a monetary policy known as quantitative easing.

Frustrated by the slow pace of the recovery, the central bank announced Sept. 13 that it would likely keep rates at a record low and also said it would inject more money into the economy by purchasing $40 billion of mortgage bonds per month in a third round of QE.

The U.S. economy is likely to grow about 1.5 percent, according to Pimco Chief Executive Officer Mohamed El-Erian. Gross domestic product is forecast to expand 2.1 percent this year and 2 percent in 2013, according to the median estimate of economists surveyed by Bloomberg.

"There is an extreme difference between valuations that are up here, and fundamentals that are down here," El-Erian, also the co-chief investment officer at Pimco, said on Bloomberg Television's "Street Smart" with Trish Regan. "The equity market has priced in not just an active Fed, but also an effective Fed, and we're getting a question mark as to whether effectiveness is as high as we'd like it to be."

Source - Bloomberg Businessweek

Pacific Investment Management Co.'s Bill Gross said structural headwinds will dominate the economic debate no matter who wins the U.S. presidential election.

"The structural headwinds in terms of economic growth, the budget deficit, the fiscal cliff" will dominate political discourse, Gross, who runs the world's biggest bond fund, said in an interview on Bloomberg Television's "In the Loop" with Betty Liu. "It means lower growth. The structural issues are really related to an excessive amount of debt, an excessive amount of leverage that's been built up over 10 or 20 years."

Markets suggest that a victory by Mitt Romney will be better for equities because taxes on dividends and capital gains won't be going up as much as under a second Barack Obama administration, Gross said. Marketable U.S. government debt has grown to $10.75 trillion from $4.3 trillion in 2006.

Stocks will likely gain about 4 percent to 5 percent annually going forward, while bonds may return about 2 percent to 3 percent, he said. The Standard & Poor's 500 Index of stocks has appreciated 15 percent this year. Treasuries have risen 1.66 percent during that span, according to Bank of America Merrill Lynch index data.

Blackstone Group LP (BX.N) is preparing to launch a multibillion-dollar fund that will buy stakes in hedge fund managers in the secondary market, as traditional buyers such as banks pull back amid disappointing fund performance and regulation.

Blackstone, whose hedge-fund solutions business has $46.2 billion in assets under management, sees an opportunity to provide an exit for banks, insurers and other financial institutions that need buyers willing to take on what are particularly illiquid investments, a source familiar with the firm's plans said.

No target for the size of the new fund had been set, although it could attract between $2 billion and $3 billion, the person said. Blackstone will start marketing the fund to potential investors soon, hoping for returns over 20 percent, the source added.

Blackstone declined to comment.

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