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.

Read the entire article here.

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."

Read the entire article here.

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.

[Read the full article here]

September's hedge fund performance numbers continue to reflect the buoyancy of the underlying market which has now seen a sustained rally of close to 13% since the low in early June. Not surprisingly September's best results came from Equity 130/30, Equity Long, and Equity Long/Short strategies, with Naos the best performer with a monthly return of 10.69% for its Emerging Companies Fund. For all performance details click here.

While on the subject of performance, a month ago we noted the four-year anniversary of the collapse of Lehman Bros, and the havoc which was to follow. For those of us old enough to remember, today marks the 25th anniversary of the October 1987 stock market crash which wiped 23% off the market's value in a single day. For a few years afterwards the market got the jitters each October for purely psychological reasons. Thankfully that phase has passed although not the tendency for investors to forget the meaning of risk after a few good years.

This week's economic data from China came in as expected, which probably surprised no one, least of all the cynics amongst us that note the almost uncanny resemblance between the Chinese government's projections and the actual numbers, particularly given the speed at which they are produced at quarter's end. However, even allowing for that healthy dose of cynicism, growth of close to 7.5% is nothing to be sneezed at. Anything less and we would undoubtably have all caught a cold.

This week we completed and released the latest AFM Review featuring one of BlackRock Australia's funds. Generally speaking Australia's best absolute return and hedge funds are dominated by boutique and home grown fund managers. As a result it is unusual to see an organisation the size of BlackRock, which globally manages US$3.65 trillion (of which $45 billion is Australian based) show up in AFM's top performing rankings. For the record the BlackRock Australian Equity Market Neutral Fund has an annualised return of 12.54% since inception in September 2001, with volatility of less than 6% and a Sharpe Ratio of 1.26. For a copy of AFM's Review, click here.

For this week's "and now for something completely different" a couple of English lads with too much time on their hands. They'll probably get (or may have got) top marks in their university exams however.

Have a good week-end.

Regards,

Chris.

September hedge fund performance is looking positive at +3.09% with 42% of single fund's performance received, taking YTD results to +7.79%. For full details and returns by sector, click here.

Meanwhile this week I spent an evening sitting in a hotel Restaurant in Melbourne reading the Bloomberg newsfeed on my iPad. It was very sad. Not just the fact that in one of the country's most vibrant cities I was reduced to spending the evening away from home, by myself, with just my iPad, but the news emphasised what a basket case Europe is, and more particularly Greece and Spain are.

Angela Merkel was due to dish out some good old Teutonic austerity medicine to the hapless, tax effective Greeks, protected by some 7,000 riot police. No wonder she only intended staying for six hours before legging it back home to face an equally unhappy home electorate. Today's news tells me that 25% of Greeks are now unemployed.In Spain the economy continues to go from bad to worse with unemployment also at horrific levels, particularly amongst the younger generation, and banks unable or afraid to foreclose on defaulting mortgagees for fear of unleashing a tsunami of property, and probably social unrest, onto the already flooded market.

Meanwhile across the Atlantic it was reported that State Street was charging (yes, charging) depositors for holding Danish Krone and Swiss Francs. And it seems those same depositors are prepared to pay for the privilege of safety.

What seemed apparent from reading these and other reports was that it looks as if there are at least five, and possibly ten hard years ahead for Europe. And if that is the case, probably for the Chinese manufacturing sector as well.

Meanwhile the Australian equity market briefly hit a 14 month high. The Aussie dollar jumped back above US$1.02 in spite of the fact that the economic fundamentals are looking decidedly shaky as the resources boom cools, unemployment is increasing, and retailing/consumer confidence continues to decline.

Go figure.

And for something completely different this week, a grumpy garbo who's behaviour wouldn't look out of place in our Nation's capital...

Have a good week-end.

Regards,Chris.

The collapse of Lehman Brothers four years ago today was the Pearl Harbor moment of a financial crisis that, over the next few months, threatened to bring down the entire U.S. financial system.

Blame for the collapse is still being debated. People bought homes they couldn't afford, peddled by lenders who knew -- or should have known -- that the loans were destined to fail. Wall Street sucked up these loans and sold them off in bundles to investors, sometimes while making bets against those same products.

Everyone should have known better. At the top of this list were the government regulators who are supposed to protect the economy from Wall Street excesses, but who instead sat and watched as a bubble built of rotten subprime loans kept expanding.

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