The active versus passive debate just got a new wrinkle, and one analyst thinks he knows why.» Read More
Once seen as a golden opportunity, big-money investors are now scrambling to keep their bets on Puerto Rico whole.
Hedge funds, mutual funds and other investors piled in over the last two years, thinking others had overreacted to the island's fiscal problems by dumping local bonds.
But the value of their debt holdings fell sharply early this week on a string of bad news.
The U.S. territory's governor surprised observers by saying its $72 billion in debts weren't payable. The White House explained that it was not contemplating a bailout. Ratings agencies cut their assessments of Puerto Rican bonds. And a report by a group of former International Monetary Fund officials detailed just how bad the island's fiscal problems are.
"The coming weeks will bring showdowns between ... the governor and bondholders, and out of the rubble, we expect the PR government to emerge leaner, having shed some debt and restructured some operations," Height Securities said in a report Monday.
In other words, more observers think that hedge funds and other creditors should expect to accept less than face value for the bonds they own. Some Puerto Rico bonds were trading at 68 cents on the dollar Tuesday.
Billionaire investor John Paulson is looking to make more money on health care.
Hedge fund firm Paulson & Co. is launching the Paulson Long/Short Fund to initially focus on health care, pharmaceutical, and related technology and consumer sector investments, according to a letter sent to clients obtained by CNBC.com. The firm, which runs approximately $20 billion overall, is seeding the fund with $500 million.
Guy Levy, Paulson's health-care expert, will be portfolio manager of the new fund, according to the communication.
"Guy's talent and expertise in health care, pharmaceutical and related sector investing have added significantly to our performance over the past five years, giving me confidence in his abilities to lead this new fund," John Paulson wrote in the letter.
When it comes to municipal bonds, the headlines can drown out the news.
Horror stories from Chicago, Detroit and Puerto Rico, painting a harrowing financial picture amid talk of budget shortfalls and potential defaults, mask a sector that is otherwise pretty sound.
Since the financial crisis and accompanying recession, states and municipalities have in fact gone in a diametrically opposite direction from their counterparts at the federal level. In the aggregate, states and municipalities cut debt each year since 2011, though the first quarter of 2015 saw a 4.8 percent increase, according to the Federal Reserve. At the same time, the federal government has been piling on debt, rising in each respective year 11.4 percent, 10.9 percent, 6.5 percent and 5.4 percent.
"Not just for states but also for local governments, economic conditions are the best they've been in years," said Dick Larkin, director of credit analysis at HJ Sims & Co. "Most states and cities are seeing a resurgence in tax receipts, they're seeing improvements in their financial position, and there should now at this point be more (analyst) upgrades than downgrades."
Yet investors are getting a little antsy.
Over the past 12 months, the $3.7 trillion muni sector has seen a net inflow of $28.8 billion in investor cash, according to Morningstar. But the group saw $594 million in outflows during May and another $1.2 billion in June.
While most analysts agree the picture overall remains positive, there are three factors generating some anxiety:
Congressmen slammed Obama administration officials this week for hiring a firm with a connection to a hedge fund manager that spectacularly blew up.
"Here we have somebody who lost millions of dollars, under investigation by the Department of Justice. We've got to figure out how in the world these people got the contract," said Rep. Jason Chaffetz on Wednesday in reference to Owen Li during a hearing of the House Oversight and Government Reform Committee, according to Politico.
The only problem was that Chaffetz had the wrong man.
There's now more data to support the idea that doing well and doing good are not mutually exclusive.
A new study from investment consultant Cambridge Associates and the Global Impact Investing Network shows that private equity and venture capital funds with so-called impact missions produce roughly the same returns as funds just trying to make as much money as possible.
Some 51 impact funds, which bet on businesses that help people or causes, launched between 1998 and 2010 returned an average of 6.9 percent per year to investors through June 2014 versus 8.1 percent for 705 nonimpact funds.
However, a more representative sample are funds raised from 1998 and 2004 as they have mostly cashed out of their multiyear investments. The seven impact funds launched from 1998 to 2001 gained an average of 15.6 percent versus 5.5 percent; nine impact funds launched from 2002 to 2004 gained 7.6 percent versus 7.7 percent.
"There's a view among some investors that impact investing necessarily entails a sacrifice in financial return," Jessica Matthews, head of Cambridge's mission-related investing group, said in a statement. "However, this data helps to show that is more perception than reality."
Past performance in fact does seem to provide a good indicator of future results, just not in the way you might think.
Anyone who's ever even contemplated investing has seen the familiar disclaimer warning against picking a manager or strategy simply on track record.
A study from S&P Dow Jones Indices shows just how important heeding that advice is, finding that positive past results come close to assuring negative future results.
Specifically, of the equity mutual funds in the top quartile performance-wise—measured against their benchmark indexes—in March 2013, just 5.28 percent were still there in March 2015. The news was worse for large caps, of which just 3.95 percent managed to stay at the top.
Over three years ended in March 2015, just 16.3 percent of funds in the top half managed to stay there. The trend paints a grim picture:
The small group of hedge funds betting on a Greek recovery remain invested, still hoping that assets like government bonds and bank stocks will rally once a political solution is reached on the nation's financial obligations.
"[There's] no change on the expectation of a deal," Diego Ferro, co-chief investment officer of $1 billion global investor Greylock Capital Management, said in an email. "This problem has been political from the beginning, the amount of money involved is not that big. So you would expect some bickering to last until it is signed."
Greylock owns government bonds and bank stocks.
The first thing to know about the Greece story is that it's not really about Greece.
Not, at least, in the big financial picture, where the country's measly $242 billion economy is only a shade larger than Connecticut's, and where its debt, the equivalent of $360 billion, would be a rounding error of the nearly $18 trillion in U.S. obligations.
Why Greece and its likely debt default and possible exit from the euro zone matters is as a symbol—of how far the global community will go towards rescuing Greece from its debts, and ultimately, perhaps, for whether similarly debt-laden weak sisters in the euro zone should simply leave the union, go back to their original currencies, and inflate their way out of trouble.
For U.S. investors, then, the dollars and cents aren't particularly compelling, but the longer-term ramifications could be more meaningful.
"You always want to think about any volatility that could be created by a default," Quincy Krosby, market strategist at Prudential Financial, said in an interview. "It's one thing to say it's 'contained,' but investors heard that subprime was contained, too."
Indeed, the contagion risks, like those posed by the subprime mortgage meltdown in the previous decade, are at the heart of the Greek melodrama.
Mark Spitznagel, the libertarian hedge fund manager, has a new part-time job: senior economic advisor to Rand Paul's campaign for president.
Spitznagel is the founder and chief investment officer of Universa Investments, a fund that specializes in protecting investors against sharp market drops, sometimes referred to as Black Swan events. The firm manages about $6 billion in assets, a sizable figure for the hedge fund industry.
"I am very grateful to have Mark Spitznagel serve as senior economic advisor to my campaign," Paul, now a U.S. senator from Kentucky, said in a statement.
"As I travel across the country, the top concern of the American people is our failing economy. I believe we can revitalize our economy by encouraging opportunity and entrepreneurship with lower taxes, a balanced budget, less Federal Reserve interventionism, and limited government spending," the candidate said.
"I look forward to working alongside Mark to solve our nation's economic problem and to restore the American Dream," he added.
Paul, one of the leading contenders for the Republican party nomination, was elected in the Tea Party wave of 2010. Much like his iconic father Ron Paul, Paul has become a libertarian standard-bearer.
As it ponders when to raise interest rates for the first time in nine years, the Federal Reserve already may have missed its best chance.
Previous rate-hiking cycles haven't crushed stock market rallies because they happened as corporate profits were increasing, according to an analysis by Jim Paulsen, the widely followed chief market strategist at Wells Capital Management.
Now that earnings are flat-lining, the market, which at the end of the day is propelled by profits, may not take so kindly to the end of historically easy monetary policy.