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Hedge Fund returns hit as baffling rules see margin costs skyrocket

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Hedge Fund returns hit as baffling rules see margin costs skyrocket

Unintended consequences of convoluted regulations are hindering hedge fund managers from boosting returns for their investors.

According to findings from analytics firmOpenGamma, hedge funds can now be charged an eye-watering 70% additional margin because of regulatory changes, destroying returns as a result. A staggering cost to absorb, particularly for global macro hedge funds who only returned 2.3% in the last year (source: HFR).

New rules, such as those forced upon clearinghouses by the Committee on Payments and Market Infrastructure (CPMI) and the International Organisation of Securities Commissions (IOSCO), mean fund managers have no choice but to rethink their strategies. Requirements, such as those which make the likes of Eurex, CME and ICE charge additional margin for large positions (so-called liquidity or concentration add-ons) eat into fund manager’s returns.

Commenting on the findings, Peter Rippon, CEO of OpenGamma said: “Making fund managers post more cash to guard against another financial meltdown is all very well in principle. But in practice, these rules trigger an enormous cost for the industry, which ultimately, will be shouldered by the very end investors rule makers are trying to protect.”

Hedge funds most affected by new margin rules are those looking to exploit price differences between two related markets, like bonds vs futures. A firm like this may have to post significantly more margin for a very large position. On the flipside, the research showed that those who carefully manage margin can control increases. The challenge is that understanding the specific nuances of new margin models requires significant investment at a cost-conscious time for fund managers.

Rippon concluded: “The bigger the hedge fund, the bigger the problem. The trouble is that it is becoming harder to gain real insight into the drivers of margin beyond what is reported by their clearing brokers. At a time when investors are scrutinising every penny, the last thing any portfolio manager needs is to be hamstrung by unnecessarily posting more margin than they have to. Some are already finding ways around this issue, which is why we are seeing more firms turn towards in-depth analysis in order to seek out opportunities to reduce margin.”

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GameStop jumps nearly 19%; ‘meme stocks’ fade after another wild ride

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GameStop jumps nearly 19%; 'meme stocks' fade after another wild ride 1

By Aaron Saldanha, Thyagaraju Adinarayan and David Randall

(Reuters) – GameStop Corp shares rallied on Thursday, finishing with double-digit gains despite a sharp retreat from session highs and leading a surprise resurgence of so-called “stonks” championed online by passionate retail investors. GameStop shares, which doubled their value on Wednesday, hit $160 at Thursday’s open before being halted after several minutes of trading and fell to around $129 before the second halt. The stock closed for the day at $108.73 for an 18.5% gain, after soaring almost 90% at the session peak.

Other “stonks” or “meme stocks” popular on sites such as Reddit’s WallStreetBets also saw their rallies fade. Headphone company Koss Corp closed up 16.8% gain after rocketing nearly 61% during the session. AMC Entertainment ended down nearly 9% after jumping more than 15% during the session.

Analysts were puzzled by the rally that came even as the benchmark S&P dropped 2.4%. Some ruled out a short squeeze like the one in January that battered hedge funds that had bet against GameStop and were forced to cover short positions when individual investors using Robinhood and other trading apps pushed the video game retailer’s shares as high as $483.

“The power of the “three R’s” (Robinhood, Retail, Reddit) are back in play,” said Neil Campling, head of technology research at Mirabaud Securities.

The number of GameStop shares shorted stood at 15.47 million, analytics firm S3 Partners said Thursday, with short interest accounting for 28.4% of the float, compared with a peak of 142% in early January.

Wednesday’s late day rally added $664 million in mark-to-market losses for investors betting against GameStop, and short sellers were down $10.75 billion in year-to-date mark-to-market losses midday Thursday, according to S3.

Some analysts said the rally may be partly fueled by a fear of betting against GameStop.

“There are not a lot of people who are just sitting there, ‘oh yeah, let’s for fun, let’s just short GameStop and get my head ripped off.’ The investors learn.,” said Dennis Dick, a trader at Bright Trading, on the Benzinga podcast.

Some investors may be jumping on the GameStop bandwagon hoping to reap gains similar to turbo-charged advances of January and then sell the stock, said David Starr, vice president of quantitative analysis at Simpler Trading.

“All of these stocks are once again rising together. It demonstrates that there is nothing intrinsic in the companies themselves,” he said.

Former GameStop shortseller Citron Research said the company should buy online gambling company Esports Entertainment Group Inc

“It would be an easy acquisition for GameStop to tuck in right now,” Citron’s Andrew Left told Reuters in an interview. “Some people say it would be a ‘Hail Mary pass’ but I think it would be a major pivot.”

HEAVY VOLUME

More than 145 million shares of GameStop had changed hands by mid-morning, almost triple its 30-day average volume of 62 million, yet below the more than 190 million shares that traded hands daily in late January.

The surge came after Reddit trader Keith Gill, who runs the YouTube channel Roaring Kitty, bought additional GameStop shares last week. Last week, Gill testified in the U.S. Congress: “I like the stock,” words since quoted by hundreds of online followers and featured in memes on financial sites.

This week’s GameStop rally began the day after the retailer announced the resignation of Chief Financial Officer Jim Bell as the company focuses on shifting into technology-driven sales.

Reddit forums were buzzing again with bullish GameStop posts on Thursday.

“Bought lots more #GME today, let’s keep fighting !!,” wrote Reddit user Fundssqueezzer.

In January, GameStop shares skyrocketed by more than 1600% as retail investors, urged on by WallStreetBets, bought shares to punish hedge funds that had taken an outsized short bet against it.

Gabriel Plotkin’s Melvin Capital hedge fund was left needing a $2.75 billion lifeline from Citadel LLC and Point72 Asset Management.

Investing legend Charlie Munger, longtime business partner of Warren Buffett, criticized the risky trading strategies employed by some traders on Reddit.

“It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors,” said Munger, Berkshire Hathaway’s vice chairman.

(Reporting by Aaron Saldanha in Bengaluru, Tom Westbrook in Singapore and Danilo Masoni in Milan; Additional reporting by Lewis Krauskopf, Sagarika Jaisinghani, John McCrank and Medha Singh; Writing by Anirban Sen and David Randall; Editing by Jason Neely, Bernard Orr, Nick Macfie and David Gregorio)

 

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Oil eases from 13-month high on worries output could rise

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Oil eases from 13-month high on worries output could rise 2

By Scott DiSavino

NEW YORK (Reuters) – Oil prices slipped from 13-month highs on Thursday as worries that four months of rising futures will prompt U.S. producers to drill more and OPEC+ to remove some production cuts.

That small decline came despite an assurance that U.S. interest rates will stay low and a sharp drop in U.S. crude output last week due to the winter storm in Texas, both of which helped boost crude prices to their highest since January 2020 earlier in the day.

Brent futures for April delivery fell 49 cents, or 0.7%, to $66.55 a barrel by 1:34 p.m. EST (1834 GMT), while U.S. West Texas Intermediate (WTI) crude fell 23 cents, or 0.4%, to $62.99. The April Brent contract expires on Friday.

“With momentum appearing to slow a week before the next OPEC+ meeting, crude may be positioning for a small correction,” said Craig Erlam, senior analyst at OANDA, noting “There’s still plenty of downside risks in the market and one of them is OPEC+ unity coming under strain in the coming months.”

Analysts noted higher oil prices in recent months – both Brent and WTI have gained more than 75% over the past four months – could encourage U.S. producers to return to the wellpad and OPEC+ to loosen its production reductions.

The Organization of the Petroleum Exporting Countries and its allies including Russia, a group known as OPEC+, are due to meet on March 4.

The group will discuss a modest easing of oil supply curbs from April given a recovery in prices, OPEC+ sources said, although some suggest holding steady for now given the risk of new setbacks in the battle against the pandemic.

Extra voluntary cuts by Saudi Arabia in February and March have tightened global supplies and supported prices.

Meanwhile, an assurance from the U.S. Federal Reserve that interest rates would stay low for a while helped support oil prices earlier in the day and should boost investors’ risk appetite and global equity markets.

The winter storm in Texas caused U.S. crude production to drop by more than 10% or 1 million barrels per day (bpd) last week, the Energy Information Administration (EIA) said.

Fuel supplies in the world’s largest oil consumer also tightened as its refinery crude inputs dropped to the lowest since September 2008, EIA data showed.

Texas state legislators on Thursday started digging into the causes of deadly power blackouts that left millions shivering in the dark as frigid temperatures caught its grid operator and utilities ill-prepared for skyrocketing power demand.

ING analysts said U.S. crude stockpiles could rise in weeks ahead as production has recovered fairly quickly while refinery capacity is expected to take longer to return to normal.

Barclays, which raised its oil price forecasts on Thursday, said oil could rally again on the weaker-than-expected supply response by U.S. oil operators to higher prices.

“However, we remain cautious over the near term on easing OPEC+ support, risks from more transmissible COVID-19 variants and elevated positioning,” Barclays said.

(Reporting by Julia Payne in London and Florence Tan in Singapore; Editing by Marguerita Choy and Steve Orlofsky)

 

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Oil holds close to 13-month high, supported by sharp drop in U.S. output

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Oil holds close to 13-month high, supported by sharp drop in U.S. output 3

By Julia Payne

LONDON (Reuters) – Oil prices remained close to 13-month highs on Thursday, with profit-taking limited by an assurance that U.S. interest rates will stay low and a sharp drop in U.S. crude output last week due to the storm in Texas.

Brent crude for April hit $67.70 a barrel during the session, its highest since Jan. 8, 2020. By 1437 GMT, it had slipped 48 cents, or 0.7%, on the day to $66.56.

U.S. West Texas Intermediate was down 49 cents or 0.8% at $62.73, after also hitting a 13-month high of $63.79.

Tamas Varga, analyst at PVM Oil Associates, said the dip was partly due to profit taking after a three-day rally.

An assurance from the U.S. Federal Reserve that interest rates would stay low for a while weakened the U.S. dollar, while boosting investors’ risk appetite and global equity markets.

The winter storm in Texas caused U.S. crude production to drop by more than 10% or 1 million barrels per day (bpd) last week, the Energy Information Administration said. [EIA/S]

Fuel supplies in the world’s largest oil consumer could also tightened as its refinery crude inputs had dropped to the lowest since September 2008, EIA’s data showed.

ING analysts said U.S. crude stocks could rise in weeks ahead as production has recovered fairly quickly while refinery capacity is expected to take longer to return to normal.

Barclays, which raised its oil price forecasts on Thursday, said it oil could rally again on the weaker-than-expected supply response by U.S. oil operators to higher prices.

“However, we remain cautious over the near term on easing OPEC+ support, risks from more transmissible COVID-19 variants and elevated positioning,” Barclays said.

The Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+, are due to meet on March 4.

The group will discuss a modest easing of oil supply curbs from April given a recovery in prices, OPEC+ sources said, although some suggest holding steady for now given the risk of new setbacks in the battle against the pandemic.

Extra voluntary cuts by Saudi Arabia in February and March have tightened global supplies and supported prices.

(Reporting by Florence Tan; Editing by Steve Orlofsky and Edmund Blair)

 

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