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Obama in the Whitehouse and the effects for investors

Date: 06 Jun 2008

Citywealth

I asked one of my New York attorney clients what he thinks the effect will be of Obama in the house for myCitywealth newsletter readers. He said “UHNW’s will be fine. Oil companies will lose tax breaks and regulations in the business and financial world will be enforced. It will be like cough medicine. It will taste bad, but it will be good for you.”

Sitting at a UBS charity investment symposium yesterday I asked what the effect of financial regulations would be. They believe a third of hedge funds will be put out of play (go bust) and anyone with a diversified portfolio, whether charity or UHNW investor will find hedge funds struggling to achieve what they have in the past in terms of returns. Although as David Rowe, their Head of Charities said “it sounds like investment wont make as much in future as they have in the past, but markets and financiers have historically shown that new ideas emerge to bring past performances back, even if not in the same ways.”

One of my readers who is involved in the hedge fund world at a high level suspects though, that this wont stop investors investing in hedge funds because as he puts it “investors are very slow to react and still continue to invest, when all evidence tells them not to.”

This usually means the financial industry can still sell products with ease to UHNW or charity investors, that may have had their day. It doesnt mean they dont work, but the returns may be lacklustre.

UBS, who acknowledge their own failings, but are now recapitalised and about to launch a large advertising campaign to reignite confidence, are going with hedge funds with macro strategies (managers just look out for opportunities generally to make returns).

Multi manager hedge funds were recommended in the Phil Coggan, Economist guide to hedge funds to replace fund of funds in popularity.

So if hedge funds are about to get a bite taken out of them by a new Obama government, then make sure you have a clear idea of what hedge funds you are invested in (and perhaps macro/multi manager should be your choices) and what strategies they are working with and that there is no style drift (they change their mind without telling you/your advisers).

I imagine an activist type hedge fund will come under fire from Obama because the government cant be “giving people their jobs back” when activist hedge fund strategies may mean hedge fund managers are lobbying behind the scenes for agressive take overs and mergers, which ultimately mean squeezing down costs in the companies they target, and job losses, just for investor returns.

As an aside they offered a model of the markets from 1920 to 2008 and commented “we have not slid into recession we have crashed” and although the stock market in the UK remains strong and separate to the banking meltdown (with one or two company exceptions – so check which companies you are investing in – UBS favour large cap), the depth of the financial crisis is now way above Black Monday and correlates more with the depression of the 1920’s. They say what caused the Great Depression was the rise in interest rates and cancellation of goverment initiatives at a time when people needed the work and less inflation, which could have kick started the market. These mistakes, they believe, will not be allowed to happen again which should help recovery. (Although some audience participants disagreed goverments can manage this, which suggests the Great Melt Down may still be upon us).

UBS say governments are now seriously worried about a deflationary spiral which is associated with the Great Depression. Expect the newspapers to grab the deflation headline soon they say.

Despite all of the above, UBS believe this is a time of great opportunity for investors (to buy significant investments at low prices), so be careful but get spending is the message.

Another speaker at the UBS charity investment symposium, Professor Paul Palmer, Professor of Voluntary Sector Management at Cass Business School warned that charities keep minded of three things: risk, reserve and investments. Know your risks: ensure you know for instance what newspapers the majority of your donors read and ensure good publicity is seen in these papers or know how to handle a media crisis. Also make sure you deliver on promises and dont leave empty wells in countries without water. Reserve: properly understand how much money you need in reserve as governments start to put pressure on charities to use the money they have invested. Paul cited the example of guide dogs for the blind. On analysis of their beneficiaries needs, they worked out that as an individual can receive a dog at twelve years old and the dogs have only a four year working life, that a recipient may need 34 dogs in their lifetime. If you know this, you can work out the cost and keep proper reserves but not undue amounts. Investments: make sure you have done risk and reserve then work out what capital needs to go short/medium and long term but dont do investments before you have analysed risk and reserve. Palmer collaborates with UBS to help wealthy private individual donors work effectively in the charity and philanthropy space.

As they say a little knowledge is a dangerous thing and the above is a formulation of my learning and should be taken as an opinion only.

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