Monday, December 30, 2013

Diversification and UBS Puerto Rico Bond Fund Losses

By Edward S. O’Neal Versión en Español

The 19 closed-end bond funds managed by UBS Puerto Rico listed in Table 1 lost $1.66 billion in the first 9 months of 2013. These funds were sold almost exclusively to citizens of Puerto Rico and approximately 70% of the portfolios of these funds were invested in Puerto Rican securities. The percentage losses over the past year range from 38% to 48% for the worst-performing UBS PR funds. These losses are substantially greater than Puerto Rican municipal bonds generally. The Standard and Poor’s Municipal Bond Puerto Rican Index was down 17% over the same period.


SLCG previously posted two blog entries on the collapse of UBS’s Puerto Rico municipal bond. Our October 7, 2013 post, Trouble in Paradise: UBS Puerto Rico Bond Fund Investors Hit Hard, reported on losses in closed end municipal bond funds managed by UBS Asset Managers of Puerto Rico and sold by UBS brokers in Puerto Rico. Then on December 18, 2013 in our Did UBS Charge its Proprietary Puerto Rico Bond Funds Excessive Markups? we identified one of the ways in which the extensive conflicts of interest at UBS affiliated companies in Puerto Rico might harm investors in these bond funds.

In this post we want to point out the effect a lack of diversification had on losses in the funds. UBS’s closed end funds were investment companies registered under the Puerto Rican Investment Company Act but were not diversified investment companies. This lack of diversification led to the losses borne by investors in these funds.

The Puerto Rico Investment companies Act place restrictions on the degree to which investment companies can hold concentrated portfolios. The Act specifies two categories of funds depending on the level of diversification: diversified and non-diversified funds. Diversified funds can invest no more than 5% of the portfolio in securities from a single issuer. The Act allows funds to hold more than 5% of the portfolio in securities of a single issuer, however such funds are specifically labeled as non-diversified by the Act. Even for funds that are non-diversified, there is a limit to the concentration allowed by the Act. A non-diversified fund may not invest more than 25% of the portfolio in a single issuer.

UBS was allowed by a waiver to hold more than 25% of the portfolio in securities of a single issuer, causing the fund to be even more concentrated than funds which the Investment Company Act labels as non-diversified. The prospectus for the Puerto Rico Fixed Income Fund I states:

“Pursuant to the Commissioner’s ruling, the Commissioner of Financial Institutions imposed certain restrictions on the fund and granted the fund certain waivers from the provisions of the Puerto Rico Investment Companies Act….The fund is allowed to hold investments in Puerto Rico Securities and U.S. Government securities in each case in excess of the 25% limitation on investments in a single issuer imposed by section 2 of the Puerto Rico Investment Companies Act.”
Table 2 sorts the UBS Puerto Rico funds by the fraction of the portfolio invested in the Sales Tax Financing Corporate and the Employees Retirement System. The first four funds held only 5.2% of their portfolio in these two issuers and had losses of 16.3% on average, in line with the broad Puerto Rican municipal bond market. The remaining funds had 46.8% of their portfolios invested in the two issuers and suffered losses of 41.6% on average.


In our proprietary research, we model the general mathematical relationship between the expected losses of investors holding a closed-end fund and the leverage and concentration of the fund.  For the UBS PR funds specifically, we demonstrate a strong cross-sectional statistical relationship between the level of losses experienced in each of the UBS PR funds and the concentration they exhibited.  Further, we demonstrate that the losses emanated from concentration in fixed income issues that were originally brought to the market by UBS as underwriter.

Diversificación y Pérdidas de los Fondos de Bonos de UBS Puerto Rico

Por Edward O'Neal, PhD English Version

Los 19 fondos cerrados de bonos administrados por UBS Puerto Rico presentados en la Tabla 1 registraron pérdidas de $1.66 billones de dólares durante los primeros 9 meses del año 2013. Estos fondos fueron vendidos casi exclusivamente a ciudadanos de Puerto Rico y aproximadamente el 70% de las carteras de estos fondos se invirtieron en títulos Puertorriqueños. En el último año, las pérdidas de los fondos de UBS PR con peor desempeño fluctuaron entre un 38% y 48%. En general, estas pérdidas son substancialmente mayores que aquellas pérdidas registradas por los bonos municipales puertorriqueños. Durante el mismo período, el Índice de Bonos Municipales Puertorriqueños generado por Standard and Poor's se redujo un 17%.


Previamente, SLCG publicó dos entradas de blog sobre el colapso de los bonos municipales puertorriqueños de UBS. Nuestro blog fechado 7 de octubre de 2013 bajo el título: Peligro en la Isla del Encanto: Inversionistas de UBS Puerto Rico Sufren Cuantiosas Pérdidas informó sobre las pérdidas de los fondos cerrados de bonos municipales gestionados por UBS Asset Managers de Puerto Rico y vendidos por los corredores de activos de UBS en Puerto Rico. Luego, el 18 de Diciembre del año 2013 en ¿Acaso UBS Cobró Márgenes Excesivos a Sus Propios Fondos de Bonos de Puerto Rico? identificamos una de las maneras en la cual el extenso conflicto de intereses de las compañías afiliadas a UBS en Puerto Rico podrían ir en perjuicio de los inversionistas de estos fondos de bonos.

En este artículo queremos señalar el efecto generado por la falta de diversificación sobre las pérdidas de los fondos. Los fondos cerrados de UBS eran compañías de inversión registradas bajo la Ley de Compañías de Inversión de Puerto Rico pero no eran compañías de inversión diversificadas. Esta falta de diversificación conllevó a que los inversionistas tuvieran pérdidas monetarias.

La Ley de Compañías de Inversión de Puerto Rico crea restricciones sobre el nivel de concentración que las compañías de inversión pueden tener en sus carteras. La Ley especifica dos categorías de fundos dependiendo del nivel de diversificación: fondos diversificados y no diversificados. Los fondos diversificados están limitados a invertir un máximo de 5% de la cartera en valores de un solo emisor. La Ley permite que los fondos puedan tener más de 5% de la cartera en valores de un solo emisor, sin embargo, estos fondos deben ser específicamente etiquetados como no diversificados. En el caso de los fondos no diversificados, la Ley específica un límite en la concentración de los valores. Un fondo no diversificado no podrá invertir más de un 25% de la cartera en un solo emisor.

UBS recibió un permiso para mantener más de un 25% de la cartera en valores de un solo emisor, lo que provoca que el fondo sea aún más concentrados que los fondos etiquetados como no diversificados por la Ley de Compañías de Inversión. El prospectus del Puerto Rico Fixed Income Fund I dice:

"De conformidad con lo dispuesto en la decisión del Comisionado, el Comisionado de Instituciones Financieras impone ciertas restricciones sobre el fondo y otorgar al fondo determinadas exenciones provistas en la Ley de Compañías de Inversión… El fondo está autorizado a tener inversiones en valores de Puerto Rico y valores del Gobierno estadounidense en exceso del 25% en cada caso en la limitación de inversiones en un solo emisor impuesta por el artículo 2 de la Ley de Compañías de Inversión de Puerto Rico. "
La Tabla 2 organiza los fondos de UBS Puerto Rico por la fracción de la cartera invertida en la Corporación del Fondo de Interés Apremiante y en el Sistema de Retiro de Empleados. Los primeros cuatro fondos sólo tenían un 5.2 % de su cartera en estos dos emisores y presentaron pérdidas promedio de 16.3%. Esta pérdida es similar a la del mercado de bonos municipales de Puerto Rico. El resto de los fondos tenían 46.8 % de su cartera invertida en los dos emisores anteriormente mencionados y han sufrido pérdidas promedio de 41.6%.


En nuestra investigación, modelamos la relación matemática entre las pérdidas esperadas de los fondos cerrados y el apalancamiento y concentración de los fondos. Específicamente, para los fondos de UBS PR, demostramos una fuerte correlación entre el nivel de pérdidas experimentadas en cada uno de los fondos de UBS PR y el nivel de concentración presentado. Más aún, nosotros demostramos que las pérdidas son fruto de la concentración en productos de renta fija que originalmente fueron introducidos al mercado por UBS como suscritor.

2013 SEC Enforcement Summary

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

A couple months ago, we provided an analysis of SEC activity as represented by litigation releases.  In that post, we commented on the breakdown of SEC litigation releases over time, aggregated by month and weekday.  Recently, the SEC has released their enforcement statistics (PDF) updated for the 2013 fiscal year.

All told, the SEC obtained monetary sanctions of more than $3.4 billion (including disgorgement and penalties) over the 2013 fiscal year.  This number represents a nearly 11% increase year over year for the SEC's enforcement division.  Highlights of FY 2013 include the SEC penalizing NASDAQ for bungling the Facebook IPO and several actions filed involving SAC Capital Advisors -- including Steven Cohen.

In addition, the SEC is highlighting the $14 million paid out to whistleblowers (including this large payout) who have aided the SEC in several investigations during FY 2013.  The SEC received more than 3,200 tips over the past 12 months according to the press release.

The SEC opened 908 investigations in 2013, suggesting that 2014 might be a very active year for enforcement.  You can track the SEC's actions on their website or through our own weekly regulatory review.

Friday, December 27, 2013

SEC Litigation Releases: Week in Review

SEC Charges Archer-Daniels-Midland Company with FCPA Violations, December 24, 2013, (Litigation Release No. 22900)

According to the complaint (PDF), Archer-Daniels-Midland Company failed to "prevent illicit payments made by foreign subsidiaries to Ukrainian government officials." The SEC found that "ADM's subsidiaries in Germany and Ukraine paid $21 million in bribes" and ADM made "approximately $33 million in illegal profits as a result of the bribery by its subsidiaries." ADM has agreed to be permanently enjoined from future violations of the securities laws and to pay over $36 million in disgorgement and prejudgment interest to settle the charges. Additionally, ADM is required to "report on its FCPA compliance efforts for a three-year period." The U.S. Department of Justice announced in a parallel action that a non-prosecution agreement had been reached with ADM. Additionally, criminal charges were announced against "an ADM subsidiary that has agreed to pay $17.8 million in criminal fines."

SEC Charges Former SAP Employee with Insider Trading, December 23, 2013, (Litigation Release No. 22899)

The SEC has charged David F. Marchand with insider trading  in the securities of SuccessFactors, Inc., Ariba, Inc., and SAP AG. According to the complaint, Marchand made over $43,000 in illegal profits from the trading. Marchand has consented to a final judgment that permanently enjoins him from future violations of the securities laws and orders him to pay almost $90,000 in disgorgement, prejudgment interest, and civil penalties.

SEC Charges Woman and Stepson for Involvement in Zeekrewards Pyramid and Ponzi Scheme; Parallel Criminal Charges and Plea Agreements Also Announced, December 23, 2013, (Litigation Release No. 22898)

According to the complaint (PDF), Dawn Wright-Olivares and Daniel Olivares perpetrated "the fraudulent unregistered offer and sale of securities through Rex Venture Group LLC d/b/a ZeekRewards.com, an internet-based combined Ponzi and pyramid scheme." Both defendants have agreed to settle the SEC's charges against them by consenting to permanent injunctions and agreeing to pay over $11.4 million combined in disgorgement and prejudgment interest. Criminal charges have been placed against both defendants and in "light of their anticipated incarceration, no civil penalty will be imposed."

SEC Obtains Final Judgment Against Yonghui Zhang in Global Education Insider Trading Case, December 23, 2013, (Litigation Release No. 22897)

A final judgment was entered against Yonghui Zhang, "the remaining defendant in an insider trading case involving the securities of...Global Education and Technology Group, Ltd." Eight defendants, including Zhang, were charged "with insider trading after they reaped more than $2.8 million in profits by trading in advance of a publicly announced merger between Global Education and...Pearson plc." Zhang has consented to a final judgment that enjoins him from future violations of the Exchange Act and orders him to pay over $80,000 in disgorgement and civil penalties. "The relief obtained concludes the litigation in SEC v. All Know Holdings Ltd, et al."

SEC Settles Civil Action Against Advanced Cell Technology, Inc. Concerning Its Illegal Unregistered Distributions of Stock - Relief Includes Payment of More Than $4 Million, December 23, 2013, (Litigation Release No. 22896)

The SEC settled a pending civil action against Advanced Cell Technology, Inc. this week. The action arose out "of Advanced Cell’s issuance of hundreds of millions of unregistered shares of common stock on thirteen separate occasions without qualifying for any exemption from registration." According to the SEC, "in or about early 2006, Mark A. Lefkowitz, a penny stock financier, developed an illegal strategy for penny stock issuers to pay off past due debts and also raise capital by issuing stock purportedly pursuant to the Section 3(a)(10) exemption." From 2008 to 2009, several entities "affiliated with Lefkowitz...purchased past due debts of Advanced Cell from various Advanced Cell debtholders." After a Lefkowitz Related Entity acquired each debt, Lefkowitz and William Caldwell IV (who was then the Chief Executive Officer of Advanced Cell) "agreed on the terms of a settlement, and the Lefkowitz Related Entity filed a lawsuit against Advanced Cell in a Florida state court purportedly to collect on the debt." According to the SEC, "in each instance, the Florida state court found the settlements to be fair and entered an order granting a Section 3(a)(10) exemption." The defendants, however, never allegedly "informed the Florida state court of the full terms and conditions of the settlements, thereby compromising the fairness hearings." Advanced Cell allegedly "issued a total of 260,115,983 shares of unrestricted common stock to settle the thirteen lawsuits filed against it by the Lefkowitz Related Entities." The settlement shares, "which had a total market value of approximately $9,230,000 as of the respective settlement dates, were issued to satisfy past due debts totaling approximately $1,110,000." The Lefkowitz Related Entities purportedly retained "a portion of the profits from the sale of the shares for themselves" and then "remitted $3.5 million to Advanced Cell."

The SEC has charged Advanced Cell with violating the Securities Act and Advanced Cell has agreed to permanent enjoinment from future violations of the Securities Act, and to pay over $4 million in disgorgement and prejudgment interest.

SEC Obtains Order of Permanent Injunctions Against Chicago-Area Investment Adviser and Its Owners for Fraud, December 23, 2013, (Litigation Release No. 22895)

Last week, permanent injunctions were entered against Patrick G. Rooney and his company Solaris Management, LLC. According to the SEC, "Rooney and Solaris radically changed the investment strategy of the Solaris Opportunity Fund LP, contrary to the Fund's offering documents and marketing materials, by becoming wholly invested in Positron Corp." Rooney, "who has been Chairman of Positron since 2004 and received salary and stock options from Positron since September 2005, misused the Fund's money by investing more than $3.6 million in Positron through both private transactions and market purchases." While these "investments benefited Positron and Rooney," they provided the "Fund with a concentrated, undiversified, and illiquid position in a cash-poor company with a lengthy track record of losses." Rooney and Solaris have consented to a final judgment that enjoins them from future violations of the securities laws and have "agreed that the court would determine whether to impose penalties and disgorgement against them and whether Rooney should be prohibited from acting as an officer or director of a public company."

Court Enters Final Judgment of Permanent Injunction and Other Relief Against E-Monee.Com, Inc. and Estuardo Benavides, December 20, 2013, (Litigation Release No. 22894)

A final judgment was entered against  E-Monee.com, Inc. and Estuardo Benavides, that enjoins them from future violations of the Securities Act, orders Benavides to pay a $110,000 civil penalty, and bars Benavides from participating in an offering of penny stock. According to the SEC's original complaint, "E-Monee, its president Benavides, and one of its directors Robert B. Cook, fraudulently offered shares in E-Monee, while claiming the company owned Mexican bonds purportedly worth approximately $5 billion, and that E-Monee's shares would substantially increase in value." The bonds were in fact essentially worthless and "there was no valid basis for the claims by Benavides and Cook that E-Monee's shares would substantially increase in value."

SEC Charges Microsoft Senior Manager and Friend with Insider Trading in Advance of Company News, December 20, 2013, (Litigation Release No. 22893)

According to the SEC, Brian D. Jorgenson, along with his friend, Sean T. Stokke, traded on insider Microsoft information that Jorgenson learned "through his work in Microsoft's corporate finance and investments division." The duo allegedly made over $393,000 from the trading scheme. The SEC has charged the defendants with violating various provisions of the Exchange Act and "seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and financial penalties against Jorgenson and Stokke as well as an officer-and-director bar against Jorgenson."

Thursday, December 26, 2013

Feliz Navidad de parte de UBS Asset Managers de Puerto Rico

Por Craig J. McCann, PhD, CFA English Version

Anteriormente SLCG había publicado dos entradas sobre el colapso de los fondos UBS de bonos municipales de Puerto Rico incluyendo los fondos Puerto Rico Fixed Income Funds I y VI y Puerto Rico Investors Tax-Free Funds I y VI. Nuestra entrada del 7 de Octubre de 2013 titulada Peligro en la Isla del Encanto: Inversionistas de UBS Puerto Rico Sufren Cuantiosas Pérdidas, reportamos sobre las pérdidas en los fondos cerrados de bonos municipales administrados por UBS Asset Managers de Puerto Rico y vendidos por corredores de UBS Puerto Rico. Luego, en nuestra entrada del 18 de diciembre de 2013, ¿Acaso UBS Cobró Márgenes Excesivos a sus Propios Fondos de Bonos de Puerto Rico? Identificamos una de las formas que los inversionistas de fondos de bonos podrían ser perjudicados dado el gran conflicto de interés dentro de las compañías afiliadas a UBS.

UBS compró para sus fondos de bonos muchos de los bonos suscritos por UBS. Además, UBS es uno de los principales comerciantes de bonos municipales. Por lo tanto, UBS podría enriquecerse a expensas de sus clientes haciendo que sus administradores de cartera paguen márgenes excesivos. UBS no publica información detallada sobre los activos de sus fondos de bonos y sus transacciones, por ende, es difícil estar seguros si UBS ha sucumbido a este potencial conflicto de interés. Nosotros proveemos algunas evidencias de que esta es un área que los reguladores podrían querer echar una mirada más cercana en “Usando EMMA para Evaluar los Márgenes de Bonos Municipales (versión en inglés: Using EMMA to Assess Municipal Bond Markups).

No somos los primeros en comentar sobre el extraordinario conflicto de interés de las compañías afiliadas a UBS a través de los fondos de Bonos UBS Puerto Rico. En Febrero de 2009, David Evans de Bloomberg reportó sobre el conflicto en “Bonanza de Cuotas en Pensiones de Puerto Rico Visto como Conflicto” (artículo en inglés: Puerto Rico Pension Gets Fee Bonanza Seen as Conflicted). El fascinante artículo del señor Evans fue casi profético dado que las pérdidas del 2013 en los fondos pueden ser explicadas en gran parte por los bonos suscritos por UBS para este emisor y para la Corporación del Fondo de Interés Apremiante. Escribiremos más sobre como las pérdidas sufridas por los fondos de bono UBS Puerto Rico pueden ser explicadas por el conflicto de interés de UBS en futuras entradas a nuestro blog y en investigaciones.

Mientras tanto, pensé que estarían interesados en esta pequeña payasada de UBS.

En Nochebuena, recibimos esta carta de un bufete de abogados puertorriqueño, McConnell Valdez LLC, de parte de UBS Asset Managers de Puerto Rico (descarguen la carta a aquí) amenazándonos al menos que nos retractarnos de nuestra leve declaración acerca de los fondos UBS y dejásemos de distribuir cualquier investigación o comentario sobre los bonos. UBS Asset Managers de Puerto Rico no quiere que señalemos a los inversionistas y reguladores sobre el potencial conflicto de interés, fraude o mala administración en sus fondos. UBS podría proveer las transacciones y data de los valores de los fondos a SLCG o a cualquier otra firma de investigación financiera y permitir que la verdad sea liberada.

Pero claro, si la verdad no es suficiente, UBS debería contratar abogados para enviar cartas abusivas y amenazantes para tratar de evitar cualquier investigación independiente.

Feliz Año Nuevo!

Merry Christmas from UBS Asset Managers of Puerto Rico

By Craig J. McCann, PhD, CFA Versión en Español

SLCG previously posted two blog entries on the collapse of UBS’s Puerto Rico municipal bond funds including the Puerto Rico Fixed Income Funds I to VI and Puerto Rico Investors Tax-Free Funds I to VI. Our October 7, 2013 post, Trouble in Paradise: UBS Puerto Rico Bond Fund Investors Hit Hard, reported on losses in closed end municipal bond funds managed by UBS Asset Managers of Puerto Rico and sold by UBS brokers in Puerto Rico. Then on December 18, 2013 in our Did UBS Charge its Proprietary Puerto Rico Bond Funds Excessive Markups? we identified one of the ways in which the extensive conflicts of interest at UBS affiliated companies in Puerto Rico might harm investors in these bond funds.

UBS underwrote many of the bonds UBS bought for the bond funds. In addition, UBS is a major municipal bond dealer. UBS, thus, might enrich itself at the expense of its clients by having the funds’ portfolio managers pay excessive markups. UBS does not make detailed data on the bond funds’ holdings and transactions publicly available so it is hard to know for sure whether UBS has succumbed to this potential conflict of interest. We provided some evidence that this is an area that regulators may want to look at more closely based on our Using EMMA to Assess Municipal Bond Markups.

We’re not the first to comment on the extraordinary conflicts of interest engulfing UBS affiliated companies through the UBS Puerto Rico bond funds. Back in February 2009, David Evans of Bloomberg reported on UBS’s myriad roles including as financial advisor to the Puerto Rican Employees Retirement System in Puerto Rico Pension Gets Fee Bonanza Seen as Conflicted. David’s fascinating story was ominously prescient as bonds underwritten by UBS from this issuer and from the Puerto Rico Sales Tax Financing Corporation appear to be the main sources of losses in the funds in 2013. We’ll write more about how UBS’s conflicts of interest explain much of the losses in the UBS Puerto Rican bond funds in upcoming blog posts and a working paper.

In the meantime, I thought you would be interested in this bit of buffoonery from UBS.

On Christmas Eve, we received a letter from a Puerto Rican law firm, McConnell Valdez LLC, on behalf of UBS Asset Managers of Puerto Rico (download letter here) threatening us unless we retract the very mild statements we made about the UBS funds and desist from distributing any further research or commentary into the funds. UBS Asset Managers of Puerto Rico doesn’t want us to point investors and regulators to potential conflicts of interest, fraud or mismanagement in their funds. We think investors deserve to know how they lost $2 billion in UBS’s Puerto Rican bond funds. UBS could provide transaction and holding data to SLCG or some other financial research firm and allow the truth to set it free.

Of course, if the truth won’t do, UBS should hire a lawyer to send abusive, threatening letters to try to squash independent research.

Happy New Year!


Monday, December 23, 2013

Are Managed Futures a License to Steal?

By Geng Deng, PhD, CFA, FRM and Craig McCann, PhD, CFA

Bloomberg’s David Evans raised this question in his recent Fleeced by Fees. David found that 89% of the futures trading profits and interest on collateral in 63 SEC-registered managed futures funds from 2003 to 2012 were consumed by fees and commissions. David’s story shines a light on the abusive fees charged by the managed futures partnerships. His story quotes a spokesperson for the National Futures Association self-regulatory organization / trade group as saying that “We can’t just give investors all the answers.” Thankfully, his follow up story last week reports that the CFTC has opened an investigation into the high fees and so more useful information might be on the way to investors soon.

We’ve been working on this story ourselves for a while now and find substantially the same results as David. The table below lists the investment income (including futures profits and interest income) in 93 SEC-registered managed futures funds from 2003 to 2012. This sample is a little larger than David’s primarily because it includes some funds that didn’t survive to the end of 2012.

Our 93 filers reported $2.37 billion in interest income and $9.63 billion in futures trading profits for a total of $12.0 billion in investment returns from 2003 to 2012. The firms deducted $10.42 billion in fees and commissions (87% of the investment returns) and distributed only $1.59 billion (13%) to investors. As if that wasn’t evidence enough that the registered managed futures funds are robbing investors, consider this: the interest on the collateral was $2.37 billion. That is, the registered managed futures funds on average paid out none of the $9.63 billion in futures trading profits and only two-thirds of the interest earned on the low risk collateral purchased with investors' capital. Investors would be far better to have invested in a diversified bond portfolio than to invest in a managed futures partnership.

We’ve embedded links to each filer’s SEC filing. Click on the name of the filer and you will be taken to the SEC Edgar page where you will be able to view the source document Form 10-Ks.

Company NameReport YearsInvestment Income
(A)
Fees
(B)
Net Income (A-B)Fees
(B/A)
AAA CAPITAL ENERGY FUND L.P. 03 to 124957129210540360719
AAA CAPITAL ENERGY FUND L.P. II 03 to 1274918616033658885021
AAA ENERGY OPPORTUNITIES FUND LLC11 to 12649215531-9039239
AIS FUTURES FUND IV LP05 to 1258545244733407242
ALPHAMETRIX MANAGED FUTURES III LLC10 to 1226336428-3795244
ALPHAMETRIX MANAGED FUTURES LLC07 to 122333124216-886104
ALTEGRIS QIM FUTURES FUND, L.P.09 to 121899720170-1173106
ALTEGRIS WINTON FUTURES FUND LP06 to 121740891368123727879
ASPECT FUTURESACCESS LLC05 to 12164631909397369255
ASPEN DIVERSIFIED FUND LLC05 to 122111915186593272
ATLAS FUTURES FUND LIMITED PARTNERSHIP03 to 1134225235441068069
BEACON FINANCIAL FUTURES FUND LP05 to 06106175-69165
BLACK ROCK FUTURES INVESTMENTS LP03 to 051700214939206388
BLACK ROCK PRINCIPAL PROTECTION LP03 to 0549173744117376
BLACKROCK GLOBAL HORIZONS I L.P.03 to 12169845180028-10183106
BRIDGETON GLOBAL DIRECTIONAL FUND, LP07 to 121018817508-7319172
BROMWELL FINANCIAL FUND LP03 to 11203718-516354
CAMPBELL ALTERNATIVE ASSET TRUST03 to 1029979129831699643
CAMPBELL FUND TRUST03 to 123936162966409697675
CAMPBELL STRATEGIC ALLOCATION FUND LP03 to 122498688233989815879194
CITIGROUP FAIRFIELD FUTURES FUND L P03 to 073508340569-5486116
COMMODITY ADVISORS FUND L.P. 09 to 123155468-51521734
DIVERSIFIED 2000 FUTURES FUND L.P. 03 to 12118280993131896784
DIVERSIFIED FUTURES FUND L.P.03 to 0717163536-1820206
DIVERSIFIED FUTURES TRUST I03 to 081316111210195185
DIVERSIFIED MULTI-ADVISOR FUTURES FUND L.P. 03 to 1255543440561148779
DIVERSIFIED MULTI-ADVISOR FUTURES FUND L.P. II 03 to 1263672488571481577
EMERGING CTA PORTFOLIO LP 05 to 12109362900981926482
EVEREST FUND LP03 to 122661024955165594
FAIRFIELD FUTURES FUND LP II 04 to 12136011407329527830
FRONTIER FUND09 to 122400472389681079100
FUTURES PORTFOLIO FUND L.P.03 to 126443065599928431487
FUTURES STRATEGIC TRUST05 to 082800180899365
GLOBAL DIVERSIFIED FUTURES FUND L.P. 03 to 1254510360321847966
GLOBAL MACRO TRUST03 to 124670824526351444797
GRANT PARK MANAGED FUTURES STRATEGY FUND03 to 12419527488111-68584116
GREENHAVEN CONTINUOUS COMMODITY INDEX FUND08 to 122138916997439279
HENRY JOHN W & CO/MILLBURN L P03 to 061099711087-89101
HIGHBRIDGE COMMODITIES FUTURESACCESS LLC11 to 12-90162188-11204-24
KENMAR GLOBAL TRUST05 to 0945255578-1054123
KMP FUTURES FUND I LLC10 to 1233627643-4281227
LV FUTURES FUND L.P.07 to 123507967-76162273
MAN AHL DIVERSIFIED I LP09 to 12-3785068476-106326-181
MAN AHL FUTURESACCESS LLC10 to 12-29933837-6830-128
MANAGED FUTURES CHARTER GRAHAM L.P. 03 to 123710403201715086886
MANAGED FUTURES PREMIER ABINGDON L.P. (FILER)07 to 126945267677177597
MANAGED FUTURES PREMIER AVENTIS II L.P. 05 to 121822961375774471875
MANAGED FUTURES PREMIER BHM L.P. 10 to 12-6444932465-96914-50
MANAGED FUTURES PREMIER WARRINGTON L.P. 06 to 121436781127943088479
MERITAGE FUTURES FUND L.P. (FILER)07 to 128396897-6058822
ML BLUETREND FUTURESACCESS LLC08 to 1269193337043548949
ML CHESAPEAKE FUTURESACCESS LLC07 to 07-4087977-5064-24
ML CORNERSTONE FUTURESACCESS LLC05 to 07-1313513074-26209-100
ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC07 to 1284421470543736756
ML TREND-FOLLOWING FUTURES FUND L.P.03 to 1237624315094-277470837
ML WINTON FUTURESACCESS LLC05 to 1249442126495622946554
MLM INDEX FUND03 to 123706855471-18403150
MS DIVERSIFIED FUTURES FUND L.P.03 to 07-432223089-27411-534
MS PORTFOLIO STRATEGY FUND L.P.03 to 07331628152-24836849
MSSB CHARTER ASPECT L.P. 03 to 1279819119209-39390149
MSSB CHARTER CAMPBELL LP 03 to 12150762168246-17483112
MSSB CHARTER WNT L.P. 03 to 126580462089371594
MSSB SPECTRUM CURRENCY & COMMODITY L.P. 03 to 12284082296-794562898
MSSB SPECTRUM GLOBAL BALANCED LP 03 to 122263520567206891
MSSB SPECTRUM SELECT LP 03 to 125061134390766703787
MSSB SPECTRUM STRATEGIC LP 03 to 122097901692794051181
MSSB SPECTRUM TECHNICAL LP 03 to 12490339498672-8333102
MORIAH FUTURES FUND LLC03 to 03-30170-199-573
NESTOR PARTNERS03 to 12128074455478252736
NUVEEN DIVERSIFIED COMMODITY FUND08 to 122256590631350240
NUVEEN LONG/SHORT COMMODITY TOTAL RETURN FUND11 to 12-165411363-17904-8
ORION FUTURES FUND LP 03 to 1256529032339624189457
ORTUS CURRENCY FUTURESACCESS LLC12 to 12-40251176-5201-29
POLARIS FUTURES FUND L.P.07 to 12-369024642-28332-668
POTOMAC FUTURES FUND LP 03 to 1297888109654-11766112
PRICE FUND I LP04 to 06441712-271161
PROVIDENCE SELECT FUND LP06 to 085651146-580203
RICI LINKED - PAM ADVISORS FUND, LLC09 to 1272719102956242514
RJO GLOBAL TRUST05 to 121080879916-69108739
ROGERS INTERNATIONAL RAW MATERIALS FUND LP03 to 122570317081862266
SENECA GLOBAL FUND, L.P.08 to 12240013705-11305571
SMITH BARNEY MID WEST FUTURES FUND LP II03 to 0724519097-6646371
SUPERFUND GOLD, L.P.09 to 12129476968598054
SUPERFUND GREEN, L.P.03 to 127928485639-6355108
SYSTEMATIC MOMENTUM FUTURESACCESS LLC07 to 123493083603-48672239
SYSTEMATIC MOMENTUM II LLC06 to 08132005932726845
TACTICAL DIVERSIFIED FUTURES FUND L.P. 03 to 126951746528414233294
TEUCRIUM COMMODITY TRUST10 to 12177138520919448
TIDEWATER FUTURES FUND LP 04 to 121258042561-29981338
TRIVIEW GLOBAL FUND, LLC05 to 12-30638-668-2119
TUDOR FUND FOR EMPLOYEES LP03 to 0373141999531527
WESTPORT JWH FUTURES FUND LP 03 to 124127973810-32531179
WITTER DEAN DIVERSIFIED FUTURES FUND II L P03 to 05-6411847-2488-288

David’s story discusses at some length the Campbell Strategic Allocation Fund. Over the decade it had $2.5 billion in investment returns but deducted $2.34 billion in fees and commissions leaving investors with only 6% of the returns for bearing the risk of the futures trading on the collateral purchased. The Campbell Strategic Allocation Fund collateral alone earned $760 million and so investors received only about 20% of the returns on the fixed income collateral and none of the profits from the futures trading.

There are other great examples of what is a ubiquitous pattern of excessive fees.

The 29 registered managed futures partnerships managed by Morgan Stanley’s affiliate, Ceres, had gross returns of $5.4 billion but net returns of only $1.3 billion after $4.1 billion in fees were deducted over the 10 years from 2003 to 2012.

Annualized gross returns to the Ceres funds were 10.0%, expenses were 7.9% and net returns only 2.1%.

During the same period, S&P stocks' annual return was 7.0%, beating the Ceres managed futures partnerships 9 out of 10 years.

Municipal bonds during the same period had an annual tax free return of 4.8%, and taxable bonds 5.1%.

Ceres Managed Futures Partnership Returns, 2003-2012 (in millions)

The expected gross return to a fully collateralized futures position is the return to a cash investment plus whatever compensation is required for the risk borne in the collateral investment. For stocks and stock index futures this is the expected return on the stock market. For other underlying investments, the expected returns are less. The expected gross return to actively managed futures is also equal to the expected returns to actively managed cash investments. Given this simple arithmetic, a managed futures investment with 7 to 9% annual expenses on average will earn much less than combinations of stocks and bonds over time because of the extraordinary withdrawals taken by the industry each year from investors’ capital.

The clear answer to the headline answer is, Yes.

Friday, December 20, 2013

SEC Litigation Releases: Week in Review

SEC Charges Detroit Area Man and His Company with Conducting a Pump and Dump Scheme, December 18, 2013, (Litigation Release No. 22892)

According to the complaint (PDF), "Randy A. Hamdan and a related entity, Oracle Consultants LLC,...carr[ied] out a pump-and-dump scheme in the securities of CompuSonics Video Corporation" that resulted in illicit proceeds of almost $30,000. The SEC has charged the defendants with violating the Securities Act and Exchange Act and seeks permanent injunctions, disgorgement, prejudgment interest, penalties, and a penny stock bar.

SEC Charges Texas Oil and Gas Promoters for Securities Fraud, December 16, 2013, (Litigation Release No. 22891)

According to the complaint (PDF), Leon Ali Parvizian and his two companies, Arcturus Corporation and Aschere Energy LLC, fraudulently offered and sold securities "in the form of interests in oil and gas joint ventures."Additionally, promoters Alfredo Gonzalez, AMG Energy, LLC , Robert Balunas, and R. Thomas & Co., LLC have been charged "with violations of the securities offering and broker-dealer registration provisions of the federal securities laws" by acting as unregistered broker-dealers and selling unregistered securities. Although the defendants raised nearly $22 million from investors, "only $7.9 million, or 36 percent, of the money raised" was used to drill oil and gas wells. The rest was used on "non-JV related expenses, including legal fees." The SEC has charged the defendants with violating various provisions of the securities laws and seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties.

SEC Charges Perpetrators of Prime Bank Schemes in Las Vegas and Switzerland, December 16, 2013, (Litigation Release No. 22890)

According to the complaint (PDF), Malom Group AG, along with Martin U. Schläpfer (Malom's Chief Executive Officer), Hans-Jürg Lips (Malom's President), James C. Warras (Malom's Vice President), Joseph N. Micelli (Malom's Compliance Officer), Anthony B. Brandel (Malom's main point of contact for U.S. Investors), and Sean P. Finn (Malom's investment recruiter) "raised $11 million from U.S. investors by using a series of lies and forged documents to steer [investors] into seemingly successful foreign trading programs that were nothing more than vehicles to steal money." Finn's company, M. Dwyer LLC, has also been named as a defendant. The defendants allegedly used the stolen money for personal use. The SEC has charged the defendants with violating various provisions of the securities laws and seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties.

In a parallel action, the U.S. Department of Justice "announced criminal charges against the same six individuals charged in the SEC's complaint."

SEC Charges Seven Individuals and Six Entities Involved in Prime Bank Fraud, December 13, 2013, (Litigation Release No. 22889)

According to the complaint (PDF), Daniel D. Coddington, his company Golden Summit Investors Group, Ltd,  Jesse W. Erwin, Merlyn C. “Curt” Geisler, Marshall D. Gunn, Lewis P. Malouf, Golden Summit, Extreme Capital Ltd, Fidelity Asset Service Corp., Geisco FNF, LLC, and SouthCom Management, LLC "carried out a Prime Bank Fraud that raised more than $31 million." The complaint also charges Seth A. Leyton, Michael B. Columbia and Stonerock Capital Group LLC with "aid[ing] and abett[ing] the fraud." The SEC has charged the defendants with violating various provisions of the securities laws and seeks "permanent injunctions, disgorgement plus prejudgment interest, third-tier penalties, and other relief against all of the defendants." Additionally, "the complaint seeks disgorgement plus prejudgment interest from relief defendants Daniel S. 'Scott' Coddington, Coddington Family Trust, Joanna I. Columbia, Vincent G. Farris, and Vincent G. Farris Co., L.P.A."

Massachusetts Investment Adviser Sentenced to 36 Months in Jail for Defrauding Investors, December 13, 2013, (Litigation Release No. 22888)

Last week, Jeffrey A. Liskov was sentenced "to serve a prison term of 36 months, followed by a supervised probationary period of 3 years, and [ordered] to pay $3,003,147 in restitution" in connection with his guilty plea "to a one-count criminal Information charging him with willfully violating Section 206 of the Investment Advisers Act of 1940." The allegations made in the criminal case were similar to allegations made by the SEC that "Liskov and his former advisory firm, EagleEye Asset Management, LLC,...defraud[ed] their clients in connection with foreign currency exchange (forex) investments." Based on the SEC's charges, a  final judgment was entered last December against the defendants ordering them to be permanently enjoined from future violations of the securities laws and to pay over $1 million in disgorgement, prejudgment interest, and civil penalties. Additionally, EagleEye's registration as an investment advisor was revoked and Liskov was barred from associating with any investment adviser.

Thursday, December 19, 2013

Self-Indexing in Commodity-Linked Investments - Citi CUBES

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

Over the past few weeks and months, we've noticed a pattern in the products coming across our desks: structured investments linked to esoteric proprietary indexes, created by the same bank that issued the product.  We touched on this topic a bit when we discussed self-indexing in the context of structured certificates of deposit, but we thought we'd revisit the issue with a few of the examples that we've been looking into more recently.  The examples we'll discuss each reference a proprietary strategy for obtaining exposure to commodity futures markets.1

In September 2009, Citi launched a set of indices that tracked exposure to the commodity futures market, dubbed the Citi Commodities Curve Beta Enhanced Indices or CUBES.

Citi's CUBES operate under the assumption that the term structure of a given commodity is "expected to remain fairly constant" and that "any significant deviation from this relationship is unsustainable in the short term."  At the end of each month, Citi averages observed futures contract prices for the current month and the previous month.  This average is then used as the estimate for the term structure for the end of the following month.  Citi then selects the contract that will have the largest expected yield in one month.

This strategy will typically result in exposure to longer-dated futures contracts (futures contracts that are further out in the term structure) where prices do not vary as much. This strategy attempts to limit the negative effects of roll-yield in contangoed commodity markets.2 More information can be found in the SEC filings for the indexes.

Like most newly created indexes, the strategy backtests well.  In particular, Citi mentioned that the "S&P GSCI weighted Citi CUBES excess return aggregate index has generated returns of 14.60% [...] with an annualized volatility of 21.84%" when the S&P GSCI index has returned 4.37% with a volatility of 25.37% for the period 1999-2009.

It is important to note that Citi's CUBES methodology depends a great deal on its assumption about commodity term structures remaining constant.  The academic literature on the term structure of futures markets is voluminous, and the precise dynamics of these markets is still not completely understood.  Investors should appreciate that any investment linked to Citi's CUBES indexes represents a bet on Citi's potentially simplistic view of commodities markets.

Since the launch of the indexes, Citi has created funds that track these indices.  Having a fund or product that tracks an index that the sponsor/issuer themselves is responsible for calculating engenders deep conflicts of interest.  When, for example, the payment on debt is linked to the performance of one of these indexes, there is an incentive for the calculation agent to alter the performance of the index to decrease the bank's liabilities, reducing returns to investors.

Issuers may argue that by developing their own indexes they are reducing the fees that they would otherwise have to pay to license a third party's index, but in fact using a third party index helps reduce conflicts of interest.  As more and more exchange-traded products, structured products, structured CDs, and other investments move to self-indexing, these conflicts may become ever more common.  We will continue to track this issue closely.
_______________________________
A futures contract is a standardized contract that represents an exchange of money between two parties for the obligation to deliver a very specific commodity at some date in the future.  The prices of futures contracts on the same commodity across different delivery dates forms a term structure.
For more information about the effects of roll-yield on the profitability of futures-based strategies, see our blog posts and research on the topic.

Wednesday, December 18, 2013

Did UBS Charge its Proprietary Puerto Rico Bond Funds Excessive Markups?

By Geng Deng, PhD, CFA, FRM, Craig McCann, PhD, CFA and Carmen Taveras, PhD Versión en Español

UBS Puerto Rico's closed-end funds have received much attention in recent months. While the coverage has focused on the funds' leverage and concentration in Puerto Rican municipal bonds (see for example, New York Times and Bloomberg), discovery and further research into the funds is likely to reveal other important issues -excessive markups, for instance.

Investors, including mutual funds like the UBS Puerto Rico Funds, buy municipal bonds from dealers who typically charge a markup over the price that the dealers pay for the bonds. A trade history for each municipal bond is available through the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system. Comparing the markup (often computed as the difference between the purchase price and the inter-dealer price on the same day) with the distribution of markups for similarly-sized trades, we can determine whether the markup on a particular bond trade is unusually large and therefore likely excessive. SLCG has a research paper measuring excess markups on municipal bonds (PDF).1 In this post, we illustrate how to apply the methodology developed in the SLCG paper to the bonds in the UBS Puerto Rico Funds.

The table below shows the trading activity from September 27, 2011 to November 10, 2011 in a $51.55 million face value, 6% coupon Puerto Rican municipal bond (CUSIP 74527EFA1) issued in July 2011. Using monthly data on portfolio holdings for US mutual funds we know that the Oppenheimer Rochester VA municipal fund (ORVAX) had purchased $1,645,000 of this bond in October 2011. On October 14, 2011 we see a customer purchase of the same par amount as the amount held in the ORVAX fund.





















Starting from the bottom of the table and working our way up, on September 27 there was a $3 million customer sale and a $3 million customer purchase. These trades were likely through the same broker, since there are no contemporaneous large inter-dealer trades. The spread between the customer purchase and the customer sale is $0.281 and the half-spread is $0.1405.

On the afternoon of October 13, there is a customer sale of $2,895,000. On the following day, there are two large customer buys of $1,000,000 and $1,645,000, both at a price of $105.401. Since there are no inter-dealer trades, these trades are likely to be with the same dealer. The spread between the customer purchase and the customer sales is $0.404, and the half-spread is $0.202.

It is likely that the dealer who bought the $2,895,000 in the afternoon of October 13, 2011 at a price of $104.997 sold the remaining $250,000 to another dealer at $105.603 who, in turn, marked up the price to $107.603 on October 14, 2011. The brokerage industry received a transfer of $2.606 per $100 in par value traded for this small trade.

This pattern is consistent with the published literature including our own research on municipal bond markups, which document that markups are larger on smaller trades and are larger than markdowns on similarly-sized trades. Fixed costs in processing trades and better informed large traders are two forces likely behind the empirical finding that large trades typically are charged lower markups.2

Although we are in the process of analyzing individual portfolio holdings for the UBS Puerto Rico funds over the last 6 years, it is harder to track the UBS Puerto Rico bond purchases because the Puerto Rico funds do not report quarterly holdings, as do the mainland funds. Also, the mainland funds reports once filed with the SEC are eternally available while UBS only makes publicly available the most recent version of its Puerto Rican mutual fund reports. However, we have spotted some patterns in the trading data that make us question whether the UBS Puerto Rico funds paid excessive markups for the bonds in their portfolios.

On March 31, 2010, the UBS Puerto Rico Fixed Income Fund IV held $250,000 in par amount of a bond issued in May 2008 by the Government of Puerto Rico's Employees Retirement System (CUSIP: 29216MBA7). A year later, the fund held $7,750,000 in par amount of the same bond so we know that the UBS fund made net purchases of that bond totaling $7,500,000 par amount during that year.

The table below has all of the trades occurring on September 23, 2010 for the Retirement System bond. All of the trades on that day occur within an hour of each other. There are six inter-dealer trades, all occurring at the same price of $99.25. There are five customer purchases, all occurring at the same price of $100.5 and seven customer sales, all at a price of $99.



All the customer purchases occurred at the same price of $100.5, despite wide variations in the trade amounts. The $1.25 markup results in a $27,500 transfer from the customer purchasing the $2,200,000 in par amount to the brokerage firm selling the bonds. In our municipal bond paper, we analyzed over 13.6 million customer trades, totaling $2.5 trillion in par amount traded to calculate the fair markup for any given trade size. For trades of $2,200,000, the median markup is about $0.038 per $100 in par amount, according to our analysis. Therefore, the customer purchasing the $2,200,000 paid $26,647 in excessive markups.

In contrast, two trading days later on September 27, large trades were executed at low markups for the same Retirement System bond. The table below shows a customer purchase of $10,000,000 for a price of $99.25 and nine customer sales totaling $10,000,000 for $99. The spread on these trades is $0.25 and the half-spread is $0.125. It appears that customers selling this bond on September 27 paid the same markdown as the customer selling on September 23. On the other hand, the customer buying a large quantity on September 27 effectively paid no markup (consistent with the evidence in the published literature on such large trades) while the customers buying large quantities on September 23 appears to have paid excessive markups.






 
UBS’s bond funds should pay miniscule markups consistent with large purchases by institutional investors but by virtue of its common control of the bond underwriter, the bond deal and the portfolio manager, UBS might have paid much higher markups since the benefit of such high markups flow to UBS and the costs are almost entirely born by fund investors.

Detailed transaction data analysis should be done on all of the purchases of bonds in the UBS Puerto Rico funds, allowing us to determine whether UBS was paying itself higher markups than those it received on the same bonds from mainland funds and whether UBS paid higher markups on UBS-underwritten bonds than on non-UBS-underwritten bonds.

Although we currently do not have access to such detailed transaction data, we are in the process of analyzing portfolio holdings using the 114 (and growing) annual reports and mid-year holding reports from 2008 to 2013 that are currently available to us. Stay tuned for our analysis which we will post in the coming weeks.
____________________________________
1. Deng and McCann (2013) “Municipal Bond Markups”
2. Breen, Hollifield, and Schurhoff (2006) "Dealer Intermediation and Price Behavior in the Aftermarket for New Bond Issues."

¿Acaso UBS Cobró Márgenes Excesivos a sus Fondos de Puerto Rico?

Por Geng Deng, PhD, CFA, FRM, Craig McCann, PhD, CFA y Carmen Taveras, PhD English Version

En los últimos meses, los fondos cerrados UBS Puerto Rico han recibido mucha atención. Aunque dicha atención se ha enfocado en el apalancamiento y concentración en bonos municipales de Puerto Rico (véase por ejemplo, el New York Times y Bloomberg), es probable que futuras investigaciones encuentren otros asuntos importante – por ejemplo, márgenes excesivos.

Los inversionistas, incluyendo fondos mutuos tales como los Fondos UBS Puerto Rico, compran bonos municipales pagando un margen sobre el precio pagado por los corredores. La serie histórica de compras y ventas de cada bono municipal se encuentra disponible en el sistema de Acceso Electrónico de Mercado Municipal (del Municipal Securities Rulemaking Board). Comparando los márgenes (computados usualmente como la diferencia entre el precio de compra y el precio entre corredores en el mismo día de la transacción) con la distribución de márgenes de transacciones de tamaños similares, podemos determinar si el margen para una transacción de bono en particular es inusualmente grande y por ende probablemente excesivo. SLCG tiene un documento de investigación cuantificando márgenes excesivos en bonos municipales (PDF) . En esta entrada del blog, ilustraremos como aplicar la metodología creada por SLCG en esta investigación a los bonos en los fondos de UBS Puerto Rico.

La siguiente tabla muestra la actividad de compraventa desde el 27 de Septiembre de 2011 al 10 de noviembre de 2011 para el bono municipal puertorriqueño emitido en julio de 2011 (CUSIP 74527EFA1), con valor de $51.55 millones y cupón de 6%. Usando data mensual para los valores de cartera de fondos mutuos americanos sabemos que el bono municipal Oppenheimer Rochester VA (ORVAX) había comprado $1,645,000 de este bono en octubre de 2011. El 14 de Octubre de 2011 vemos que un cliente hizo una compra por el mismo valor a par que el valor en posesión del fondo ORVAX.


Comenzando por el final de la tabla y desarrollándonos hacia arriba, el 27 de Septiembre hubo una venta del cliente de $3 millones y una compra de cliente por $3 millones. Estas transacciones fueron probablemente hechas a través del mismo corredor, dado que no hay transacciones inter-corredor en ese día. La diferencia entre el precio de compra y el precio de venta es de $0.281, y la mitad del margen es de $0.1405.

En la tarde del 13 de octubre, hay una venta de cliente por $2,895,000. El siguiente día hay dos grandes compras de clientes por $1,000,000 y $1,645,000, ambas al precio de 105.401. Dado que no hay transacciones inter-corredores, estas transacciones son probablemente hechas con el mismo corredor. La diferencia entre el precio de compra y el precio de venta es de $0.404, y la mitad del margen es de $0.202

Es probable que el corredor que compró los $2,895,000 en la tarde del 13 de octubre de 2011 al precio de $104.997 vendió el restante de los $250,000 a otro corredor al precio de $105.603, y éste a su vez incrementó el precio a $107.603 el 14 de octubre de 2011. La industria de corretaje recibió una transferencia de $2.606 por cada $100 del valor par negociado en esta pequeña transacción.

Este patrón es consistente con la literatura publicada incluyendo nuestra propia investigación sobre márgenes en bonos municipales, que documenta que a mayores márgenes, menor es la transacción y que son mayores que las rebajas en transacciones de tamaño similar. Dos probables fuerzas detrás de este descubrimiento empírico: Los costos fijos en proceso de las transacciones y la mejor información que los grandes corredores poseen.

Aunque todavía estamos en el proceso de analizar los valores individuales de cada cartera de los fondos UBS Puerto Rico de los últimos 6 años, es más difícil contabilizar las compras de bonos UBS Puerto Rico dado que los fondos de Puerto Rico no reportan sus valores de manera trimestral, como lo hacen los fondos estadounidenses. Además, los fondos estadounidenses reportan desde que depositan sus archivos con la SEC y están disponibles por siempre mientras que UBS sólo hace público la versión más reciente de sus reportes de fondos mutuos puertorriqueños. Sin embargo, hemos encontrado algunos patrones en la data de transacciones que nos hacen cuestionar si los fondos UBS Puerto Rico pagaron márgenes excesivos por los bonos en sus carteras.

El 31 de marzo de 2010, el fondo UBS Puerto Rico Fixed Income Fund IV tenía $250,000 en valor par de bonos emitidos en mayo de 2008 por el Sistema de Retiro de los Empleados del Gobierno y la Judicatura de Puerto Rico (CUSIP: 29216MBA7) . Un año más tarde, el fondo poseía $7,750, 000 en valor par de los mismos bonos, o sea que sabemos que el fondo UBS hizo compras netas del bono por un total de $7,500,000 durante ese año.

La tabla más abajo tiene todas las transacciones del 23 de septiembre de 2010 de los bonos del Sistema de Retiro. Todas las transacciones de ese día ocurren a menos de una hora entre ellas. Hay seis transacciones inter-corredor, todas al mismo precio de $99.25. Hay cinco compras de cliente, todas al mismo precio de $100.5 y siete ventas de cliente, todas al precio de $99.


Todas las compras de cliente se hicieron al mismo precio de $100.5, aunque hay grandes variaciones en el monto de las transacciones. El margen de $1.25 provee una transferencia de $27,500 por parte del cliente comprando $2,200,000 a valor par a la firma corredora vendiendo los bonos. En nuestra investigación de bonos municipales, hemos analizado más de 13.6 millones de transacciones de clientes para un total de $2.5 trillones de transacciones a valor par para calcular el margen justo a cobrar para cualquier transacción. Según nuestro análisis, para transacciones de $2,200,000, el margen medio era de alrededor de $0.038 por cada $100 en valor par. Por lo tanto, el cliente que compró los $2,200,000 pagó márgenes excesivos de $26,647.

En contraste, dos días más tarde en el 27 de septiembre, grandes transacciones fueron ejecutadas para los mismos bonos del Sistema de Retiro a bajos márgenes. La tabla más abajo presenta una compra de cliente de $10,000,000 a un precio de $99.25 y nueve ventas de clientes por un total de $10,000,000 a $99. El margen de estas transacciones es de $0.25 y el medio margen es de $0.125. Parece ser que los clientes vendiendo este bono el 27 de septiembre pagaron la misma rebaja que los clientes que vendieron el 23 de septiembre. Por otra parte, los clientes comprando grandes cantidades el 27 de septiembre efectivamente no pagaron márgenes (consistente con la evidencia de dichas grandes transacciones en la literatura) mientras que los clientes comprando grandes cantidades el 23 de septiembre aparentemente pagaron márgenes excesivos.


Los fondos de bonos UBS deberían de pagar márgenes minúsculos lo que sería consistente con las grandes compras por inversionistas institucionales pero en virtud de su control como suscritor del bono, de las negociaciones del bono y el de la administración de la cartera, UBS podría haber pagado márgenes mucho mayores dado que los beneficios de dichos márgenes fluyen directamente a UBS y los costos son casi todos pagados por los inversionistas de fondos.

Aunque actualmente no poseemos a más información sobre las transacciones, estamos en el proceso de analizar la cartera de fondos UBS usando 114 (y aumentando) reportes anuales y reportes semestrales desde 2008 al 2013 actualmente disponibles para nosotros (estamos obteniendo más reportes). Manténganse sintonizados para nuestro análisis que será publicado en las próximas semanas.

________________________________________________
1Deng y McCann (2013) “Márgenes de Bonos Municipales” (traducción al español).
2Breen, Hollifield, and Schurhoff (2006) "Dealer Intermediation and Price Behavior in the Aftermarket for New Bond Issues."

Tuesday, December 17, 2013

SPIVA Scorecard: Persistent Lack of Persistence

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

Earlier this week, S&P Dow Jones Indices released their semiannual SPIVA Persistence Scorecard, which assesses how consistent top performing actively managed US equity mutual funds have been.  This is the third SPIVA release since our blog has been in existence and each time we bring attention to their work.  Once again, their results suggest that mutual fund managers only rarely outperform for long.

This year the study found that roughly 7% of funds that were in the top 25% of actively managed mutual funds in September 2011 remained in the top 25% as of September 2013.  If an investor had randomly chosen one of these top-performing actively managed mutual funds in 2011 by chance, then there would have been roughly a 6% chance of holding a top performing mutual fund.  In other words, knowing that an actively managed mutual fund is a top-performer tells an investor almost nothing about the likelihood of the mutual fund outperforming its peers over time.

Although the precise findings of each semiannual report vary, the message remains consistent: very few actively managed funds are able to consistently outperform their peers.  Summarizing their results, the authors state that "very few funds can consistently stay at the top. Our studies show that as time horizons widen, the performance persistence of top quartile managers declines."

While these results are based on an analysis of actively managed equity mutual funds, they may have implications for other types of investments as well.  For example, exchange-traded funds (ETFs) have typically been considered passive investments, but are increasingly adopting active or even non-transparent strategies.  Presumably similar results hold in this context and we hope to determine in this is the case in the near future.

Friday, December 13, 2013

SEC Litigation Releases: Week in Review

SEC Awarded $400,000 in Disgorgement from Certified Public Accountant for His Violations of Commission Suspension Order, December 12, 2013, (Litigation Release No. 22887)

A court ruling was entered this week that requires Michael H. Taber to pay the government $400,000 "in compensation he received while suspended from appearing or practicing before the Commission as an accountant."

SEC Halts Texas-Based Oil and Gas Investment Scheme, December 6, 2013, (Litigation Release No. 22886)

According to the complaint (PDF), Robert A. Helms and Janniece S. Kaelin "misled investors about their experience in the oil and gas industry while raising nearly $18 million for supposed purchases of oil and gas royalty interests." In reality, the majority of these funds was allegedly used to "make Ponzi payments and cover various personal and business expenses." Additionally, Roland Barrera and Deven Sellers have been charged with "illegally selling investments for Helms and Kaelin without being registered with the SEC...[and misleading] investors about the sales commissions and referral fees they were receiving." The court has entered a temporary restraining order against the defendants that freezes their assets, prohibits the destruction of documents, requires them to provide an accounting, and authorizes an expedited discovery. The SEC has charged the defendants with violating various provisions of the securities laws and seeks permanent injunctions, disgorgement, prejudgment interest, and penalties.

Thursday, December 12, 2013

SEC Scrutinizing Exchange Traded Notes

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

Risk.net is reporting that the Office of Capital Markets Trends of the Securities and Exchange Commission (SEC) is looking into the details of exchange traded notes (ETNs).  The office, headed by Amy Starr, is looking into the fees and the disclosure of risks and formulas used to determine ETN indicative values according to statements made by Starr at the Structured Products conference in Washington, DC on December 10.

ETNs have been a frequent subject on the blog and regulators have issued warnings over these instruments in the past.  ETNs are unsecured debt usually issued by banks and other financial institutions.  ETNs report indicative values on a daily basis based on a calculation and these values may deviate from the market value of the notes.  ETNs differ from exchange-traded funds (ETFs) in important ways, which we discuss in our introduction to ETFs post.  Issuers use creations and redemptions to keep the indicative value in line with the market value, but when these mechanism are halted by the issuer large premiums or discounts can surface--see our discussion of TVIX for an example.

According to Starr, investors need "to know exactly what the investment is, what it's doing and how it's doing".  We couldn't agree more with the SEC.  Investors need to have a clear idea of what they're investing in and, if they don't understand it, then they should probably not be investing.  We're interested in seeing what the SEC comes up with for additional disclosure guidance for ETNs.