Deutsche Bank markets primefinance monthly hedge fund trends - february 2013

Deutsche Bank Marketing material - For institutional investors only

Markets Prime Finance 5 Time Voted No. 1 Prime Broker

Monthly Hedge Fund Trends
Global Custodian Prime Brokerage Survey
2012, 2011, 2010, 2009, 2008

February 2013
Executive summary* Global performance
Deutsche Bank Research Highlights: “US housing recovery: January 2013 Performance Dispersion
Engine of growth in 2013” and “Investor Positioning and
7.00%

Emerging Markets Equity
Flows: Underweights and Inflows Supporting Equities”

CTA / Managed Futures
Our Global Markets Research team believes that 2012 marked a turning

Event Driven
Equity L/S
6.00%
point in the US housing market recovery and expect housing to be an

All Funds
important engine of growth in 2013. They project that house prices will
rise 3.9% y/y, and the resulting wealth effect will add about $85 billion 5.00%

Multi-Strategy
Distressed
to real personal consumption expenditures.

Macro
CB & Vol Arb
4.00%

Market Neutral
In the second piece, our team notes that despite $100 billion in
equity flows over the last 10 weeks, funds still remain underweight. 3.00%

Fixed Income
They believe that continued reallocation out of cash could help sustain

Credit
the torrid pace of equity inflows. 2.00%

Investor Sentiment 1.00%
In early 2013 investors are showing a renewed interest in fundamental
equity l/s and event-driven equity strategies. They believe hedged equity 0.00%
strategies will benefit from an environment in which macro events
and government intervention take a backseat. European investors are -1.00%
inquiring about equity l/s, commodities and macro managers, with a 75th Median Average 25th MSCI World
keen interest in emerging markets macro.
Median
Performance
Emerging Markets Equity 3.80% Multi-Strategy 1.95%
A strong start to 2013 with the global median up 2.23% and all
Equity L/S 3.24% CB & Vol Arb 1.75%
strategies performing positively. Equity strategies performed the best
Distressed 2.83% Credit 1.56%
this month, with emerging markets heading the pack (up 3.80%);
All Funds 2.23% Macro 1.00%
China l/s and US l/s strategies were particularly impressive, posting
CTA / Managed Futures 2.18% Market Neutral 0.91%
gains of 6.28% and 3.81% respectively. January also witnessed an
Event Driven 2.10% Fixed Income 0.65%
unusually high dispersion of returns with Emerging markets equity
between 1.66%-5.73%, event driven between 0.71%-4.82%,
and macro between -0.20%-3.44%. Source: Hedge Fund Intelligence (HFI), February 2013

Leverage
MSCI World 30-day volatility increased 20% in January, ending the January 2013 Cumulative Median Performance by Strategy
month at 8.88. Gross fundamental equity exposure and net fundamental
equity exposure both increased in January, ending the month at 2.41 5.00% MSCI World
(up 1.43%) and 0.61 (up 7.96%) respectively.
Emerging
3.80%
Markets Equity
Securities Lending 3.24% Equity L/S
The start of the year has seen shorts increase in financials and consumer
2.83% Distressed
discretionary stocks in Japan, Chinese autos, and Taiwanese firms that
form part of Apple’s supply chain. Our stock loan team also witnessed 2.23% All Funds
strong demand for Japanese firms Fanuc and Advantest on the back of CTA / Managed
2.18%
downward earnings forecast revisions, steady demand in Asian solar Futures

names and short covering in US shipping. 2.10% Event Driven

1.95% Multi-Strategy
Regulatory
In January it was confirmed that 11 EU Member States will move 1.75% CB & Vol Arb

forward with an FTT under the enhanced cooperation procedure that 1.56% Credit
is likely to come into effect on 1st January 2014. ESMA announced a
1.00% Macro
cooperation agreement with Brazil under AIFMD, MEPs discussed the
potential phasing out of performance fees under the UCITS regime 0.91% Market Neutral
and the European Parliament debated whether alternative investment 0.65% Fixed Income
managers marketing to retail investors should be required to produce a
Packaged Retail Investment Products (PRIPs) key information documents 0.00% 1.00% 2.00% 3.00% 4.00% 5.00%

(KID) going forward.
Source: Hedge Fund Intelligence (HFI), February 2013

In the US, certain derivatives reporting requirements under Dodd-Frank
came into effect at the start of the year, while the CFTC extended the
comment period on several aspects of derivatives-related regulation.
The Office of the Comptroller of the Currency (OCC) announced a two * This document contains extracts and opinions from
year transition period to comply with the swaps push-out rule that will various departments and business areas within
begin on July 16th 2013. Deutsche Bank, including extracts from Research
Reports, as well as from external reports specifically
referenced herein. It is not, however, a research
piece and has been produced by a front office
function. Also, please refer to the body of the
document for a more detailed description of and
proper references to the topics covered in the
Executive Summary section.

For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com

Monthly Hedge Fund Trends - Deutsche Bank Research Highlights 2

Marketing material - For institutional investors only

Global Economic Perspectives – US housing Asset Allocation – Investor Positioning
recovery: Engine of growth in 2013 1 and Flows: Underweights and Inflows
The continuing housing recovery is critical for US economic growth in
Supporting Equities 2
2013. Indeed, in addition to the direct implications for residential
The combination of fund managers covering fiscal cliff underweights
investment for GDP, house prices are crucial for household and banking
and $63b in equity flows helped fuel the 5% equity rally in January.
sector balance sheets and, therefore, for consumer spending and credit
With our composite equity beta up notably but still near 3y lows, funds
conditions in the year ahead. We believe that 2012 marked a turning point
remain underweight despite trailing to start 2013. Long-short equity
in the housing market recovery and expect housing to be an important
funds, macro funds and hybrids are closer to neutral, but mutual funds
engine of growth in 2013. We project that house prices will rise 3.9% y/y,
are very underweight. Only 25% of our equity mutual fund sample
and the resulting wealth effect will add about $85bn to real personal
underperformed in the two-day dip to end January, implying exposure
consumption expenditures.
is low. Sector positioning has also neared extremes in Tech and Energy
underweights; Healthcare, Discretionary and Staples overweights.
This constructive view of the housing market is driven by both demand
and supply fundamentals. On the demand side, our model projects that
The current pace of $100b in equity inflows the last 10 weeks has
household formations will continue to rise to their longer-term average as
surpassed those prior periods when flows returned to equities. Bond
the labor market steadily improves. There remain significant upside risks
funds are also getting moderate inflows as a normal allocation of savings,
to this view, as the average number of adults per household has
mainly going to EM and HY. Money market funds are still sitting on
continued to climb. In addition, housing affordability remains at record
$90b of cumulative inflows since October, after cash holdings stayed
high levels, but continuing tightness in lending conditions has meant that
flat through most of 2012. Some portion of the $31b in money market
high affordability has translated into a lower than anticipated increase in
outflows likely found their way to equities and bonds the last three weeks.
housing demand.
Continued reallocation out of cash could help sustain the torrid pace of
equity (and bond) inflows, like it did in early 2012.
On the supply side, several years of severely depressed homebuilding
activity and improving housing demand has resulted in low levels of new
homes for sale, and the stock of vacant homes has returned back to trend Funds remain underweight across risk assets
after increasing substantially during the housing crash. Moreover, the
average months of supply has returned to pre-housing crisis levels. This Equity exposure up modestly but remains very underweight
tight housing market portends well for further price increases in 2013. −− Mutual fund equity exposure is still 7pp underweight;
−− Hybrid funds increased exposure notably but remain 4pp underweight;
To be sure, there remain risks in the housing market. Although
foreclosures and delinquencies have declined significantly from their −− Long-short equity fund beta has been modestly below the historical
2008 levels, they remain well above normal values. And even with the average;
recent increase in home prices, nearly 30% of homes with a mortgage −− Macro hedge funds have moved to a 4pp overweight position;
have negative home equity. However, the fundamentals already
mentioned and our forecast models suggest that, despite these risks, −− MFs and HFs significantly overweight Consumer sectors and Health
housing will contribute significantly to economic growth in 2013. Care; MF positioning in Energy and Tech near historical lows;
−− Across regions, all funds except Asia are underweight; US funds most
U/W.
House prices are projected to rise about 4% in 2013
Futures and option positioning for rates, FX and commodities
yoy% SA Corelogic house prices yoy% SA
−− Rates positioning has remained close to neutral;
−− Yen falls even as shorts trimmed; EUR net longs increase; GBP longs
25 Actual Model forecast 25 pared;
Out of
20 sample 20 −− Oil long nears 3y highs; copper long pared; gold long cut; silver longs
forecasts
15 15 added.

10 10
Big inflows to equities, moderate bond inflows, money
5 5 markets outflows
0 0
Moderate bond inflows last two weeks; big outflows from money markets
-5 -5 −− Money market outflows of $31b the last three weeks;
-10 -10 −− Government bonds saw 9th straight week of outflows, totaling -$5.1b;
-15 -15 −− Outflows from IG corporates last 2 weeks; inflows to EM and HY
continue;
-20 -20
1984 1989 1994 1999 2004 2009 2014 −− Big inflows to floating rate funds; big outflows from longer maturity
bonds.
Source: FRB, Census, BEA, Treasury, CoreLogic, BLS, Haver Analytics,

DB Global Markets Research Equity inflow of $19b last week; 10 straight weeks of inflows totaling $100b
−− Inflows aided by strong $11.3b flows to US; big inflows to US ETFs
($9.7bn)
−− Mutual funds get 4th consecutive week of inflows, after 24w of
outflows;
−− EM equity inflows continue for 21st straight week ($60b cumulative);
−− Modest inflows to Japan and Europe;
−− Inflows to Cons Goods, Tech, Healthcare; Telecom outflows;
−− Big inflows to large cap funds; inflows to small and mid caps as well.

1
Deutsche Bank – Global Markets Research: “Global Economic Perspectives – US housing recovery:
Engine of growth in 2013” 30th January 2013. http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3297-
4D7B/9283984/DB_GEP_2013-01-31_0900b8c08652f8ba.pdf
2
Deutsche Bank – Markets Research: “Asset Allocation – Investor Positioning and Flows: Underweights
and Inflows Supporting Equities” 1st February 2013. http://pull.db-gmresearch.com/cgi-bin/pull/
DocPull/3449-3478/17814882/Investor_Positioning_and_Flows.pdf


Monthly Hedge Fund Trends - Investor Sentiment 3 3


Interest in fundamental l/s equity and event-driven
equity strategies
In early 2013 we are hearing renewed interest in fundamental long/short
equity from all types of investors. The last couple years fundamental
valuation has often taken a back seat to macro events and the risk-
on/risk-off government manipulation that has made extracting alpha
extremely difficult. With managers stating dispersion in equities is
widening, it is likely we will see gross exposures ramp up to take
advantage of the reversal in correlations experienced over the last couple
years. Many investors, while slow to shift assets early in the year, are
picking up on this opportunity; and combined with the low interest rates
and spread tightening in most credit opportunities, 2013 could see a
shift towards hedged equity strategies. Even with renewed interest in
the strategy, the preference isn’t necessarily for high net managers,
but rather there is increased attention being paid to managers who can
demonstrate alpha in their short book. Capacity is also an issue, as the
focus towards uncorrelated strategies puts a premium on managers
small enough to play in the small-mid cap space.

Further there is renewed interest in less-liquid event-driven equity
strategies that are classified as catalyst or activist. Given the
underperforming fundamental l/s equity over the past couple years,
patient investors with a tolerance of longer lock-ups are seeking
managers that can un-lock alpha over longer periods. Clearly a reversal
of sentiment post the 2008 liquidity crisis, however investors point to
less levered companies with healthy cash reserves.

Midwest bullish on equity strategies
This month our Midwest team visited St. Louis and Chicago. While many
allocators expressed disappointment in how their hedge fund portfolios
performed during 2012, most said they still had a high level of conviction
in their current stable of managers and hedge funds as an asset class.
Several investors commented that they were interested in sourcing new
equity long/short managers because they were on the lower end of their
typical range of allocation and believed that because the strategy has
been out of favor for several years it may be well positioned to rebound
this year.

In Chicago, most fund-of-funds are developing a range of strategies to
adapt to the challenges facing their industry. An increasingly important
area they are focusing on is developing ’40 Act products to tap into
the retail space and the increasingly important Defined Contribution
market. They view retail money as very “sticky” and potentially very
profitable despite the low margins because of the size of the market and
the scalability of the products. Several funds also mentioned they are
launching vehicles with a more focused-mandate such as start-ups or
commodity focused, and continue to push for lower fees to help add-
value to their client base. They also continue to develop more customized
solutions on both a discretionary and non-discretionary basis to help
diversify their business models.

Broad strategy interest in Europe
Meetings with European investors in January have been encouraging,
as investors feel that hedge funds have played their desired role in 2012.
As such, they continue to see value in a hedge fund allocation within the
overall portfolio and are currently discussing where to allocate this year.

Much like the global equity markets year-to-date, investors have entered
2013 ready for another solid year of performance. The large range of
strategy searches that we have received indicates that investors feel that
2013 should be a healthy environment for alpha generation from a range
of hedge fund managers.

We have seen several investors actively looking at fundamental equity
long/short, commodities and macro managers, with a noteworthy
number having a focus on emerging markets macro. A few have
mentioned trimming of credit positions after strong performance
in 2012. Some European investors have mentioned a preference for
niche strategies with less crowded trades and ideas, whilst others have
indicated that they are keeping their eyes open for early stage investing
opportunities. The European wealth managers continue seek UCITS
strategies, as they prioritize onshore regulated vehicles. Their clients
also tend to have a preference for more liquid investment terms.

From Deutsche Bank’s Hedge Fund Capital Group
3


Monthly Hedge Fund Trends - Performance 4


Americas Americas

2013 Year to date median performance January 2013 Performance dispersion of returns

Event Driven
5.04% SP 500 6.00%

US L/S
3.81% US L/S

Global L/S

All Funds
5.00%

Multi-Strategy
2.59% Global L/S

Distressed
2.57% Distressed 4.00%

2.16% All Funds

Fixed Income
3.00%

Credit
2.03% Event Driven

Macro
1.92% Multi-Strategy 2.00%

1.75% Credit
1.00%
CTA / Managed
1.72%
Futures

0.91% Fixed Income 0.00%

0.69% Macro
-1.00% 75th Median Average 25th SP 500
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%

Source: Hedge Fund Intelligence (HFI), February 2013 Source: Hedge Fund Intelligence (HFI), February 2013

Europe Europe

2013 Year to date median performance January 2013 performance dispersion of returns

Emerging
Emerging Markets Equity

3.84% 7.00%
Markets Equity

Global L/S
CTA / Managed
2.71%
Futures 6.00%

Macro
Stoxx 600
European L/S

2.70%
5.00%

All Funds

Event Driven
2.62% European L/S

2.17% Global L/S 4.00%

Market Neutral

Multi-Strategy
2.07% All Funds
3.00%

Credit
2.05% Event Driven

Fixed Income
1.49% Credit
2.00%

1.23% Macro 1.00%
1.02% Market Neutral
0.00%

0.38% Fixed Income -1.00%

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 75th Median Average 25th Stoxx 600
-2.00%


Asia Asia

2013 Year to date median performance January 2013 performance dispersion of returns

8.00%
China L/S

6.28% China L/S
Japan L/S

7.00%
Pan-Asia L/S
All Funds

3.75% All Funds
Asia ex-Japan L/S

6.00%
Multi-Strategy

3.68% Pan-Asia L/S
Macro

5.00%
3.56% Japan L/S

4.00%
MSCI AsiaPac
2.98%
incl Japan
3.00%
2.71% Asia ex-Japan L/S
2.00%
1.00%
2.12% Macro
0.00%
75th Median Average 25th MSCI AsiaPac incl Japan
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%



Monthly Hedge Fund Trends - Leverage 4 5


Global
−− MSCI World 30 day volatility increased 20% in January, ending the month at 8.88. Gross fundamental equity exposure and net fundamental equity
exposure both increased in January, ending the month at 2.41 (up 1.43%) and 0.61 (up 7.96%) respectively.
−− he percentage of funds in most net equity leverage bands (-1 – 1.25) have decreased since the beginning of November. However, the percentage
T
of funds in the higher net equity leverage bands (1.25 – 2) has increased.

Global net gross equity leverage vs. volatility

40 2.5
2.4
2.3
35 2.2
2.1
2.0
MCSI World 30 day Historical Vol

30 1.9
1.8
1.7
1.6
25

Leverage
1.5
1.4
1.3
20 1.2
1.1
1.0
15 0.9
0.8
0.7
10 0.6
0.5
0.4
5 0.3

12 12 2 2 2 12 2 12 t 12 2 2 13
r1 r1 y1 12
Jul g1 Sep v1 c1 Jan
Jan Feb Ma Ap Ma Jun Au 28
Oc No De
28 28 28 28 28 28 28 28 28 28 28 28

MSCI World 30d Vol Gross Leverage Net Leverage

Source: Deutsche Bank Global Prime Finance Risk, February 2013

Global – January 2013 Quarterly change in net equity leverage distribution across funds

18%

16%

14%

12%
% of funds (Deutsche Bank)

10%

8%

6%

4%

2%

0%

-2%
5 5 0 5 0.5 5 1 5 1.5 5 2
-0.7 -0.5 -0.2 5- 0.2 5- 0.7 5- 1.2 5- 1.7 5-
-1 - 5- - -0.2 0- 0.2 0.5
- 0.7 1- 1.2 1.5
- 1.7
-0.7 -0.5

01 Feb 13 01 Nov12

Source: Deutsche Bank Global Prime Finance Risk, February 2013

4
Deutsche Bank Global Prime Finance Risk, February 2013


Monthly Hedge Fund Trends - Securities Lending 6


Global 5

US % short interest sector change - January 2013 European % short interest sector change - January 2013
Financials Energy
Info Tech Telecom
Cons. Stap Financials
Healthcare Cons. Stap
Cons Disc. Utilities
Industrials Industrials
Telecom Info Tech
Utilities Materials
Energy Cons Disc.
Materials Healthcare
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Source: Data Explorers Deutsche Bank, February 2013 Source: Data Explorers Deutsche Bank, February 2013

Shorts unwind positions in US shipping names as prices Financials and consumer discretionary sectors in Japan face
approach 52 week lows heightened short interest
Despite the positive start to stocks in 2013, structural inefficiencies The average percentage of shares out on loan across the 225 Nikkei
afflicting shipping companies have resulted in increased short interest constituents has increased 6% year to date to 726 million shares out on
in many of these names. The outlook for the shipping sector is less loan. Financials (+27%) and consumer discretionary (+2%) are amongst
optimistic as companies struggle to secure traditional sources of lending. the sectors seeing the most significant increase in shorts in January.
The sector has been under pressure for failing to adapt fast enough Energy (-33%), healthcare (-14%) and utilities (-9%) have seen the
to changing market conditions and continues to suffer from excess sharpest decrease in shorts this month.
supply, which has ultimately put downward pressure on rates. While the
industry anticipates an increase in global trade, costs are also expected Sharp Corp, Gree Inc, Panasonic Corp and Ricoh remain amongst the top
to rise due to an increase in its overall fuel requirement. The names crowded names in Japan for the month of January.
most targeted by shorts in this space include Genco Shipping, Overseas
Shipholding Group, Nordic American, Frontline Ltd, and Kirby Corp. Japanese firms revise earnings forecasts downwards
Despite the unfavourable outlook, we have seen most shorts unwinding Japanese firms have been revising down earnings forecasts for March
their positions throughout the month as all of these stocks are currently in an environment plagued by slowing demand in China (exacerbated by
trading at or near their 52 week lows. That being said, liquidity is a diplomatic spat that chilled interest in Japanese products) as well as
available for those funds looking to press on further weakness. an ongoing EU debt crisis that has severely crimped consumption in the
region. Fanuc fell 17% this month, citing both of the above reasons when
Merger arbitrage funds struggle to profit from the Kinder it cut its operating profit by 13% to JPY 178 billion ($2 billion).8 Advantest
Morgan / Copano Energy deal due to a lack of borrow Corp shed 10% year to date, after the chipmaker’s operating profit for
availability in Kinder Morgan the year ending March was expected to miss expectations due to fewer
In US mergers acquisitions, Kinder Morgan Energy Partners orders from Apple and weaker PC demand.9
announced it will buy natural gas line operator Copano Energy.
The deal is the latest in a trend of multi-billion-dollar acquisitions in US regulators’ probe into batteries manufactured by GS
the US pipeline industry over the past two years as companies look to Yuasa drives short interest in its stock
take advantage of a shortage of pipelines to move gas and gas liquids. GS Yuasa stock is down 27% year to date after US regulators ordered
The terms of the deal include a stock payout in shares of Kinder Morgan airlines to prove the company’s lithium-ion batteries deployed in
Energy Parnters to long holders of Copano Energy.6 Merger arbitrage Boeing 787 planes are safe, following the emergency landing of Boeing
funds will struggle to profit from the deal as there is a shortage of Kinder Dreamliner fleets by both All Nippon Air and Japan Airlines earlier this
Morgan Energy Partners supply in lending programs to hedge this deal. month on reports of problem with the battery.10 The percentage of GS
Due to Kinder Morgan’s classification as a limited partnership (LP), Yuasa out on loan increased 12% year to date, with current levels at
most custodians will not lend due to potential tax implications to the 8.3 million shares as reported by Bloomberg.
long holder. The lack of borrow supply in Kinder Morgan has prevented
the spread from trading tighter from its closing level on the day the deal Chinese autos on the rise on bullish sales forecasts
was announced. Bullish forecasts on Chinese auto sales for 2013 contributed to the rally
in Chinese auto stocks in early January. There were spikes in shorting
Rally in solars activity into the strength with Guanzhou Automobile Group a constant
The early half of January saw a rally in regional solar stocks with positive feature on the daily top shorted stocks list as as a percentage of volume.
sentiment driven by news of Warren Buffet’s $2.5 billion investment New borrow demand for Dongfeng Group, Great Wall Motor Co and
in solar projects, coupled with Chinese plans to add 49 gigawatts of BYD Co Ltd has emerged.
renewable energy capacity in 2013. While the desk saw long term shorts
covering into the squeeze, short interest remained steady given new Disappointing profit and sales growth in Apple drives short
client flow shorting into the strength. Two-way action continued through
the month for crowded names such as GCL Poly Energy Holdigs and interest in its supply chain
OCI Co Ltd. There were also onshore recalls for Taiwanese solar plays News that Apple had its slowest profit growth since 2003 and weakest
Neo Solar Power Corp and Gintech Energy Corp due to profit taking. sales increase in 14 quarters amid rising costs and accelerating
competition from Samsung Electronics sparked renewed interest in
the Apple supply chain names, Hon Hai Precision Industry Co Ltd,
China Metal Recycling suspends trading in response to TPK Holding Co and Quanta Computer Inc were stand outs.11
“strong sell” rating
China Metal Recycling came into to focus this month when the company
suspended trading in response to Glaucus Research rating the company 5
This material has been produced by the Deutsche Bank Securities Lending Group and must not be
a “strong sell”.7 China Metal Recycling has been a mainstay on our regarded as research or investment advice.
top ten crowded shorts list with 23 days volume short. A new wave of
6
http://www.reuters.com/article/2013/01/30/us-copanoenergy-kindermorgan-idUSBRE90T04K20130130
7
http://www.forbes.com/sites/simonmontlake/2013/01/29/chinese-scrap-metal-tycoons-shares-
borrow demand resulted from the suspension with borrow fees rising suspended-for-second-day/
above 20%. A high 68% utilization rate of the borrow pool leaves China
8
http://www.bloomberg.com/news/2013-01-28/japanese-stocks-advance-to-2-1-2-year-high-as-yen-
weakens.html
Metal Recycling as one of our top squeeze candidates. 9
weakens.html
10
weakens.html
11
http://www.bloomberg.com/news/2013-01-23/apple-s-holiday-sales-miss-predictions.html


Monthly Hedge Fund Trends - Regulatory 12 7


AIFMD – ESMA announces cooperation arrangement Alternative Investment Managers marketing or selling to
with Brazil retail investors might be required to produce a PRIPS KID
In January, the European Securities and Markets Authority (ESMA) going forward
announced a cooperation arrangement with Brazil under the Alternative The European Parliament are currently debating the European
Investment Fund Managers Directive (AIFMD). The AIFMD enters into Commission’s proposal to update the PRIPS regulation which sets the
force on 22 July 2013, with a one year transition period, in advance of regulatory framework for key information documents (KID) for a variety
which ESMA must negotiate cooperation agreements on cross-border of investment products. MEPs held a debate in January to discuss
supervision with relevant non-EU authorities. Under AIFMD, alternative potential amendments to the legislation. Whilst the Commission’s
investment funds from third countries will only be allowed access to the proposal was limited to “packaged” retail investment products only,
EU market if their home country regulators have cooperation agreements MEPs from all the political groups were in favour of extending the scope
with their EU counterparts. The announced agreement, with the Brazilian of the regulation – but with disagreement on how far. Pervenche Berès
Comissão de Valores Mobiliários (CVM) covers Brazilian investment MEP, the rapporteur for the legislation, has expressed a desire for the
funds that manage or market alternative investment funds (AIFs) in the KID to apply to all savings or investment products, including shares, life
EU and EU alternative investment fund managers (AIFMs) that manage insurance and bonds, but as in the European Commission (EC) proposal,
or market AIFs in Brazil. certain insurance and pension products are excluded. Alternative
Investment Managers marketing or selling to retail investors would also
UK Treasury publishes a consultation paper on the potentially be required to produce a PRIPS KID under the Commission’s
transposition of AIFMD proposal.
Individual Member States must also transpose the AIFMD in national
law by the July deadline. In January, the UK Treasury published a MEPs will submit their amendments in early February and then the
consultation paper on the transposition of the AIFMD in the UK, ECON Committee will vote on the Parliament’s final position at the end
indicating that it will take a “copy-out” approach wherever possible of March. The final PRIPS text will then have to be agreed in negotiation
in order to minimise the regulatory burden. The UK Treasury with the EU Council and EC later in the year.
consultation paper is open for comment until 27th February 2013.
Capital Requirements Directive (CRD IV) still in the final
ESMA clarifies certain aspects of the Regulation on Short stages of trilogue discussion
Selling and Certain Aspects of CDS (SSR) The implementation of the Basel III standards in Europe (CRD IV), which
On 30th January, the European Securities and Markets Authority cover among other things increased quality and quantity of capital,
(ESMA) published a revised Questions Answers (QA) document short- and long-term liquidity ratios and the possibility of an introduction
clarifying a number of aspects of the Short Selling Regulation. The QA of a 3% leverage ratio, is still in the final stages of trilogue discussion
complements the sections relating to the scope of the SSR, such as the between the European Commission, Parliament and Council. Agreement
treatment of ETFs and ADRs/GDRs, the calculation of net short positions, is expected to be reached in March, with implementation expected to
the treatment of derivatives on sovereign debt with respect to duration take place from 1 January 2014.
adjustment and a new section dedicated to the application of the
restriction on uncovered CDS positions. ESMA Guidelines on the market European Council votes in favour of the EU FTT under
making exemption were published on 1st February and are expected to Enhanced Cooperation Procedure, while Italy and Portugal
apply in Q2 2013.
plan to unilaterally introduce a FTT
The European Council voted in favour of an Enhanced Cooperation
The technical standards relating to the European Market Procedure (ECP) for the EU FTT on 22nd January. This opens the way
Infrastructure Regulation (EMIR) are expected to enter into for the eleven participating Member States (France, Germany, Austria,
force in March Belgium, Spain, Portugal, Italy, Slovakia, Slovenia, Greece and Estonia) to
The regulatory and implementing technical standards were adopted commence discussions, but first the EU Commission must formally bring
by the European Commission on 19th December and passed to the forward a proposal. This is not expected before mid-February. It is likely
European Parliament (EP) and Council for approval. The EP considered to apply the FTT to a wide range of cash and derivative transactions,
rejecting two of the standards, but the motion did not get sufficient where a counterparty is “resident” in a participating Member State.
support. As a compromise, the European Commission have committed
to issuing a set of “FAQs” to clarify the issues in relation to timely Separately, a number of Member States including Italy and Portugal
confirmations and setting the clearing thresholds for non financial have announced plans to unilaterally introduce FTTs as part of their 2013
counterparties. The Commission will also issue a Memorandum of budgets. The Italian FTT will apply from 1st March 2013 to purchases
Understanding to improve its interaction with the Parliament on the of shares and similar securities, including ADRs and conversions
rulemaking process going forward. The technical standards related to to existing shares, from Italian issuers. This will be set at 0.1% for
clearing, reporting and CCPs are likely to come into force in March 2013. transactions on regulated markets or multi-lateral facilities and at 0.2%
for OTC transactions. There are exemptions for share issuance, securities
The margin requirements for non centrally cleared derivatives were due lending and repos, market-making, supporting underwriting, intra-
to be finalised by the end of 2012 are now expected to be subject to group transactions, listed firms under a EUR 500 million market cap and
further consultation. BCBS- IOSCO, who initially issued proposals last “subjects merely interposed in the execution of a transaction.”
July for universal two way exchange of initial and variation margin by
all financial firms and systemically important non financial entities are The law also includes a tax on derivatives related to the securities
now expected to consult again on a revised set of proposals within the covered by the FTT, to apply from 1st July 2013. The rate at which they
coming weeks. would be taxed is to be determined but will be a fixed amount which
varies by the nature and notional value of the contract. The law also
includes a 0.2% duty on significant modification and cancellation of
MEPs discuss the phasing out of performance fees under
electronic orders in a short time frame for instruments covered by the
the Undertakings for Collective Investment in Transferable FTT.
Securities (UCITS) regime
Negotiations are continuing in the European Parliament around the The Portuguese tax will apply to the purchase and sale of financial
review of the UCITS directive which introduces new policies and instruments, such as equity shares, bonds, money market instruments,
practices for remuneration, a sanctions regime and increased depository units in investment funds, structured products and derivatives, and
liability. A debate was held on 22nd January in which MEPs discussed conclusion or modification of derivatives. It also makes provision for a
performance fees and depository liability. Some MEPs expressed a special regime to target high frequency trading. The maximum tax rate
desire to see performance fees phased out, whilst others are in favour is 0.3% for most cash and derivative products, but 0.1% for HFT. The
of retaining them. Some MEPs also want stricter liability for UCITS tax will become effective during 2013, although the exact date is not
depositories when compared to the AIFMD. A compromise will now be currently known.
prepared and the relevant committee is due to vote to adopt a position
on 25th February. A final text will have to be negotiated with the
European Council, who do not currently have any meetings planned.
Deutsche Bank Government Regulatory Affairs Group
12

It is uncertain when a final agreement will be reached. This is a summary of some of the themes underlying recent regulatory developments affecting hedge
funds and their managers. It does not purport to be legal or regulatory advice and must not be relied on
for that purpose. Deutsche Bank is not acting and does not purport to act in any way as your advisor.
We therefore strongly suggest that you seek your own independent advice in relation to any legal, tax,
accounting and regulatory issues relating to the merits or otherwise of the products and services discussed.


Monthly Hedge Fund Trends - Regulatory 8


CFTC extends comment period on several aspects of
derivatives-related regulation
The US Commodity Futures Trading Commission (CFTC) extended
the comment period for their proposed rule on enhancing protections
for customers and customer funds held by futures commission
merchants(FCMs) and derivatives clearing organizations (DCOs)
from January 14th to February 15th. Market participants continue to
await further developments with respect to requirements for swap
execution facilities and block trades, as well as margin requirements
for uncleared swaps. Developments on the latter are likely to be
influenced by international developments, with BCBS-IOSCO expected
to issue another set of proposals for public comment in the coming
weeks. The US Securities and Exchange Commission (SEC) extended
the comment period for their proposed rule on capital, margin and
segregation requirements from January 22nd to February 22nd.

Swaps push-out provision transition period to begin on
July 16th, 2013
In early January, the Office of the Comptroller of the Currency (OCC)
published guidance on the transition period for the swaps push-
out provision of the Dodd-Frank Act, which prohibits banks that are
designated as swap entities from using the federal assistance they
receive -- such as federal deposit insurance or access to the discount
window -- to support certain swaps activities. The OCC’s guidance
states that insured Federal depository institutions can request up to
a two-year transition period, which would begin on July 16th 2013,
to comply with the swaps push-out rule.

Derivatives reporting obligations under Dodd-Frank
take effect
The Dodd-Frank derivatives reporting requirements for interest rate and
credit asset classes took effect at the beginning of the year and reporting
will begin for equity, foreign exchange and other commodities swaps
on February 28th, 2013 for swap dealers and major swap participants.
Central clearing requirements will be phased-in beginning March 11th
for swaps between swap dealers and major swap participants in asset
classes deemed subject to the central clearing requirement by the CFTC.

SEC intends to publish money market funds reforms by
the end of March
Outside of derivatives, the US Financial Stability Oversight Council
(FSOC) on January 15th extended the comment deadline from January
18th until February 15th for their proposed rules on money market fund
(MMF) reform. The FSOC proposed in November three recommendations
for structural reform of MMFs, including a floating net asset value (NAV),
a stable NAV combined with a NAV buffer and “minimum balance at
risk,” and a stable NAV combined with a NAV buffer and other measures.
The FSOC released these recommendations after disagreement within
the SEC prevented the SEC from advancing proposed rules. On January
16th, SEC Commissioner Daniel Gallagher suggested a consensus is
forming within the SEC and indicated his intention to publish rules on
MMFs by the end of March.


Deutsche Bank markets primefinance monthly hedge fund trends - february 2013

Deutsche Bank markets primefinance monthly hedge fund trends - february 2013

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Deutsche Bank markets primefinance monthly hedge fund trends - february 2013