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By John L. Bowman, CFA, President of the CAIA Association. 

By Marc Dummer, CAIA, CIMA® - Managing Director & Client Portfolio Manager; May Tong, CFA, Managing Director and Portfolio Manager, Asset Allocation; Jessica Bush, CFA, Portfolio Manager, and Ben Rotenberg, CFA, CAIA, Portfolio Manager at Principal Asset Management.

By Masao Matsuda, PhD, CAIA, FRM, President and CEO of Crossgates Investment and Risk Management.

By John L. Bowman, CFA, President of the CAIA Association. 

In 1806, American Frederic Tudor famously sailed to the French Antilles to sell ice to the Martinique islanders. Having experienced refreshing cold drinks and ice cream during New England summers, he envisioned bringing Long Island Ice Teas and Cookies and Cream decadence to the much more sweltering Caribbean climate. 

By Rush Harvey, CMT, CAIA, Director of Private Capital Advisory at Raymond James.

I left the limited partner (“LP”) seat in April 2022 to join the Private Capital Advisory (“PCA”) team at Raymond James (“RJ”) and have received the questions below weekly since from both LPs and General Partners (“GPs”):

By David Berns, PhD, CIO & Cofounder of Simplify.

Introduction

By Artem Milinchuk, Founder & Head of Strategy of FarmTogether.

By William (Bill) J. Kelly, CAIA, CEO of the CAIA Association.

By Christopher Kantos, Managing Director and Head of Quantitative Research at Alexandria Technology.

By Isaac Bock, Managing Director and Head of Strategy for AlphaRoot, a cannabis-based insurance company.

As the cannabis sector continues to flourish, the grass keeps getting greener for investors in the industry. With cannabis legalization at an all-time high in Europe, more people are drawn towards investing in cannabis-related stocks. 

By Christopher Carrano, Vice President at Venn by Two Sigma.

Key Takeaways

Rokos Capital Management and Bridgewater Associates were among several big hedge funds to up their holdings in shares on Nvidia at the end of last year, positioning themselves to benefit from the stock’s almost 50% gain so far in 2024, according to a report by Reuters.

The report cites securities filings as revealing that at the end of December, Rokos bought more than 254,000 shares worth $126m in the chipmaker, which has benefitted from a surge in investor interest in AI-related stocks.

Meanwhile, Bridgewater, the hedge fund founded by Ray Dalio, increased its stake in Nvidia by 458% to more than 268,000 shares, with the firm’s positions being worth $133m at the end of December.

Arrowstreet Capital also upped its Nvidia holding, with the acquisition of an additional 3.9m shares, taking its position to $2.1bn.

Other funds sold or reduced their Nvidia stakes, with Greg Poole’s Echo Street Capital Management divesting its entire holding of 355,000 shares, D1 Capital Partners closing out its position with the sale of nearly 147,000 shares and Discovery Capital Management selling about 119,000 shares, which had accounted for 9.2% of its portfolio.

British hedge fund trader Anthony Mark Peterson will admit to his part in a scheme that defrauded the Danish tax authorities of more than DKK9bn ($1.2bn) when his case is heard in court later this month, according to a report by Reuters.

The report quotes Patterson’s lawyer, Henrik Stagetorn as saying: “There will be a court hearing in February where he plans to confess.”

Patterson, who had initially denied any wrongdoing, has been charged with participating in an attempted fraud over an additional DKK500m.

The case stems from a Danish investigation into so-called “cum-ex” trading by London-based hedge fund Solo Capital Partners with the firm’s Founder and the main suspect in the case, Briton Sanjay Shah, currently in detention in Denmark, having been extradited from Dubai in December. Shah denies the charges against him.

Another Briton, Guenther Klar, was jailed for six years by a Danish court for defrauding tax authorities of more than DKK320m crowns as part of the same scheme, but has also denied wrongdoing and is appealing against his verdict.

Following a year of record losses, Element Capital Management, the global macro hedge fund firm founded by Jeffrey Talpins is planning to downsize its operation in terms of external investments and run mainly in-house capital, according to a report by Bloomberg.

The report cites a unnamed person with knowledge of the matter as revealing that the firm the New York-based firm informed clients on Wednesday that it intends to return an undisclosed sum to investors and focus on generating higher returns while managing fewer assets.

According to Bloomberg’s source, the firm is also planning to reduce the firm’s roster of external investors as part of the plan for internal cash to account for the majority of its assets.

Element, which has been closed to new money since 2018, lost about 10% last year on the back of losses in the previous two years and has seen assets sink to about $8.5bn from a peak of $18bn. The fund reportedly gained 5.3% in January.

PARTNER CONTENT

By Michael Brice
President, BW Cyber, LLC 

Almost two years ago the Securities and Exchange Commission (SEC) announced its plans for enhanced cybersecurity regulation of registered investment advisers (RIAs) and funds. Since that time the SEC has released similar rules for publicly traded companies (I’ve already written about this here). When the new cyber rules for RIAs and funds become final, I suspect the SEC will be quite swift in making public examples of managers who fall victim to cybercrime. In a worst-case scenario, I fully expect we’ll see a classic double-whammy in which ‘the beatings will continue until morale improves’.

If regulations are the ‘stick’, we need some ‘carrots’ from our regulators. I’d like to see some parity with the newly emerging cyber regulations which also provide critically needed support to help victims recover from a cyber-attack. 

I’m not talking about the creation or expansion of a cyber government organization – we already have CISA (Cybersecurity & Infrastructure Security Agency). I’m referring to the predominant cyber financial threat affecting RIAs, private equity firms and PE portfolio companies nationwide: wire fraud. 

Wire fraud is far more widespread than most people realize. Why? because it’s a big fat red flag to your investors.  Ergo – nobody talks about it publicly. So let me explain briefly what a wire fraud looks like and what you can expect:

• You find out you were tricked into sending a wire (usually in the hundreds of thousands of dollars but often in the millions of dollars). The realization is sickening.  
• You don’t know who to call or what to do, but most people start with their bank. Good luck.
• You may be lucky and have a bank fraud unit that helps you to get your money back; or you might not. There’s no legal requirement for them to help you because, guess what – it wasn’t their fault.
• So maybe you call the Sherriff, or Secret Service, or Treasury, or the FBI. (Spoiler alert, the proper step to take once you realize you are a victim of wire fraud – after you notify your bank – is to submit a fraud report to the FBI via the http://www.ic3.gov/ website). 
• Now guess what – nobody updates you on the status of your loss. Nobody. This goes on for months. You just hope that the bank is doing what they can and that your IC3 report is being investigated by the FBI. 
• Now for the kicker – there’s no single government agency federally funded or mandated to report to Congress with the primary goal to defend and protect Americans against wire fraud. 
• As best I can tell, the FBI does what they do because they care – not because Congress has made it a regulatory requirement. And you know who else cares – Treasury, the Secret Service, and your local Sherriff. And yes, I suspect even your bank…
• But without an agency with a federally funded legal mandate, and a stated mission to be the ultimate agency to oversee and respond to wire fraud, answer your calls, provide a wire fraud ticket, ensure your bank is actively working to get your money back, keep you updated on your case, and to ultimately take responsibility for reporting to Congress, you’re left hoping that somebody at the bank or at the FBI or somewhere else will elevate your case above the other 3.2 million (and growing) cyber fraud cases totaling over $27.6B in losses that have been reported to the FBI since 2018.

So how does this end if you are the victim of a wire fraud? Sadly, unless you identify the fraud quickly (generally within three business days), the odds of getting all your money back are not in your favor. And if you’re an RIA or fund, based on the new regulations, it’s possibly going to result in an SEC regulatory enforcement action against you and your organization:  A big fat red flag event. 

While the proposed 2024 SEC cyber regulations are long overdue when compared to the rules put out by FINRA and the NFA years ago, we also desperately need Congress to provide a single federal organization with a legal mandate to ‘own’ wire fraud and to help businesses and citizens deal with the aftermath. 

Michael Brice, Founder, BW Cyber, LLC – Michael is the Founder and President of BW Cyber, LLC, a veteran owned/veteran friendly cybersecurity consulting firm that provides SEC cyber compliance and related cybersecurity technology solutions to the wealth and asset manager verticals. In addition to his military experience as a US Marine Corps officer, Michael has over 35 years experience providing technology, security, and related cybersecurity consulting solutions in the financial services industry. Michael is also the Executive Liaison between BW Cyber, LLC and the FBI for all forensic investigations related to wire fraud investigated by his firm. In this role, he often collaborates with the FBI to provide community outreach to help wealth and asset managers better understand the nature of cybersecurity and the devastating impacts that criminals around the world are causing with their ongoing wire fraud attacks. Michael is a graduate of Clemson university where he obtained a BS in Computer Information Systems. 

An electricity failure and subsequent shutdown of a BP refinery in the US sparked an oil sell-off as hedge funds and other money managers sold the equivalent of 86m barrels in the six most important petroleum-related futures and options contracts over the past week, according to a report by Reuters.

The refinery in Whiting, Indiana — the largest in the US Midwest and BP’s largest globally — first opened in 1889 as part of John D Rockefeller’s Standard Oil Company and now produces 7% of all asphalt in the US, according to the oil company’s website, processing over 400,000 barrels daily. Its unexpected shutdown — which is expected to last up to three weeks, according to another report from Reuters — was caused by site-wide electricity failure at the start of the month.

As a result, surplus crude is likely to accumulate across the region — particularly around the NYMEX delivery point in Cushing, Oklahoma — according to the report. This contrasts with investors’ bullish bets since mid-January on depleting inventories in Cushing and a subsequent squeeze on deliverable supplies. Now, production shutdown has delayed further depletion and sent prices sliding.

The report notes that this is the third time since mid-2023 that fund managers have tried to build a bullish position, only to be forced to retreat as inventories remained above average. Now, bullish long positions outnumber bearish shorts by a ratio of 2.24:1 from 1.02:1 eight weeks earlier.

The report also attributes heavy sales of NYMEX, ICE WTI (-62m barrels, at the fastest rate since last October) and Brent (-23m) to fund managers expecting a significant increase in the amount of crude available. The combined position in WTI fell to a three-week low of 55m barrels, down from 117m barrels the previous week.

Despite the sell-off of US diesel (-7m) and gasoline (-11m), fund managers bought up European gas oil to the tune of 17m barrels, reflecting beliefs that Europe’s industrial recession is coming to an end, as are trade disruptions brought on by the Red Sea crisis.

Meanwhile, the net long position in gasoil futures and options increased to 50m barrels from 1m on 12 December 2023. Despite the disruption of fuel production brought on by the Whiting refinery, investors eschewed US gasoline and diesel futures in favour of realising profits on previous bullish long positions, after a period of bullish bets on the outlook for US fuels.

Elsewhere, hedge funds and other money managers sold the equivalent of 401bn cu ft in two major futures and options contracts linked to the price of gas at Henry Hub, a distribution hub on the natural gas pipeline system in Erath, Louisiana.