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McHudson Farm CBD Extract Reviews

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    To compen- sate, the government is to exempt medicines and news- papers from the unpopular general sales tax. The State Bank also intro- duced a temporary 17 per cent interest rate on foreign currency deposits channelled to it through commercial banks. This should attract a fresh inflow of currency to replenish the reserves.

    Credit to public sector cor- porations will be restricted and legislation is planned to facilitate the recovery of overdue loans by state banks through attachment of col- lateral. Bad debts in the banking system amount to Rsl20bn, equivalent to about 6 per cent of gross domestic product and a large drag on government finances. Bankers expressed con- cern about the ability of the government to push through the package.

    Mr Jafarey is known to have annoyed IMF officials in the past by failing to live up to commitments made in nego- tiations. Indian banks under pressure on rates By Quentin Peel and Tony Tassel I in Bombay Indian banks are coming under mounting pressure to cut interest rates quickly and step up lending activity following an easing in mone- tary policy at the weekend.

    The Reserve Bank of India, the central bank, announced a broad package of measures over the weekend aimed at reviving economic growth through freeing bank resources for lending and reducing the cost of credit. The move brought wide- spread cheer to Indian finan- cial markets yesterday. After a public holiday on Monday, the BSE 30 Index, the country's most promi- nent share market indicator, rose In addition, the finance ministry has called a meet- ing with leading banks on - November 8 and 9 to discuss bank lending policies.

    Already two state-owned 20 per cent even though inflation is running at around 6. Although H ank prime rates currently range from Others, including the country's largest commercial bank, the State Bank of India, are expected to make a decision on rate cuts over the next few days.

    The moves will bring wide- spread relief to Indian busi- nesses, many of which are paying interest at more than move might help spur a recovery in bank credi t growth after a slump in the first half of current fiscal year to March.

    This was mainly because of a fall in demand, with many corporates delay- ing decisions to take up credit because of high inter- est rates. Some analysts suggest the slowdown in credit growth was partly caused by bureaucratic delays by banks in processing loan applications. One banking industry source said bank delays had choked the sys- tem.

    With, these borrowings repaid, he indicated that the latest easing of policy would have a more pronounced impact. Mr Rangarajan also allayed concerns that increased government bor- rowings might soak up the increased liquidity arising from the changes.

    About 80 per cent of the government's budgeted gross market borrowing for had already been completed, and there was no indication of an increase beyond the targeted limits. Inflation was expected to remain under control at per cent in despite the Impact of the easier mon- etary policy. As such, inflat ion should remain within the forecast range, given an expected gross domestic product growth of around 6. Mahathir plea for information curbs Malaysian executive faces court charges By James Kynge in Kuala Lumpur Dr Mahathir Mohamad, Malaysia's prime minister, placed fresh empha- sis yesterday on the need to restrict information, in remarks which appeared to be at odds with a national drive to win investment from western media companies.

    Dr Mahathir said the rapid advance of technology had rendered traditional government controls impotent He appealed to broadcast- era and journalists to practise self- censorship to shield the public from foreign propaganda, deviationist teachings, pornography and other undesirables.

    Censors in broadcasting centres had the responsibility not only to censor unwanted material but also to choose programmes that could help promote good behaviour.

    He said then that there would be no censorship within the corridor, a sq km zone intended to serve as a base for world-class media and information technology companies. By James Kynge The boss of a Malaysian gaming company, Repco Holdings, has been charged in court with giving a mis- leading statement likely to influ- ence trading in the company's shares, officials said yesterday. The court action, being brought by the Securities Commission, is an indication of Malaysia's determina- tion to combat excessive speculation and other abuses as it liberalises its financial markets.

    He pleaded not guilty and was allowed bail until his trial next February. The Securities Commission case involves a profit forecast which Repco made on January 27 this year. A week later, however, it with- drew the forecast, citing premature assumptions related to the prospects of its gaming business. It then pub- lished a new pre-tax profit projec- tion for the year of MS8 L82m.

    Repco is listed on the Kuala Lum- pur Stock Exchange's second board. The company's share fell 6. Diplomatic analysts saw it as a positive signal that China's anger over a resolution on Tibet, passed in the. German parlia- ment in June, had cooled. Sino- German relations appeared firmly back on track as Mr Klaus Kink el, the German foreign minis- ter, finished two days of talks in Beijing aimed at clearing up the damage paving the way for a visit by President Roman Herzog next month- China was also concilia- tory about Mr Kink el's deci- sion to bring up in discus- sions fhp cases of a number of dissidents.

    Including Mr Wang Dan, the detained stu- dent leader. However it Hag elicited envy among companies from some other countries who argue that a cosy political relationship between Bonn and Beijing has helped German compa- nies win co ntra c ts.

    German companies appeared relieved that the dispute over Tibet appeared to have blown over. The rep- resentative of one semi-offi- cial organisation involved in promotion of bilateral trade said he knew of no contracts which had been lost directly as. Other German industry representatives tried to play down the disagreement. Mr Wang Jiang Bing of Roland Berger, the manage- ment consultants, said to medium-sized projects which make up the bulk of German investment in China, were relatively unaf- fected by political manoeu- vres.

    For 50 yens, IMD has been working with business to develop people. Real hmunf philosophy has met the test of time and the demands of some of the best managed companies in die world.

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    It is equally valid for service and manufacturing organizations In todays competitive world, customers have a choice. Fax 41 21 5. Box , CH Lausanne, Switzerland. Total maximum amount Ut The contest wfll be adjudicated according to Art. Azienda Napoletana Mobility - Via Q.

    Marino, NapoO- Haiy. The deadBne or receiving offers Is 2 pm on 14th November The General Manager Dr. Interested parties can request a copy of toe complete call for bids from AJN. Azienda Napoletana Mottfite - Via G. Mr Tung, who has stepped down as chairman of Orient Overseas to mount his campaign. The coincident index of economic indicators fell further to Three stayed on the plus side, while two remained negative.

    The three-month moving average for the diffusion index has stayed over Seoul Sri Lanka reverses sell-offs. Sri Lanka's parliament yesterday passed legislation re-acquiring state enterprises privatised by the previous government voted out two years ago. Withdrawal of either, unlikely to bring the government down, but wfll push ' President Ghandrika Kxxmaratunga to seek support minority Tamil parties.

    Amcd Jayasinghe, Ramos keeps promise Imptemarmnion of- Urucu-Coari 'Product Pipefine. Designed for the rigours of hour flights, F ym 8. Nothing can fly you farther, faster, in greater comfort than the Global Express' jet.

    Since the reforms began in the mids, New Zealand had halved unemployment tO 6 per cent, cat annual inflation from around is per cent to 2 per cent and turned a budget deficit equivalent to 9 per cent of gross domestic product into a fiscal surplus.

    The report noted that economic growth had averaged 4 per cent since , adding that the reforms were estimated to have increased New Zealand's growth potential by about 1 per cent a year. Subsidies to the agricultural sector, which accounts directly and indirectly for a big chunk of New Zealand's exports, have been slashed from 3. Support for fanners is the lowest in any OECD country. However, in one of th e few notes of criticism, the WTO report said much of New Zealand's agricultural exports were still subject to licensing controls operated by statutory marketing boards, some with monopoly powers.

    WORLD TRADE Road to Vietnam still bumpy ride By Jeremy Grant m Hanoi Foreign investors hoping for an easier ride in Vietnam, where legal potholes are many and success stories few, are likely to be in for a disappointment For months, Vietnamese officials have hinted at radi- cal changes to be made to the four-year-old foreign investment law that would cut red tape and clarify con- fusion over mortgages and land use rights.

    The country urgently needs to reverse declining investment figures. Econo- mists estimate only about a quarter of total commit- ments has been disbursed. Significant changes, how- ever. Final drafts usually make it on to the statute book unaltered. Instead, Hanoi will proba- bly only tinker with the law. For example, it is expected to ban wholly-owned foreign projects in power generation, the manufacture of telecom- munications equipment, and in airports and ports.

    But very few Investors are likely to consider such investments anyway. Also, all foreign projects will have to be insured with Vietnamese insurance com- panies. Wholly-owned ventures in insurance, banned in earlier drafts, will be allowed.

    Observers say the main reason for the apparent dilu- tion of early proposals is reluctance by officials to give concessions to foreign Investors at a time of creep- ing political conservatism and lingering doubt about the role of foreign invest- ment in the communist-run country. They have spearheaded criticism of the perceived dominance of foreign over local busi- nessmen.

    Many Vietnamese businessmen, too, are sensi- tive about the Inability of their cash-strapped compa- nies to contribute much equity to foreign joint ven- tures. Local newspapers cover the Issue regularly almost as a point of national pride. However, some observers point out that Gange s to the foreign investment law are less im portnnf than a thor- ough overhaul of the envi- ronment in which they are implemented. Part of the problem is Vietnam's enthu- siasm for lawmaking.

    An average of between 30 and 40 laws and decrees are issued weekly by ministries, the central bank and the govern- menL The effect of this often overlapping legislation Is confusion and repeated dis- ruption to business plans. Now Ukraine's nearly bankrupt military industrial complex, the second biggest In the for- mer Soviet Union, is court- ing new clients in an already crowded world arms market The latest United Nations arms registry shows Ukrai- nian arms exports are on the rise, reversing the decline of the past four years.

    Other former Warsaw Pact members have made similar forays into the market. Rus- sia re-emerged in as an important global weapons supplier, its share jumping from 4 per cent to 17 In a year. Ukraine would like to fol- low. It remains unclear, how- ever whether the country is really emerging as an arms supplier in the same league as Israel or South Africa, considered second-tier exporters after the US, Britain and Russia.

    Its main products are tanks, trans- port aircraft ships, and mis- siles and missile guidance technology. These are all areas where competition is fierce. Ukraine can still break in, believes an analyst in Kiev. They're very price competitive, too. The previous year it shipped 56 air-to-air missiles to China and performed well in muni- tions, according to the UN Register of Conventional Arms.

    Possibly its greatest strength lies in its missile and missile guidance facili- ties at Kharkiv and Dnepro- petrovsk, both industrial cities in the east, which are considered among the best In the world.

    The govern- ment also insists it is strengthening its legal base to fulfil all international obligations on the export of missile technology. Conversion of military plants has been only partly successful. For Instance, it is providing rockets for Sea Launch, a new commer- cial satellite launch venture that brings together Ukrai- nian, Russian, Norwegian and US companies.

    He considers Ukraine's large Pakistani deal as atypical. As far as the Pakistani deal was concerned, says , a diplomat, the Ukrainian gov- ernment felt confident that it could provide the neces- sary sovereign guarantee because many of the tanks had already been built. The rest of the order is to be filled over the next four years. The Kiev government is now negotiating with Rus- sian sub-contractors which provide electronics and sights for the TUD.

    Other producers have sought formal alliances. The latest model of Antonov transport aircraft, the An, is befog developed jointly by Ukraine, Russia and Uzbeki- stan. But these countries are inexperienced in creating industrial consortia. Another formidable chal- lenge is to improve market- ing and service.

    The panel said the US should return all anti-dumping duties collected on cement since they were imposed in Mexico said yesterday it reserved the right to take the case to the WTO, whose tougher dispute settlement rules do not give member states the right of v eto. Brussels has since resc inde d the duties but has refused to adopt the report on the grounds that it is now in the process of revising its anti-dumping rules.

    Japan said yesterday it might call a special meeting of the Gatt anti-dumping exnmnittee in a last attempt to. Hanoi said last year it needed a refinery to reduce reliance on imports and cut its fuel bill, despite signs of refining overcapacity in the region.

    The area's poor infrastructure was also cited as a serious hurdle: Itself impossible before all parties agree on a financing formula. The modernisation will raise capacity from 1, to 4, tonnes of cement a day. Under the contract, Hughes would install about 17, telephone lines. Tdur of the reactors will be the biggest in the world, each weighing 1, tons.

    Running wild, they can threaten a company's existence. To help you handle your risks, we have instituted the Account Team: This team is dedicated to your industry and wi ensure continuity of service for you company.

    Both wanted and unwantet changes it initiates itself. Unfor- tunately, it can also fall victim to unwanted changes. From December, its suppli- ers will: T im Tucker, chief information officer erf ShopKo. Although data warehouses were first developed in the early s, there has been a surge in their popularity over the past few years, as a result of improvements in technology and the increasing need for managers to gain rapid access to information.

    Data warehouses make it easier to access and analyse information because they bring together data from a number of systems that sup- port business functions. They arrange the informa- tion in a way that makes it easy to analyse, using such techniques as data-mining, data visualisation and desk- top mapping.

    It predicts that the proportion of medium-to- large companies with data warehouses will rise from 20 per cent to 80 per cent over the next five years. The increasing familiarity with data warehousing has allowed suppliers and com- panies to focus on a new issue: Now people are t hinking lees about building a warehouse and mare about how to use it" says David Gittmgs.

    He -believes that there is pressure to open ware- houses up to a far wider group , of people, inside and oiitside the organisation. Hie Web is the perfect vehicle for it," says Stewart Holness. The individual user only has to know how to use a stan- dard Web browser, which is relatively cheap and simple to run. Many companies are likely to see benefits in opening up their warehouses to their employees, suppliers and customers. MicxoStrategy thinks that they could go even further.

    It argues that many businesses, such as market research companies, credit card issuers, telecom- munications companies, banks and insurance compa- nies have accumulated demographic data that would be of interest to other companies in planning their sales and marketing.

    Those companies could allow other companies to access their data warehouses through the Internet. By charging for its use, they could turn a cost centre Into a profit centre, it says. Wednesday of each month step in this direction, by allowing its clients to access its data remotely. Wilson notes, however, that Axciom is careful about which companies receive its data in this way. It would not distribute data over the Web without vetting the recipients, he says.

    The question of bow widely data is distributed raises some delicate issues. Consumers may be sensitive about data becoming more widely available; in the US there have been moves to tighten regulations on how consumer data is used. More generally, companies are nervous about the pros- pect of making corporate data available over the Web, because of the risk that it would allow competitors to gain access to strategic information.

    But he believes that it can be solved by careful software design. He draws a distinction between the type of corpo- rate information that may be freely, disseminated inside or outside the organisation, and more commercially sensitive data, such as breakdowns of product sales, which should only be accessed by a limited number of employees.

    The security measures needed for more confidential infor- mation would add considera- bly to. Another issue that could hinder the take-up of Web warehousing concerns con- gestion on the Internet. Users of a data warehouse would quickly become frus- trated and disillusioned if it proved difficult to gain access to the Website. But suppliers believe the potential benefits of opening up data warehouses through the Net will outweigh their drawbacks. Many have already designed technology that will allow companies to integrate their data ware- houses with the Web.

    In addition to allowing large companies to mine their data warehouses with Web browsers. IBM has pro- posed a service for smaller companies that cannot afford or do not need com- plete data warehousing systems. They will be able to use warehouses hosted by IBM, fed by data sent to and fro over the Internet.

    The companies that are getting involved In this mar- ket have high expectations. David Wells thinks the suppliers' confidence in Web warehousing is justified because the risks and costs of connecting a data ware- house to the Web are lim- ited. Not only is the market ewmil, but the costs of setting up secure Credit-card software were prohibitive. However, in the past month, off-the-shelf software and.

    These services mark the coming of age of consumer commerce on the Internet. But Forrester estimates it will be worth Sbn by , and otbers are even more bullish. He points to Trafford Software, which will be the first company to adopt pjpex's service. In Canada, iStar will take over not only sales and advertising but, through its link with the Canada Post Corporation, distribution as welL The other factor companies must consider before moving online is the.

    As David Aldridge, a vice-president of iCat, points out. By making it possible for a small team with a well organised distribution network to compete with the biggest retailers in the world, the Internet provides enormous opportunities for specialised groups, Mr Nuttall says.

    Oxford, says the large retailers should be watching out. It all started a month ago when my col- lege-age daughter needed a new flatmate. Spurred on by the pros- pect of paying the rent for the vacant room. I eagerly took on the task of checking out these applicants. Since credit reports do not tell much about a year-old.

    I looked again to the Net Finding these young peo- ple on the Internet and learning about their life- styles proved remarkably easy. One young man appeared promising until I read his personal Web pages. Scattered with thinly veiled allusions to drugs, the pages provided new, and not encouraging, insight While in the investigative mode.

    The white pages, in par- ticular. But privacy advocates are rais- ing alarms. These are valid concerns. There should also be limit s on how much information is provided in a directory. Yet I suspect that much of the opposition to e-mail directories is motivated by a desire to maintop the qua- si-anonymity of cyberspace.

    I have little sympathy far those who hide behind pseudonyms to send mes- sages they would not have the courage, or stupidity, to deliver in person. Search tools may even help to clean up the Inter- net by bringing it to users that they are as much responsible for the words they tap into an online dis- cussion group as those that they express elsewhere.

    One can only wonder how many of the bizarre Internet news- groups would exist if partic- ipants realised that their true identity and address is not difficult to find. To date, the privacy debate has focused primar- ily on tbe potential for com- mercial exploitation of per- sonal information. Yet information already freely available on the Net may pose a more immediate and potentially more serious threat to personal privacy.

    There are huge archives of information on tbe Internet that may contain embar- rassing. How long mil it be before an Internet check becomes part of the process of get- ting a job or a loan? You are on the road.

    Whether it is Bangalore or Birmingham, you are a long way from home and office. So how do yon pick up your e-mail? Even assuming that you crawl under the hotel bed and figure out how to plug your modem into a for- eign phone jack, the tele- phone costs of calling your Internet service back home may be prohibitive.

    Akin to h ank networks such as Cirrus and Star that allow custom- ers of one bank to use the ATMs of another, i-Pass is forging agreements among Internet service providers to enable them to trade time on each other's networks. The goal Is to provide local access numbers for travel- lers. Providers are expected to begin rolling out the service in the next few months. This is an idea whose time has come. E-mail is now an essential form of business communication.

    Local access, wherever you may be. Marimba, an eight-month- old software business formed by four of the devel- opers of Sim Microsystems' Java progr amming lan- guage, is striking a chord with Internet publishers.

    PointCast, which pio- neered tbe Internet broad- cast approach with Its news services, has already proven the concept With its auto- matic updates of news on selected topics, PointCast Is a big time-saver. The draw- back is that it may not carry all the news services you want Castanet in con- trast.

    Does this mean that even- tually there may be thou- sands of channels on tbe Internet? Alternatively, we may become far more selective about the services we choose to access. This technology could nonetheless change radi- cally the way information is published on the Internet. Already Marimba is begin- ning to look like the next Netscape. I have a feeling we will be hearing a lot more about this little band of programmers. What are your views on Internet privacy? Are the white pages directories giv- ing away too much informa- tion?

    Should snoops be able to search your newsgroup messages? Are Website operators tracking your activities? Join me in the new Eagle Eye discussion group on Ft. Louise Kehoe can also be reached via e-mail at l fcehoefdrr.

    Marrying content and carriage — will media and telecommunications companies merge? Does the 'common carrier' concept have a future in the age of cxmvergJtnce? A VAT receipt trill be sent on payment of the registration fit. FT Conferences, Midland Bank pic. The Dispatches programme also asserts that a substan- tial change in export policy towards Buenos Aires was hidden from parliament.

    Mr Eduardo Menem, an Argentine senator and brother of the Argentine president disclosed in Lon- don on September 13 that he was optimistic about an early move to relax the embargo and authorise the supply of naval engine parts. Argentine foreign minister, in New York on September Mr di Telia says in the pro- gramme that he used the meeting to reiterate Argen- tina's wish for an early lift- Manufacturing optimism grows By Robert Chote, Economics Editor The upturn in British manufacturing is set to gather pace in coming months, with no sign yet that the stronger pound is causing any problems, the Confederation of British Industry said yesterday.

    The survey will provide ammunition for both Mr Kenneth Clarke, the chancel- lor of the exchequer, and Mr Eddie George, the governor of the Bank of Rngiand - the UK's central bank - when they discuss interest rates next Wednesday.

    Over the past four months new orders picked up at their sharpest rate since April last year. Both domes- tic and export orders are forecast to rise more strongly over the next four months, although in recent surveys these expectations have proved over-optimistic. The survey of 1, manu- facturers was carried out before the recent surge in the pound. But Mr Andrew Buxton, chairman of the CBrs economic affairs panel, said subsequent anecdotal evidence had suggested that industry was not worried by the present level of the pound.

    Mr Buxton added that inter- est rates should be kept at 5. The pound edged up to Expectations of higher inter- est rates in the run-up to the general election - due to be held by the end of May - meanwhile receded a little in the sterling futures market. Factory output has stag- nated for most of the past year, with tentative signs of an upturn during July and August.

    Reinsurance for earthquakes in California found By Jim Kelly, Accountancy Correspondent The London insurance mar ket is to provide Sm in reinsurance cover for the California Earthquake Authority - an innovative state-sponsored body set up to provide homeowners in the state with protection against catastrophe.

    The latest figures on the market's involvement in the scheme were given yester- day in London by Mr Chuck Quackenbush. The earthquake authority will use private sector capi- tal and insurance cover and. Some insurance companies refused to renew policies and most are limiting new ones. Rather than legislate to ensure home- owners were covered he said the state had opted for a partnership with the private sector.

    He said it was a unique solution to providing insur- ance in areas prone to natu- ral catastrophe that could provide a model for other states and countries. Mr Quackenbush said that once in place the scheme would be adequate to meet claims from a disas- ter - including the San Francisco earthquake of It would be sufficient to cover the quake two- and-a-half times over.

    Government in rail sell-off row By David Wighton, Political Correspondent A renewed row over the privatisation of the national railway network erupted yesterday after the disclo- sure that the government blocked a plan for excess profits made by private operators to be shared with taxpayers.

    Mr Roger Salmon, the franchising director and for- mer NM Rothschild mer- chant banker, believed strongly that the best value for taxpayers would be pro- vided by requiring private rail operators to share any abnormal profits with the taxpayer. But the audit office report reveals that Sir George Young, the transport secre- tary. In December , Sir George took the unusual step of directing Mr Salmon for- mally not to pursue profit sharing proposals.

    Ministers argued that such provisions could reduce possible benefits to passen- gers and would cut total returns to the taxpayer as bidders would offer less for franchises. Mr Andrew Smith, shadow transport secretary, said: The report says was a record year, with 4, jobs promised from 35 inward investment projects com- pared with 3, jobs in the previous year.

    The EDB said it was revis- ing its three-year jobs target to from 12, to 18, The figures suggest that the ceasefires have had a less than dramatic impact on foreign perceptions of business prospects within the province. The documentary includes interviews with Argentine naval officers who confirm that the procurement of pans for Tyne engines, made by Rolls-Royce for Argen- tina's warships, had recently become much easier.

    Rolls-Royce said yesterday it had approached the DTI about 18 months ago for guidance on whether the engines could be sold to Argentina under the embargo. The DTI had advised that the whole engine was subject to embargo but some of its parts could legally be exported.

    The company declined to say when the DTI pronounced this. The new bill will tighten up rules on waste disposal m ports, provide ministers with more powers to intervene in a pollution incident and require non-UK ships to carry full insurance. Sir George believes last February's Sea Empress ou spill in Pembrokeshire baa heightened the need for new legis lation on marine pollution. It also represents the latest stage of the government's crackdown on sub-standard shipping using UK waters.

    Sir George is also looking for ways of passing on the costs of port-ship inspections to ship owners. Currently the cost is borne by the British taxpayer. A fifth provision will increase the liability to shipowners for compensation In pollution incidents. It granted the first global licence yesterday to Britannia Airways, part of Thomson, the UK's largest tour operator.

    Britannia, which has been working closely with the CAA to establish the new global licence, said yesterday that it would speed up the process of establishing new routes and would save on administration.

    It was also a recognition of the ax pandin g international operations of charter airlines, it said. Britannia said long-haul travel accounted for 20 per cent of its business from noth- ing 10 years ago.

    Meanwhile, research from the Association of British Insurers also argues that UK entry could have a positive impact on the industry - although the benefits would initially be modest. Their fifth a nn ua l survey of long-term employment strategies attributes this optimism to the increasing use - of flexible working practices in the UK.

    Monday by the widow of a headteacher murdered outside " a Loudon school. Mr Bart- holomew-White said he could answer questions if he were allowed to go to Denmark to obtain information. Mr Bart- holomew-White said he did not know the answer. The Scandex managing director said he had never visited the New York office, said to be at 99 Wall Street, and did not know the name of the company that employed the people working there.

    Mr Heslop asked why calls to the number on the stationery reached a company called Roundhill First Capital, which said it had not heard of Scandex. When yon no find some thin g that is not carefnUy designed to appeal to the tastes of.

    One-off items emerging from the mbyte of single authors, once the bed- rock of- -television drama, sure becoming so uhusual that we tend to think they must be supe- rior. But of course that is not so. But does it grab you as a drama? Shaw, however, so applauded the social audacity of Ibsenism that he kept moving forward from its premise. His women take charge of their own destinies, and some of them use men or drop men In so doing. Over a century after he wrote it, Mrs Warren J s Profession still enthralls.

    The title alone, of course, leads you to guess what profession Mrs Warren had or has - the oldest one. But I love the skill with which Shaw, so unsensationally, first discloses that and 1 love more the awn with which. In consequence, he then develops one ethical and psychological debate after another.

    Mrs Warren finally recognises that what toe likes, more even than her daughter, is making money. True, It shows that Bart- lett does not know how to work well on a large stage, bow to unify the different acting styles among his cast, or how to make us believe that all his characters belong to the same world. But Shaw carries us over all these blips. Do yon ha ve the foggiest idea what is going on?

    This serial appears to begin with the desire that we should understand that colonialism and racism are wicked and that Rhodes stood for both. It would be hard to imagmo anything less like formula drama than Loving. Much of the tune this felt like an episode of Upstairs Downstairs written by Dennis Potter, an irresistible combination.

    There was the Potter-like use of vignettes which seemed oddly disconnected, and an interest in the implications and precise use of language - studied, stilted, and yet somehow still peculiarly authentic — which also reminded you of the old rascal. Above all there was the similar use of music from the crooners.

    It was so powerfully atmo- spheric that there was no diffi- culty in suspending disbelief and entering into that hangover from the Edwardian world, the great country houses of the s and 40s, which most of us know only from television. But when you finally re-emerged from the looking glass yon tended to won- der why, instead of all the bints and allusions, we could not sim- ply have been told the story straight out. P erhaps this was one of those literary adapta- tions which win the approval of those who have loved the books because the TV versions remain so "faithful".

    But viewers who had not read tbe book - the great majority, presumably - might have been grateful for a little less literature and a bit more telly on the small screen.

    Yet another BBC production, Beck there is an episode tonight at 9. It is made in minute Camp: Gruff-voiced, she uses a humming tremolo on her vowels.

    Catherine Cusack plays Vivie fall-out for bluestocking hard- ness: Neil Stacy, though he overdoes some pauses early an, hand les the urbane warmth and suavity of Mr Praed very well.

    As his ecclesiastical father and as Mrs Warren's busi- ness partner, John Quentin and Ian Gelder lend strong, well- paced playing. Anyone could see the faults of this production, but in truth they hardly matter.

    Both cast and audience are caught up in Shaw's Play. The macho central character is a blonde with a nice figure, single, but serviced by two wimpy, worshipping men. Her job is detection - she lives in London and tracks down miss- ing persons - but she is not a police officer. Luckily one of her adoring chaps is. She runs her own business with a multi- racial staff, bat is too jolly decent to charge high enongh fees to make a proper profit.

    You could go to the pattern book and create any number of variations: Unhappily the much admired Prime Suspect series is now looking pretty much like for- mula drama, too.

    This is partly because, having helped invent the more-macho- than- men female-detective- with-wimps-m- tow stereotype it now looks awfully like the clones which fol- lowed it. Moreover, just as some pop record producers try for a new hit by producing something as nearly as possible identical to the last one.

    More seriously, if you insist on sticking to the four-hour formula when yon have 90 minutes of good material, you begin to look slow and even risk being boring- Oddly enough this particular production. Here, instead of colonial- ism and racism, the subjects for the sermon sub-text were the proliferation of drugs and the loss of tbe younger generation to a criminal sub-culture offering something more a lt rra c tive than mainstream society.

    Most disap- pointing of all was tbe infliction of the Mexican stand-off formula at the end, with DS Tenuison In the mandatory derelict ware- house facing the psychopath who has already pushed one victim through a hole in the floor. The plot contortions necessary to contrive this familiar climax were thoroughly unconvincing. Having said all that, this was not a bad crime serial by prevail- ing international standards.

    Bnt wbat a pity that, by insisting on using tbe formula system, work- ing from the ontside in rather than the inside out, a drama which could have been outstand- ing became just another in tbe familiar catalogue.

    Fash- ioned in every sense and. Right up to the reclu- sive end of her days she mastered the art of myth-management. Set back-stage and on-stage at a concert in Paris in tbe s, the self-styled "Queen of Ajax" begins by kneeling on a Air jacket to scrub down her dressing room. There is even less dra- matic function behind the role of her silent, elderly dresser, other than to illustrate Dietrich's vio- lent mood swings from generos- ity to imperiousness.

    Perhaps it is all a case of being too in love with the subject. Sean Mathias directs with kid-gloves on. Sian Phillips, however, lifts all this into a different sphere. She transcends mere impersonation, deliberately moving away from the iconic image and thereby delivering a delicious shock of recognition when, for the pur- poses of an interview, she sud- denly switches into the familiar public persona.

    Some of the incidental music is cheap but the arrangements fit Phillips's bari tonal growl like a glove. It is shocking and pow- erfully dramatic. Would that the play could match her. At the Oldham Coliseum until Saturday, then on tour.

    I f not exactly an unsung hero of British music he has recording awards to endorse his special gifts , conductor Vernon Handley is not sung enough. Deceptive because a full perfor- mance with speakers for Edith Sitwell's verse steers an exqui- sitely tenuous course between the Scylla of archness and the Charybdis of clod-hoppping.

    Tbe evening's soloists were Richard Stilgoe, an expert in brittle panache, not to mention near-Gil- bertian patter, and Juliet Steven- son.

    Add to this the fear tha t she might, lik e many of her colleagues, be tempted to "act" the Sitwell verbal arabesques. In the event all went swim- mingly. By now the listener felt as confident as Stevenson that she will and should do Facade again.

    Throughout, the conductor seemed more attentive to the players than the speakers, doubtless adding to the tension of performing under the eye of the composer's widow, herself some- thing of a specialist in the work. Piers Lane was the buoyant pianist in the Sinfonia Concert- ante. Martin Hoyle Rely VS. Bach, Rameau and Rebel: Among them is Agrippina, who founded the city of Cologne. Conducted by Alan Hacker, performed by the Oper K5ln. Soloists include Paula Rasmussen and Graham Pushee; 7.

    Each provides a comprehensive survey of what has happened in Danish sculpture since the era of the classicist sculptor Bertel Thorvaldsen. The exhibition at the Ny Cartsberg Gfypothek features a selection of Danish sculpture from the period , including works by Ludvig Brandstrup, C. Schumann and Schubert; 7. Conducted by Bernard Haitink and performed tv tbe Royal Opera. Hundreds of villages have been burned down by Turk- ish security forces since Many now live in filthy shanty towns on the outskirts of big cities, lack- ing both employment and basic services.

    More than 1, have died in political kill- ings. Of course, the violence is not one-sided. But that cannot justify the brutal behaviour of the Turkish state. To research the root causes of the war, he said, is a pun- ishable offence; to publish the results makes you a criminal or terrorist. Thus the Turkish people are denied the right even to think about the most funda- mental problem facing their country. He compared the Turkish state to a s inking ship, but said the Kurds to their great credit wanted not to abandon it but to help clean it up.

    This time last year Turk- ish diplomats were lobbying hard for the customs union between Turkey and the European Union. Promises were made, and constitu- tional amendments passed, to improve observance of human rights. Mrs Tansu Oilier, then Turkish prime minis ter, called elections for December 24, 10 days after the European parliament was due to vote.

    She presented herself as the last bastion of European democracy against Moslem fundamentalism, into whose arms she said Europe would drive Turkey if it rejected the customs union. The European parliament took note, and the customs union is now in force.

    But the Islamists won the elec- tion anyway. The party which won most votes in four south- eastern provinces received no seats, because it fell short of a countrywide 10 per cent threshold. It is now in the process of being ban- ned - as happened to previ- ous parties which mobilised the Kurdish vote. Overall the human rights situation is clearly no better, and probably worse. Not surprisingly, the Kurds and their friends are very angry. Mr Gerger even said foreigners who sup- ported the customs union had Turkish and Kurdish blood on their hands.

    But I am still not convinced we were wrong. To me it seemed a good idea, as it apparently now does to her. Nor did l put much trust in her promises and amend- ments. Such legal provisions will always be ignored or cir- cumvented so long as Turk- Losing bottle: PepsiCo under pressure for its Burma links ish society has not Internal- ised the values on which they are based, and achieved a broad consensus on the need to enforce them. That can only be a long process, but there are signs that it is happening - one of them being the very fact that Mr Gerger could make such a speech in public as he did in London, knowing he would be back in Ankar a next day.

    I suspect it even applies to Burma, although there one hesitates to disagree with Ms Aung San Suu Kyi, a leader who was able to dem- onstrate. If the junta were weak, divided and heavily depen- dent on western support, so that the shock of sanctions might induce a rapid change of heart, it would be worth trying.

    But sadly that is not the picture given by recent reports from Burma. Its rulers are clearly deter- mined not to band power to Ms Suu Kyi at any price. They have a firm grip on the country. For a long time they isolated it almost com- pletely from the rest of the world. There is little reason to think a further bout of isolation would damage their power. Isolation generally slows down economic and social change, whereas foreign trade and investment have been potent and radical agents of change through- out the world.

    Where the west withholds investment, it reduces its own influence. Pfizer forum Do more and better medicines keep people out of hospitals? The study goes beyond individual case studies that have demonstrated the efficacy and cost- effectiveness of particular medications. In the present analysis, information was assembled at the national level on all prescriptions, hospitalisations, surgery, and mortality from representative surveys conducted by the U.

    Department of Health and Human Services for and The data were classified by illness category, such as 'hypertensive disease" and "pneumonia and influenza," and I focused the study on the amount of change between and The main objective of the analysis was to probe for the existence of a systematic relationship between changes In the drugs prescribed for each illness and changes in hospital use, surgery, and mortality associated with the illness.

    The results of the study show that within illness categories, higher- than-average rates of prescribing are associated with fewer hospital admissions and shorter hospital stays. Controlling for the possible effects of other changes, it appears that an increase of prescriptions is associated with 1. High volumes of drug prescriptions are also associated with lower rates of inpatient surgery. The study also examines the impact of another aspect of prescribing; the extent of change from to in the kinds of medications prescribed for a particular illness.

    The key finding here is that along with the sheer volume of prescriptions, the "novelty" of the medications prescribed was also associated with reduced hospital use. Interestingly, though, the definition of novelty used was the actual measure of the change in the types of drugs prescribed, and thus the measure would rise even with changes in prescribing that is related to new use of old drugs.

    Therefore, "novelty" broadly represents new approaches to drug therapy, rather than being strictly limited to new biochemical entities resulting from pharmaceutical research.

    As for the impact on mortality, the results were somewhat mixed, depending on what measure of mortality used: A lower rate of physician referral was also associated with relatively high levels of prescribing.

    In addition, there appears to be no association between prescribing and ambulatory surgery- This suggests that the reduction in inpatient surgery linked to prescription volume, mentioned earlier, was not simply a shift in the venue of surgery from inpatient to ambulatory settings, but actually reflects an overall decrease in the volume of surgery. An additional compelling result of the study is that not only did additional expenditures on phar- maceutical products reduce aggregate health care costs, but also that the magnitude of the savings was substantial.

    Indeed, the broad results suggest that every additional dollar spent on drugs was associated with several dollars of savings in the aggregate cost of hospital care. Although it would not be correct to infer from these findings that spending more on prescriptions and drug development is a painless method for reducing health care costs, the study does demonstrate the phar- maceutical industry's contribution to keeping health expenditures in check.

    Based on common experience with the effectiveness - and often dramatic impact - of drugs, the findings of econometric analysis should not be terribly surprising. But the broad perspective of this study, encompassing essentially the entire pharmaceutical industry, and finding a substantial favourable impact on health care costs, adds another dimension to understanding the role of drug products in the health care marketplace.

    The European parliament - voted amendments to the recent directive on distance selling which give the consumer greater protection against cold-calling.

    Financial services are excluded from the draft directive. Ken cniHim, chairman, Ria Oomen-fiitiitm. Many of my colleagues and I at the headquarters of the bank Argentarta read with great interest your interview with our president, Francisco Gonzalez Survey: Spanish hanking an d finance, October However, your statement that no ashtrays are to be found In these headquarters is absolutely incorrect.

    Thank you nonetheless for having written your profile. Sir, Denis MacShane Letters. There is an important difference. Much of thp pressure for action on labour standards comes from interest groups whose concern is to protect themselves from foreign competition.

    The total number of awards did fall, but largely because the number of silver lower value awards dropped dramatically while tbe number of hi ghpr value awards such as multi, triple, double platinum and gold awards all increased.

    Year on year the total number of sales required for all awards increased from 20m to 29m. This does not seem to reflect a subdued market, more, a buoyant state of affairs.

    Beaumont Sir, For two years or more you have published articles and letters written by every expert about the euro. I simply do not trust politicians' promises, nor their economic forecasts. Most politicians are idealistic, ambitious dreamers who lead us du mb voters into paying more taxes.

    From full nationalisation, back to privatisation in such a short timw is no way to conduct a nation's economic affairs. I trust people who want to make money. The reactions of Europeans before this gamble are predictably mixed: Profound anxiety is more than justified, for both economic and political rea- sons.

    The principal conclusion I draw from the literature on currency areas, sparked off by the Canadian economist Robert Mundell in the early s, is that an optimal zone is one with a single flexible labour market. A single currency can be expanded to larger areas, but only alongside a labour mar- ket in which relative wages are flexible and workers and entrepreneurs are ready to pitch tent elsewhere.

    The labour market of the European Union, with its 18 m unemployed, is very far from being integrated. Hie most important barriers are those of language and cul- ture.

    Other barriers, such as over-generous unemploy- ment benefits, national social security entitlements, non-portability of pension rights and public subsidies to "fling industries, could in principle be removed by reforming public policy.

    But in large parts of Europe, for the foreseeable future, they will reinforce the cultural differences, strongly discour- aging people from seeking work away from home. Thus, Spain, with a 20 per cent headline unemployment rate, and around 10 per cent of its labour force employed in the black economy, constitutes not only a defec- tive monetary zone in itself.

    A further reason for resist- ing the entry into Emu of countries with rigid labour markets, such as Spain, is that, once inside, they will demand subsidies to allevi- ate tbelr plight. This will prolong the illness. The clearest example is Canada, where the Atlantic provinces and Quebec suffer from structural unemployment and with this pretext draw subsidies to an extent that endangers the federation.

    Flexible exchange rates would not help a country with a rigid labour market, but neither would merging this country in a monetary union do either it or the union any good: Emu is peddled as a political nos- trum to cure all ailments.

    The Germans want the union to stop them from foiling into Nazi ways. The French want to be cured of an inferiority complex. The Italians want to become a nation. The Spaniards want to bury Franco.

    The Portu- guese want to be French. Doing away with competi- tion in the monetary field is really an attempt to make the move to a federal Europe irrevocable in the hope that monetary union wfll give a huge boost to centralisation in the EU.

    The European Central Bank will decide interest rate policy for afl member states. The Ecofln council of finance ministers] will super- vise their budgetary policy. Pressures will mount from the poorer member countries to get subsidies, and from the richer, to equalise social contributions and benefits across the community, in search of the proverbial level playing field that was a part, of Mr Defers' flat earth eco- nomics.

    The conflict between deep- ening and widening the union win sharpen. Instead of toe euro running in paral- lel with the east European currencies, a long time will have to elapse before the central bank governors of Poland or the Czech Repub- lic join the exalted board of the Frankfurt monetary authority.

    Some of the backers erf the euro have sought to create a reserve currency that could look the dollar in the eye. This fits in with an anti- Americanism prevalent in continental circles. Certain commentators regard emerging market hedge funds as a contradiction in terms. Many of the emerging markets do not allow short-selling, nor do they offer viable futures or other derivative products with which to hedge. Emerging markets represents 3 percent of all assets under management.

    Why Hedge Funds Make Money 25 Managed Futures The managed futures trading managers, otherwise called commodity trading advisers CTAs , trade in the listed financial and commodity futures markets around the world. They may also trade in the global currency markets. Most traders apply their individual disciplines to the markets using a systematic approach although a small percentage use a discretionary approach.

    The systematic approach tends to use price and market-specific information in determining investment decisions. The discretionary approach tends to use price and market information as well as broader economic and political fundamentals in determining the investment decisions. Managed futures represents 3 percent of all assets under management. The majority of funds of funds invest in multiple hedge funds five to with different investment styles. The objective is to smooth out the potential inconsistency of the returns from having all of the assets invested in a single hedge fund.

    Funds of funds can offer an effective way for an investor to gain exposure to a range of hedge funds and strategies without having to commit substantial assets or resources to the specific asset allocation, portfolio construction, and individual hedge fund selection. A growing number of style or category-specific funds of funds have been launched during the last few years—for example, funds of funds that invest only in event-driven managers or funds of funds that invest only in equity market-neutral-style managers.

    Although the preponderance of evidence suggests hedge funds over time offer equity-like returns with lower risk profiles, few studies consider the sources of the returns.

    Although the hedge fund structure is relatively new, the investment activities conducted within them are not. These investment activities typically center on market-making and proprietary trading.

    Historically, large financial institutions were the only organizations with the capital, infrastructure, and access to conduct the trading and investment activity now common to hedge funds. Senior positions on proprietary trading desks represented the top of the career ladder for professional traders. With the advent of hedge funds, another rung was added to this ladder. Traders who could establish a history of profitability and proven expertise could now ply their craft with investor assets, potentially earning both higher incomes and the opportunity to control their professional destinies.

    Over the last decade, two trends have developed. The hedge fund structure is drawing top-flight talent off the trading desks at an accelerating pace. In broad terms, the risk capital funding the market-making and speculative activities of the largest proprietary traders is increasingly coming from private sources in the form of hedge funds.

    These trading advantages include superior information first call on breaking news , reduced transaction costs either in the form of lower commissions or tighter quotes from the market-makers , and superior market access, as well as other structural and statutory benefits.

    These edges exist or were granted because the markets need these liquidity and speculative functions to be performed to ensure their smooth operation. They represent the first component of the inherent return in hedge funds. A second level of inherent return is created by virtue of the fact that most of the specialized activities conducted within hedge funds require a substantial research infrastructure.

    It is not economic, in most cases, for traditional mutual funds to build the appropriate research capability, given the Why Hedge Funds Make Money 27 substantially lower fees they charge relative to hedge funds. Risk arbitrage, for example, requires specialized expertise from analysts and lawyers. Given the fact that there are a limited number of deals at any point in time and limited liquidity, it does not make economic sense for a fund charging 60 basis points to hire the individuals necessary to conduct the activity.

    Virtually all hedge funds take advantage of some type of investment edge. Many enjoy multiple advantages. To take a basic example, a specialist on the floor of a stock exchange is granted market privileges that average investors do not receive.

    Most notably, they are allowed to see the buildup of orders above and below the current price of the stocks they are assigned. Further, they are allowed to take the opposite side of customer transactions in their own trading accounts as well as receive other statutory advantages from the exchanges. Finally, they execute their trades with the lowest possible transaction costs.

    Those factors are trading advantages, and the combination of those trading advantages means that even a specialist with a modest level of skill can ply his craft profitably.

    But not all specialists are equally profitable. Even specialists who cover companies with tremendous similarity can vary greatly in profitability. Although alpha usually determines the degree to which any given hedge fund prospers, virtually all successful hedge funds exploit some type of trading advantage. These advantages include superior information, lower transaction costs, better market access, size advantages, and structural inequities in the markets in which they operate.

    One of the most common advantages is superior information, which often manifests itself in situations where the hedge fund manager is dealing in a limited universe of securities and financial instruments.

    Typically, these managers will surface in an area where only a relatively small group of experts follows the instruments closely, though a larger group may follow the sector generally. In these situations, a mismatch of both expertise and objectives can be exploited to the benefit of the hedge fund manager. For example, managers specializing in distressed securities develop tremendous expertise pertaining to a relatively small universe of companies.

    A given manager has the opportunity to learn more about a particular company than all but a handful of individuals. Further, activity in the securities of distressed companies typically companies in Chapter 11 usually precludes involvement from large public investment funds.

    Relative size, either large or small, can be an edge. For instance, shortterm or day-trading equity firms typically benefit from the fact that their small size relative to large mutual funds allows them to capture smaller 28 HEDGE FUNDS market movements.

    Size advantages can generate other advantages. For example, managers dealing in below-investment grade debt in a particular emerging market country or region can find themselves among the largest investors in that narrow universe of securities. As some of the largest players, they are viewed by the market as buyers or sellers of last resort. As a result, these managers tend to get the first call on breaking news, leading to an advantage in superior information.

    That same size advantage compounds into superior market access as market-makers will typically make deeper and tighter quotes to the active investor compared to the occasional participant. Large size usually translates into lower transaction costs. For example, most statistical arbitrage programs generate large volumes of equity trading, as every long position is matched against a short position. Furthermore, positions are usually turned over quickly.

    This makes them very desirable clients to their prime brokers, who offer them low commission rates in addition to the benefits of superior market access and first call on information. Other types of managers will benefit from structural inequities in the marketplace. Derivative markets, for example, exist for the purpose of transferring risk. They typically facilitate transactions in which one party, saddled with an unwanted market risk, contracts with another to lock in a future price—a discipline known as hedging.

    In that transaction, the speculator usually assumes the risk position at some discount or premium to fair-market value. In essence, the hedger is paying what amounts to an insurance premium to the speculator who assumes the risk. Hedgers usually operate in derivative markets for non-economic reasons. Their motive is to operate their underlying businesses profitably rather that look to profit from their derivative market dealings.

    Another advantage lies in the broad investment mandates that are typical of most hedge funds. Managers are not restricted to the long side only or to listed securities only. Hedge funds typically can employ a wider range of strategies to capture an investment idea than most traditional managers.

    Put simply, hedge funds function as vehicles to capture manager skill, or alpha. Virtually any financial activity can be packaged within the structure. The additional profitability of a trading enterprise directly related to these trading advantages is the inherent return of hedge funds. As investment banks and other financial institutions retreat from the business of providing liquidity and speculative capital, that inherent return is being offered to investors in the form of hedge funds and other alternative investment vehicles.

    Why Hedge Funds Make Money 29 Positive Selection of Alpha The inherent returns of the activities are amplified by a key attribute of the hedge fund structure: Performance-based compensation creates positive manager selection. Only managers with established industry pedigrees have the credibility to raise initial assets. Only managers who continue to deliver compelling net returns to investors keep and grow their assets.

    The hedge fund structure is attractive to top-tier talent as it affords greater financial rewards to managers who can deliver net performance on large pools of investor capital. Further, it allows successful managers to build their companies in their own image, working where and when they want. The incentive-based compensation structure amplifies the positive selection process.

    Unlike mutual funds, most hedge funds have limited capacity to invest assets. As a result, they depend on incentive fees and must generate profits consistently to maintain their financial viability.

    This typically influences the mindset of hedge fund managers away from the complacency that can occur among traditional managers who dwell in a benchmarked universe.

    This mindset is further augmented by the fact that most managers invest their personal capital in the funds they manage. The firm and its employees do only as well as the investors. It is not uncommon for successful hedge funds to close to new investments or even return capital to investors.

    This occurs because large hedge funds often earn more from incentive fees than from management fees. These factors coalesce to create an attitude where annual profitability is paramount. These advantages can include cheaper costs, better market access, and superior information, as well as other structural and statutory benefits.

    These advantages are not new. In fact, they have existed for decades, but prior to the emergence of hedge funds, they were in the exclusive domain of large financial institutions that traditionally supplied liquidity and 30 HEDGE FUNDS speculative capital to the marketplace. Starting with the inherent return as a foundation, the potential benefits of this return are amplified through the positive selection of alpha.

    This positive selection occurs because of the performance-based compensation intrinsic to all hedge funds. Incentive-based compensation creates a Darwinian model in which only the most talented managers can far exceed the earning potential available within the financial institutions from which they emerged. The hedge funds have been added uniformly, and no discretion has been used to either overweight or underweight the allocation.

    What is interesting to note is that, as hedge funds are added, the index return increases and the volatility is reduced see Figure 2. Although a typical long-only manager may charge 10 to 85 basis points of assets under management, the hedge 18 1 17 16 15 14 13 12 11 7 10 6 9 5 2 4 8 8 9 10 11 3 12 13 14 15 Volatility Annualized Standard Deviation 1.

    Pension Fund Index 4. Russell Return Index 4. Pension Fund Index 5. Hedge funds are able to command aboveaverage fees because they have historically provided superior risk-adjusted returns and they have very limited capacity.

    This is simply a case of supply and demand; the relatively small number of superior hedge fund managers are in such demand that they are under no business-related pressure to acquiesce to the institutional investors by dropping their fees.

    The high fees charged by hedge funds have created cultural difficulties for investors accustomed to fees measured in low basis points. Few institutional investors, if questioned, would choose to invest with managers offering lower fees at the expense of reduced performance.

    Many of these hedge funds will give an institutional size discount, but their fees are still a multiple of standard institutional fees. Virtually all hedge fund managers recognize that their strategies work best when employed with a limited amount of capital.

    In contrast, most institutional funds are effectively open-ended, with the managers believing that no asset cap is necessary. The management of a hedge fund normally has a very large personal stake in the fund and will not jeopardize the potential return on its own assets by taking in more client assets than it believes are optimal. The cost of operating a hedge fund varies with the size of assets and the scope of the investment approach. The management fees charged by hedge funds usually range from 1 percent to 3 percent of assets per annum.

    Generally speaking, managers expect to be able to cover the fixed costs of running their business with this fee revenue. As with institutional fund managers, these management fees are due regardless of the performance of the underlying fund. These fees are in addition to management fees and usually take the form of 5 percent to 50 percent of the profits charged on a schedule ranging from monthly to annual.

    No fee is earned if the fund has a negative return as the vast majority of funds only pay incentive fees to the manager on new profits to the investor. This performance fee is key to understanding the motivations of a hedge fund manager. The arrangement provides the incentive to the manager to focus on generating absolute returns on a manageable asset base. If successful in generating absolute returns, the hedge fund manager can earn as much as or more than a traditional manager running five or 10 times more capital.

    The structure of institutional funds rewards asset-gathering and does not penalize mediocre performance; the hedge fund fee structure focuses the manager on positive absolute returns and not degrading these returns by taking on too much capital. The hedge fund fee structure benefits the fund by enabling it to attract the high-end talent necessary to run a successful fund.

    The chance to share in potential performance fees is a powerful recruiting tool and mirrors the Capacity 37 type of compensation schemes used in investment banks and other sophisticated entities. Hedge fund managers can keep their overheads low by offering senior candidates a relatively modest salary with a healthy share of the performance fee. One of the key questions for hedge fund investors is determining which individual funds actually deserve these premium fees. The proliferation of pools of capital managed with a hedge fund fee structure has made it extremely important to perform proper due diligence on the universe of managers to answer this.

    This due diligence allows an investor to concentrate on the types of hedge funds that will add value, on a net of fees basis, to the overall investment strategy. An institutional investor with substantial long equity exposure may be very willing to pay a premium fee to a manager who has a record of generating returns that are not correlated to the equity market. The same investor would probably be unwilling to pay hedge fund fees to a leveraged long equity-focused fund. A fund that provides the investor with superior investment talent is structured to enable this talent to implement rationally a disciplined investment approach, reward absolute performance, and produce robust risk-adjusted returns, all of which is worth the higher fees to an institutional buyer.

    On a secondary basis, they may also be referring to the maximum number of people that a hedge fund may want to employ and the size of the infrastructure that they want to manage. Not all boutique hedge fund managers want their businesses to grow into substantial asset management companies with the operational, political, and bureaucratic characteristics typical in such companies.

    It is well known that a limited number of managers demonstrate the ability to outperform over time. For many managers, performance often degrades once assets grow beyond a certain level. The reason for this is simple: Slippage is defined as the degree to which market prices are moved through the process of entering or exiting a position.

    The larger the position, the greater the effect of slippage. Funds focusing on investing in the currency markets should be able to manage much more money than funds focusing on exotic fixed-income arbitrage opportunities. Funds focusing on largecapitalization stocks should be able to manage more than those specializing in the micro- or small-capitalization arena.

    Greater transparency is commonly associated with providing greater investor protection from both a performance and a fiduciary perspective. This is not always the case. Transparency is a double-edged sword with the potential to be misunderstood and misused.

    Certain levels of transparency are essential for effective due diligence. Investors and asset allocators must have some ability to look through to the underlying portfolio to understand whether the manager is adhering to stated investment parameters and whether the investment methodology is consistent with stated objectives.

    This is particularly true for managers investing in unlisted securities and derivative instruments. There is a curious dichotomy in the mindset of investors in alternative investments. Investors in private equity funds view lack of transparency and liquidity as par for the course and, often, as a benefit. However, lack of transparency and liquidity in a hedge fund can be regarded as a disadvantage.

    Much of the recent clamor for transparency has focused on managers supplying full portfolio information to investors on a real-time basis. In this instance, transparency can have the ability to do more harm than good. The reasons are very straightforward: Again, this works against the best interests of investors. Furthermore, we have seen no empirical evidence to show that the use of the ubiquitous value-at-risk VAR models which are based on the mathematical formulae developed by some of the professionals who per- Notes 39 formed so badly in protects investors from major market setbacks.

    The reasons are threefold: Real-time transparency is only valuable in two circumstances: Few investors have either of these advantages. By definition, more transparency means more information. Fifteen years ago there were discreet advantages to having information ahead of the crowd because you could act on the information before its impact was generally understood. Today, by the time you get the information, it is old and everyone else has it, too. Therefore, you have no time to react before the herd.

    The majority of statistical and intellectual evidence suggests otherwise. However, by adding the positive selection of alpha, intrinsic in the structure of all hedge funds, the inherent return is enhanced. Hedge funds are paid—and have the incentive—to trade and invest when others cannot, will not, or need to be on the other side. Reproduction or use of all or any part of the research is prohibited without the express written permission of both the author and the AIMA.

    The author and the AIMA retain all future publication rights to the original research paper and this chapter. However, for managed futures to grow as an investment alternative, individuals need to increase their knowledge of and comfort level with the use of managed futures in their investment portfolios. Basically, managed futures provide direct exposure to international financial and non-financial asset sectors while offering 41 42 MANAGED FUTURES through their ability to take both long and short investment positions easily a means to gain exposure to risk and return patterns not easily accessible with investments in traditional stock and bond portfolios.

    Investors must come to appreciate that the investment benefits in managed futures are wellfounded in financial theory and empirical evidence. Yet, managed futures, as an investment alternative, have been available only since the late s. Today, institutional investors, such as corporate and public pension funds, endowments and trusts, and bank trust departments as well as high net-worth individuals, include managed futures as one segment of a well-diversified portfolio.

    Moreover, this number does not include the billions of dollars under management or in proprietary trading programs of major financial institutions, which trade similar strategies, but which do not report to traditional data sources.

    This growth in investor demand for managed futures products indicates investor appreciation of the potential benefits of managed futures—for example, reduced portfolio risk, potential for enhanced portfolio returns, ability to profit in different economic environments, and the ease of global diversification. Results see Table 3. Bond Portfolio III Risk and Return Performance managed futures, as well as investment in stocks, bonds, and hedge funds, dominate those portfolios that invest solely in traditional stock and bond investments Portfolio I of U.

    In general, the correlation of CTA strategies with other CTA strategies depends on the degree to which the strategies are based on trend-following or discretionary approaches. Because most CTAs follow trend-following strategies, the overall dollar-weighted and equal-weighted indices are also highly correlated with other CTA strategies dominated by trend-following indices.

    However, as shown in Table 3. For instance, as Table 3. In contrast, as Table 3. Thus, they may not provide the diversification benefits with equities offered by CTAs. Investors must also realize the uniqueness of the time period. For instance, hedge funds have been marketed as offering unique risk and return properties that are not easily available through traditional investment securities or investment products. These return opportunities stem from the expanded universe of securities available to trade and to the broader range of trading strategies.

    One reason for the supposedly low correlation and potential diversification benefit is that hedge funds often describe themselves as employing skill-based investment strategies that do not explicitly attempt to track a particular index. Because their goal is to maximize long-term returns independently of a proscribed traditional stock and bond index, they emphasize absolute returns and not returns relative to a predetermined index.

    It is important to realize, however, that although hedge funds do not emphasize benchmark tracking, this does not mean that their entire return is based solely on manager skill or is independent of the movement of underlying stock, bond, or currency markets. Hedge fund managers often track a particular investment strategy or investment opportunity. When appropriately grouped, these hedge fund strategies have been shown to be driven by the same common market factors, such as changes in stock and bond returns or stock market volatility, that drive the traditional stock and bond markets.

    For instance, Table 3. A positive negative value indicates an increase decrease in the returns of the strategy as the spread increases. A positive negative value indicates an increase decrease in returns when the VIX implied volatility increases. In contrast, managed futures universe returns are not correlated with the stock and bond markets or changes in equity market volatility, but track indices that reflect trend-following return patterns.

    In contrast, managed futures programs that are not trend-following in structure are not correlated with these trend-following indices such that investments across trend-following and non-trend-following strategies may offer diversification. Managed futures trade in markets that offer investors the same market integrity and safety as stock and bond markets.

    Managed futures investment, as is the case for stocks and bonds, provide investors with the assurance that their investment managers work with a high degree of government oversight and self-regulation and trade primarily in closely regulated markets. Managed futures are not more risky than traditional equity investment. Investment in a single CTA is shown to have risks and returns that are similar to investment in a single equity investment.

    Moreover, a portfolio of CTAs is also shown to have risks and returns that are similar to traditional equity portfolio investments. Most traditional money managers and many hedge fund managers are restricted by regulation or convention to holding primarily long investment positions and from using actively traded futures and option contracts which offer lower transaction costs and lower market impact costs than direct stock or bond investment.

    Thus, in contrast to most stock and bond investment vehicles, managed futures offer unique return opportunities, which exist through trading a wide variety of global stock and bond futures and options markets and through holding either long or short investment positions in different economic environments for example, arbitrage opportunities, rising and falling stock and bond markets, and changing market volatility. As a result of these differing investment styles and investment opportunities, managed futures traders have the potential for a positive return, even though futures and options markets in total provide a zero net gain among all market participants.

    Thus, managed futures are shown on average to have a low return correlation with traditional stock and bond markets as well as many hedge fund strategies and to offer investors the potential for reduced portfolio risk and enhanced investment return. As important, for properly constructed portfolios, managed futures are also shown to offer unique downside risk control along with upside return potential.

    The Benefits of Managed Futures. Schneeweis, Thomas, and Joe Pescatore, editors. The Handbook of Alternative Investment Strategies: Annualized standard deviations are derived by multiplying the monthly data by the square root of The additional CTA indices are segmented by CTA reporting strategy for example, currency, financial, diversified or style discretionary, trend-following. For hedge funds, event-driven indicates the median of the reporting hedge funds grouped as distressed and risk arbitrage.

    The Zurich Fund of Funds is the median of reporting fund of funds where capital is allocated among a number of hedge funds. The Zurich Global Established is the median of the reporting hedge fund managers who are primarily hedge equity managers with a long bias who pay attention to economic changes, but are more bottom-up oriented in that they tend to be stock-pickers. It is important to note that the Zurich CTA and hedge fund universe returns used in this study are not the same as the Zurich hedge fund indices that are designed specifically to track particular strategies that meet predefined criteria and are, by design, more style pure.

    However, growing default rates, a growing supply of distressed securities, and dwindling hedge fund and bank demand reduced its attractiveness. For another look at this category, see Chapter 11 on high yield investments. Notwithstanding some very serious issues regarding markto-market pricing of these inherently illiquid securities, the asset class has been a successful complement to many fund-of-fund strategies when viewed over the long term, based on its counter-cyclical nature.

    Mark-to-market pricing, or the lack of it, has undoubtedly smoothed the monthly volatility, an issue I will discuss in depth later. Prior to that, in the s and early s, distressed managers soared, annualizing 25 to 40 percent with few statistical outliers. Volatility, although certainly higher during these boom years, was not overly so, yielding Sharpe ratios in excess of 2. The fall of Drexel Burnham Lambert and the high yield market overall made the opportunity especially attractive for value investors with a long-term perspective.

    Investors liquidated these positions en masse, due to the negative stigma associated with these defaulted or soon-to-default securities or by obligation due to their investment charter. A good example of the typical s distressed play was U.

    Gypsum Corporation USG , which attempted to repeal a takeover attempt through a leveraged recapitalization. As a side note, USG has once again filed for Chapter 11 bankruptcy protection as a result of the mounting threat of asbestos litigations.

    Poor asset quality, low default rates, and a strong equity bull market made distressed investing both uninteresting and highly directional towards the middle and latter half of the s. Passive approaches to the asset class were particularly dismal, as poor management, misguided business models, and operational difficulties made many businesses not worth saving. High yield credit quality deteriorated significantly, and much of what was outstanding had little to speak of in terms of asset quality and recurring cash flow.

    Although default rates remained low, record levels of high yield debt outstanding produced record default volume. The distressed market grew by default, while the high yield market, which often serves as an incubator to distressed securities, still traded at a historically low spread to Treasuries, despite the deteriorating new issuance credit quality.

    What would normally have traded at a greater than basis point spread to comparable Treasuries priced much richer, discounting the risk of default. High yield investors continued to demand new product, and corporations, seeing an excellent financing opportunity, rushed to issue high yield securities.

    Investment banks jumped at the opportunity to generate fee income off the sale of such securities to the market and did not do a proper job in weeding out flawed businesses from the high yield market. Although large high yield new issuance resulted in a larger supply of distressed secu- Performance and Market Profile 59 rities albeit with low default rates , it did so only on an absolute-dollar basis.

    Some distressed investors and commercial and investment banks continued to allocate capital to the distressed sector, albeit across an inferior investment opportunity set. Supply and Demand Factors These factors all contributed to growing default rates, and a rapidly increasing supply of distressed securities. In addition, the demand for distressed securities dwindled as hedge funds and commercial and investment banks quickly reduced leverage or exited the business following the credit and liquidity crisis in the Fall of The Event-Driven Index includes both distressed and risk arbitrage managers, implying a much more severe quarterly outflow for the distressed sector see Figure 4.

    Once the negative outflows from proprietary sources are factored in, the total withdrawal of capital became monumental. Hence, with rising default rates, poor quality merchandise, and record high yield new issuance, distressed supply quickly outstripped demand. A Primer on the Bankruptcy and Restructuring Process Investing in distressed situations involves purchasing the claims of companies that have already either filed for Chapter 11 or Chapter 7 bankruptcy protection, are trying to avoid Chapter 11 through an out-of-court debt restructuring with their creditors, or are in immediate danger of doing so.

    Companies in danger of filing will typically trade at a wide spread to Treasuries, reflecting this risk. There are basically two general investment philosophies to distressed securities investing: Relative value investors will choose a more passive approach and, to some extent, ride the coattails of the activist investors who seek to add value in the reorganization process.

    Distressed investments vary widely in terms of the type of security available: Investment debt, bank loans, trade claims, private placements, real estate mortgages, and lease contracts are examples of the most common types.

    Distressed investments can also take the form of direct investments and debtor-in-possession DIP financings. The supply of available distressed debt is highly cyclical in nature, based on a variety of economic, capital market, company specific, corporate structure, and technical factors.

    Performance and Market Profile 61 Distressed investors generally attempt to profit on pricing inefficiencies associated with such securities, the negative stigma associated with such claims, or simply an inability on behalf of the original investors to value such claims accurately or direct their legal interests during restructuring proceedings.

    When considering a potential investment, distressed investors consider a variety of factors. Industry practitioners Barnhill, Maxwell, and Shenkman summarize the most important considerations as follows: Why is the company in distress? Distressed investors generally categorize the life cycle in any or all of the following four stages: The various stages will differ in the length of the associated investment period, the price level of the security purchased, the level of fundamental due diligence required, issues being addressed, and the potential impact of a passive or active investment approach.

    Depending upon in which stage an investor is investing, the investment firm may get involved in any of the following restructuring stages: Companies filing for Chapter 11 bankruptcy protection are seeking a court-supervised reorganization of the firm while affording relief from interest payments due to existing creditors. Chapter 11 filings can be voluntary or involuntary in nature.

    In an out-of-court restructuring, creditors and debtors agree on a private exchange offer. An out-ofcourt restructuring may be in the best interests of both parties to avoid associated deadweight costs such as legal and administrative expenses and the lengthy time constraints often associated with bankruptcy proceedings. Active and Passive Approaches As I have already alluded, there are three general approaches to distressed investing.

    The first two relate to a proactive investment approach. The third investment approach, which is the domain of a passive investor, is a simple buy-and-hold strategy, purchasing undervalued securities trading at distressed levels that are suffering from general investor disinterest. Hedge fund investors typically become involved in this stage, as the more activist approaches require a long-term investment horizon. Although we believe the private equity model of distressed investing is generally superior to the relative value model due to the longer-term nature of distressed investing, multi-strategy approaches in distressed hedge funds many times make sense.

    The appropriateness of the three investment approaches will depend on the strength of the investor as an active or passive investment entity, the successful execution of his or her investment strategy, and the time involved, relative to resources dedicated to such an approach. Proactive investment strategies involve active investor participation in the reorganization process. The investor may purchase outstanding debt claims with the intent of transferring these claims into voting common stock upon reorganization.

    The investor may also purchase new voting stock that is to be issued subsequent to the reorganization. A plan will be accepted by the debt class as long as two-thirds in value and greater than one-half of the number of claimholders in that class vote in favor of the plan. This investor, however, cannot force the debt class to approve its own reorganization plan. The dissenting debt class, by holding up the reorganization process, may coerce the other class holders to acquiesce them by increasing its recovery rate.

    Barnhill, Maxwell, and Shenkman categorize three key qualities essential to successful distressed investing: This is a very labor-intensive process, requiring a skilled and fundamentally oriented investment infrastructure investment personnel , a comprehensive and wideranging network of information resources, and an operationally sound Performance and Market Profile 65 procedure for collecting and synthesizing information.

    A thorough understanding of the company as well as some extent of top-down industry and even macro considerations is vital as well. Getting a handle on asset valuation will help the investor understand the downside risk, which is essential to any absolute return strategy. Superior interpretation, negotiation, and bargaining skill.

    For passive approaches, interpretation and successful investment execution based on that is critical. A thorough understanding of all investment risks, including how these risks correlate and how to mitigate these risks. Experience here is critical as well. Understanding the options embedded in this strategy can offer added insight as to what those risks are and how they may play out.

    The Investment Process Again, a distressed investor needs to consider a variety of factors before initiating a distressed security investment. As asset valuation is of paramount importance in distressed investing, a thorough analysis will require inquiry into the following: This determines the value that creditors will divide upon the reorganization of the firm.

    The two methods used are discounted cash-flow analysis and industry comparables. Again, the priority list ranks as follows: These creditor claims must be ranked in terms of priority. The dollar amount sought by each claimant will be confirmed or rejected by the bankruptcy judge. The corporation plan value relates to the entire package of cash, bonds, and equity distributed for the newly reorganized entity.

    Sources of Risk Numerous risks are involved with distressed securities investing. Most of these risks are firm- and situation-specific. This is what practitioners refer to as event risk. Due to the event-driven nature of distressed securities investing, the majority of the responsibility for the final outcome depends on the skill and expertise of the distressed investor. Market-related risks such as the economy, interest rates, and the state of the equity markets would have a minimal impact on long-term distressed investments due to their event-driven nature except in times of severe overall market stress, when correlations tend to increase significantly.

    To the extent that the above affects market liquidity, market-related risks will have a significant impact on the distressed investment strategies.

    Liquidity Market Risk During an investment period, mark-to-market losses can occur due to non event-oriented factors. Market liquidity is perhaps of most importance. Although market liquidity in distressed securities has improved significantly in recent years, this area is still significantly less liquid than other securities markets. Market liquidity can also be very cyclical in nature, dictated by supply and demand for such securities. For distressed funds with quarterly liquidity provisions to investors, trading out of distressed claims can be prohibitively expensive unless there are interested buyers for them.

    If the investment fund holds control positions, it is actually prohibited from immediately exiting the investment, due to its ownership interests. Firm-Specific Risk The following event risks are much more firm specific.

    The majority of these risks can be mitigated via thorough due diligence, a solid knowledge of bankruptcy law, and the experience to understand exactly how these risks correlate.

    What Barnhill, Maxwell, and Shenkman define as the J Factor risk is a very important input to be considered before making an investment. How actively involved might the judge get in the proceedings? Does the judge usually rule in favor of stockholders or management? Refers to the vagaries and operational steps involved in the transferring of creditor claims. Have security title transfers been accurately reported and disclosed in a timely fashion?

    Refers to the risk of purchasing claims with liabilities that the new purchaser of such security had no role in creating, yet becomes subject to after their purchase. These liability transfer risks are known as fraudulent conveyance, avoidable preferences, equitable subordination, or environmental liability risk. Represent another risk to purchasers of distressed securities.

    Where exactly in the capital structure and what the exact size of each claim purchased will be might not be determined until the disputed claims are actually resolved. Relates to the effect of time on annualized returns. The passage of time also coincides with increased legal and administrative expenditures, which directly affect recovery values. In addition, holding period risk can cause serious pain to distressed investors who value their portfolio on a mark-to-market basis and have to raise capital to satisfy investor redemptions.

    There are a host of other risks associated with distressed investing, such as lack of information about other purchases and purchasers, Chapter 7 liquidation risk, insider trading issues, and tax issues. During the to sample time period, the correlation between the U.

    Prior to , increases in the default rate lagged after weakness in the economy, not during it. After , however, increases in the default rate occur in advance of a weakening in the economy. It believes that default rates over time vary due to other factors that are independent of the macro-economy at least, indirectly for a certain range of fluctuations in the growth of that economy. Only above a certain threshold does economic growth impact default rates. Helwage and Kleiman and model this threshold level at 1.

    Other factors that exhibit stronger explanatory power for default rates, such as credit quality and aging bias, could be correlated with macroeconomic activity and affect default rates through those channels. So the belief here is that, unless the economy slides into a full-fledged recession, macroeconomic conditions will be almost irrelevant. The true issue related to economic strength is the possibility of a widespread credit crunch throughout the economy.

    Distressed Securities Valuation Methodology The distressed investment sector will always represent a concern due to a lack of an efficient pricing mechanism for such securities. Depending on their investment focus, managers may hold an entire portfolio of illiquid and rarely traded debt instruments, leaving the onus on the manager or their dealers, who may be biased to self-mark their portfolio.

    As long as these securities are not traded regularly on an organized, widely agreed upon pricing source, auditors will defer judgment on pricing to the manager. Auditors will require that the report conforms to generally agreed accounting principles and that the manager is consistent in his valuation methodology. The manager may use a variety of pricing sources, all of which may or may not be in agreement with each other, particularly if the security is defaulted and not recently traded.

    McGraw Hill Companies Inc. CHAPTER 5 Convertible Securities By Tremont Advisers Convertible bonds offer corporations a third way to raise new capital, giving investors a moderate current income in exchange for the opportunity to participate in a potential rising stock value by converting the bond instrument into company shares using essentially an embedded call option. But, at a very basic level, they face two choices: Issue more equity, which further dilutes earnings per share but has low current financing costs.

    However, there is a third choice that is a hybrid of the above two: Convertibles typically offer the instrument purchaser bondholder a moderate current income with lower current financing costs coupons than the company could typically offer for its straight debt. This potential for equity participation comes essentially in the form of an embedded call option within the convertible instrument.

    Like the regular equity and fixed-income markets, convertible instruments have supply- and demand-driven equilibrium growth rates and size constraints at any moment in time. Changing economic conditions may induce or dissuade corporations to issue new convertible instruments versus equity or straight debt, and corporate issuers of convertible instruments may find it economically prudent to retire certain instruments from time to time.

    Additionally, the general fortunes of the fixed-income and equity markets will affect the convertible market capitalization by causing prices of convertible bonds already issued to rise and fall. Very often, convertible issuance is driven by merger activity in that the capital raised from the issuance allows companies to pursue their acquisition strategies.

    Together, these effects imply that the market capitalization of the convertible bond sector will ebb and flow rather than rise indefinitely. Both outright buyers and arbitrageurs must take these shifting capital flows into account.

    Importantly, the composition characteristics of the issuance will vary over time by credit quality for example, investment grade, high-yield, junk , concentration in sectors for example, telecommunications, biotechnology, financial , and so on.

    S market in the first half of As companies within both of these sectors tend to have high cash requirements, raising capital via convertibles made sense. So only Convertible Bonds: Make-up and New Issuance 73 about 30 percent of the secondary convertible market in the United States in the third quarter was investment grade, significantly lower than in past years!

    Similarly in Japan, more than 85 percent of existing issuance was investment grade, though important differences in accounting methodologies might tend to overestimate their average credit quality by U. The combination of highly concentrated sectors with high Internet stock valuations and low credit quality plus expensive bond premiums presents a new set of risks and opportunities unlike those seen in the market two, four, or six years ago.

    The best convertible arbitrageurs will evaluate these changing macrodriven factors and respond through diversification, careful analysis, and hedging away of unwanted risks. In the United States, for example, regular coupon-paying convertible bonds made up about 47 percent of the market in Though the composition of these types of securities changes over time, the ratios in the United States have not differed greatly since Notable is the record surge in the United States in both new issuance and global share over the previous two years.

    Also notable is the relative trickle from Japan of new issues from to There were net retirements in Europe in the first half of as redemptions during that period actually exceeded issuance.

    Of note also in Europe is the concentration of new issuance in the TMT sectors. Although there has historically been an assumed immunity from callability, issuers facing financial troubles might be required to call in expensive debt that they have traditionally allowed to survive beyond 75 Convertible Bonds: Due to the poor amount of new issuance in Japan since , investors have bid up prices on the existing inventory of securities, in some cases to higher prices than might be expected based upon the de facto call risk.

    A systemic risk, prompted by an unexpected shock to the Japanese economy, for example, might cause many issuers to call in such bonds simultaneously, thereby causing a sudden premium contraction.

    Convertible bonds pay a coupon until maturity and then repay the face amount unless conversion occurs first. They are debt securities so they legally rank senior to equity securities in a default scenario, but they may have other more senior debt above them.

    As bonds, their value depends on, among other things, prevailing interest rates and the credit quality of the issuer. As the stock price rises or falls, the number of shares that would be owned upon conversion of the bond into common stock is variable; thus, arbitrageurs frequently reset their hedges. A bond issuer may elect to call in its debt if prevailing economic conditions make this a prudent choice, thereby causing the embedded option within the bond to expire early. They can allow it to be redeemed, sell it in the market, or convert it and sell the stock.

    They typically buy the convertible bond and sell the common stock of the same company. Like all option buyers, they must pay a premium conversion premium, investment premium, and time premium to own the option, and that premium is at risk due to time decay, credit exposure to the company, and so on. Thus, an important implication of a carefully established hedged convertible bond position is that it can be near to self-financing for an extended period of time, whether the underlying stock price rises, falls, or does not fluctuate much.

    Convertible preferreds prefs are convertible into common stock shares, similarly to a convertible bond, but they represent equity rather than debt in the company.

    Importantly, convertible preferred stock is subordinated to debt of the issuing company. Prefs typically pay dividend income rather than coupon payments. Dividend payments may be treated differently from interest by taxation authorities, so issuers and purchasers have differing tax-related incentives for desiring prefs. Like convertible bonds, their convertibility allows arbitrageurs to set up a hedge using common stock that isolates the embedded option within the pref.

    The list of product acronyms goes on, evolving as economic conditions, tax laws, and issuer and investor preferences change. Investors typically receive higher current income in exchange for somewhat lower participation in common stock appreciation.

    Although holders of conventional convertible bonds may elect never to convert and, thus, enjoy the fixed-income instrument should the stock perform worse than expected, this downside protection is absent in a mandatory because conversion to stock is a foregone conclusion from the start.

    Because the conversion value is a fixed ratio set at issuance, it has a linear relationship to the underlying equity price. The investment value is also mostly linear with respect to the underlying equity price because a bond is a predictable fixed-income investment, except that it falls rather sharply at very low values of the underlying equity price. The dashed line is always greater than both the investment value and conversion value. Also, note that in regions A and B the speculative, low-grade to busted parts of the spectrum , the bond has a relatively high conversion premium; conversely, in investment-grade regions C and D, the conversion premium is relatively lower.

    Meanwhile, the investment premium in regions A and B is much less than in regions C and D. In A and B, the convertible bond acts more like the substitutable straight fixed-income instrument. Region A typically includes distressed companies; convertible bonds whose prices fall within this region, though cheap, are considered credit bets. Some arbitrageurs focus on one of those three types of trades; others use a blended approach. In all cases, they have the opportunity to earn varying amounts of standstill income from coupon interest and rebates and to employ leverage.

    First, referring again to Figure 5. So it is essentially a market-neutral position, and any volatility should result in a profit. As the stock price fluctuates toward Region D, the arbitrageur adjusts the hedge by selling more stock short, in accordance with the higher delta.

    As the stock price fluctuates toward Region B, the arbitrageur realigns the hedge by buying back some of the short stock, in accordance with the lower delta. Instead, the hedged convertible bond position is maintained in anticipation of an eventual move in the underlying stock.

    Second, the trader may construct a cheap put in Region D, wherein the deep-in-the-money-call option can be alternatively viewed as a cheap, outof-the-money put if it is highly hedged. But, if the stock were to fall significantly, the arbitrageur would make quite a gain on the downside, as bond losses should be greatly exceeded by short stock gains.

    Though the bonds in this region trade at a low delta and act more like straight fixed income, they still have some correlation to the already depressed stock price. Any improvement to the stock price therefore is likely to represent an improvement in the credit scenario for the bond as well.

    Embedded Options Within Convertible Bonds 81 However, arbitrageurs may also take directional bets by hedging either much heavier or much lighter on the shorting of stock. Some managers may also enter into private placement convertible opportunities, though these typically have a longer investment time horizon.

    In evaluating the price of a convertible bond, therefore, an investor needs to analyze its straight fixed-income value plus the value of the various options embedded in the security. Quantitative options pricing models, similar to Black-Scholes, are used to determine fair value. In addition to the long, American-style call embedded in the bond, there are some other implicit, yet important, options that bear mentioning.

    So bankruptcy management experience is important for arbitrageurs dealing in the busted or distressed parts of the spectrum where that short put is not so out-of-the-money anymore. In addition to default risk, convertible investors face other risks.

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    Aug 26, GLG EM Diversified Alternative. GLG EM Equity Alternative The Fund has a value bias: we buy low value stocks which have underperformed and .. Class DN H GBP Shares. (%). %. Class DN H NOK Shares £ £ -. £ The accompanying notes form an integral part of. N management guided with the LCC resulted in a slightly greater (%) grain with global rice stocks at their lowest for a generation, emphasizes that we can no management Rotavator Plastering bunds 92 Water and weed management .. from development to commercialization in southern Vietnam Drying air. certain stocks that have such deteriorating fundamentals that the only direc- Jun Dec Jun Dec Jun Dec Jun Dec Jun .. Gov./Corp. TABLE Correlations in Best and Worst 44 S&P Ranked did well in (+ percent) and was not too greatly affected by the.

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    Aug 26, GLG EM Diversified Alternative. GLG EM Equity Alternative The Fund has a value bias: we buy low value stocks which have underperformed and .. Class DN H GBP Shares. (%). %. Class DN H NOK Shares £ £ -. £ The accompanying notes form an integral part of.


    N management guided with the LCC resulted in a slightly greater (%) grain with global rice stocks at their lowest for a generation, emphasizes that we can no management Rotavator Plastering bunds 92 Water and weed management .. from development to commercialization in southern Vietnam Drying air.

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