The Fed Keeps Interest Rates in the Doldrums: Investors React

(December 13, 2012) — The Federal Reserve is doing all it can to keep long-term interest rates low, so how will investors respond?

The Fed will spend $45 billion a month to sustain this aggressive drive, with plans to keep a key short-term rate near zero until unemployment drops below 6.5%, it has revealed. With the economy’s relatively slow growth, and 7.7% unemployment in November, the Fed says its policies are meant to jumpstart the economy. It said it will direct the money into long-term Treasurys, replacing an expiring bond-purchase program. The new purchases will expand its investment portfolio, which has reportedly reached nearly $3 trillion.

“This is the challenge institutional investors face. With interest rates at such lows, investors are facing negative real yields,” Erik Knutzen of Boston-based consulting firm NEPC told aiCIO. “To meet their return objectives, many are forced to move to riskier areas, and for those not ready to do so…well, they just need to support the reality of lower returns.”

Knutzen added: “The Fed announcement has been well-forecasted, and their actions are justified. What they’ve been doing has been working to a certain extent: they’ve been able to spur a moderate level of growth in the US that has been higher than the inflation rate. We’re gradually digging our way out, but that’s not without risk of future inflation along with financial repression in the near-term.”

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Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the Fed’s latest round of monetary stimulus will help the Treasury department to issue debt for no cost. “What really happens, and this is critically important, is that the Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury,” Gross told Bloomberg. “It means the Treasury is issuing debt for free. There are complications. Inflation is one of the complications.”

Analysts have said that the Fed’s plans will make it easier for companies, investors, and consumers to make financial decisions, due to the fact that they will have a fuller picture of when borrowing costs will begin to increase. “This approach is superior” to setting a timetable for a possible rate increase, Chairman Ben Bernanke said at a news conference. “It is more transparent and will allow the markets to respond quickly and promptly to changes” in the Fed’s economic outlook.

Related article:Has the Fed’s Plan Backfired?

(December 13, 2012) — The Securities and Exchange Commission (SEC) has charged the manager of two New York-based hedge funds with conducting a pair of trading schemes involving Chinese bank stocks.

The alleged gains: $16.7 million in illicit profits.

According to the US regulator, Sung Kook “Bill” Hwang, the founder and portfolio manager of Tiger Asia Management and Tiger Asia Partners, committed insider trading by short selling three Chinese bank stocks based on confidential information he received in private placement offerings. “Hwang and his advisory firms then covered the short positions with private placement shares purchased at a significant discount to the stocks’ market price. They separately attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. This enabled Hwang and Tiger Asia Management to illicitly collect higher management fees from investors,” the SEC said.

“Hwang today learned the painful lesson that illegal offshore trading is not off-limits from US law enforcement, and tomorrow’s would-be securities law violators would be well-advised to heed this warning,” said Robert Khuzami, director of the SEC’s division of enforcement.

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Sanjay Wadhwa, associate director of the SEC’s New York regional office and deputy chief of the Enforcement Division’s Market Abuse Unit, added, “Hwang betrayed his duty of confidentiality by trading ahead of the private placements, and betrayed his fiduciary obligations when he defrauded his investors by collecting fees earned from his attempted manipulation scheme.”

This case is the latest in a long line of SEC allegations. The regulator has filed more than 175 insider trading actions since October 2009, charging more than 400 individuals and entities. The defendants in these actions are alleged to have made more than $905 million in illicit gains.

The US Attorney’s Office for the District of New Jersey has meanwhile announced criminal charges against Tiger Asia Management.

Read the full complaint here.

In October of this year, for example, the SEC charged a pair of hedge fund managers and their firms with lying to investors about how they were handling the money invested in their firms. “These hedge fund frauds have lured even the most sophisticated investors using the siren song of outsized returns or secured and guaranteed investments,” said Robert Khuzami, director of the SEC’s Division of Enforcement, in a statement. “As fraudsters increasingly capitalize on the cachet of hedge funds, we will maintain our strong presence in policing this industry.”

According to the SEC’s October complaint, filed against Banet and Lion Capital Management in federal court in San Francisco, the US regulator alleged that San Francisco-based hedge fund manager Hausmann-Alain Banet and his firm Lion Capital Management stole more than a half-million dollars from a retired schoolteacher who thought she was investing her retirement savings in Banet’s hedge fund. In the other case, the SEC charged Chicago-based hedge fund managers Norman Goldstein and Laurie Gatherum and their firm GEI Financial Services with fraudulently siphoning at least $147,000 in excessive fees and capital withdrawals from a hedge fund they managed.