Money- Why to worry on Hedge funds

Indian financial regulators get skittish when the word “hedge fund” is used. Recent announcements suggest some movement by Sebi and the ministry of finance in their favour, while the RBI continues to argue against. One source of fear of hedge funds is the notion that all hedge funds act in concert. However, the global hedge fund industry is highly competitive. Over $1 trillion is managed by more than 8,000 hedge funds, each of which fights to gain an edge over the others. Coordination between such a large number of adversarial entities is impossible. Though a herd mentality can set in, on any given day some hedge funds will buy and some hedge funds sell.

The customers of hedge funds are institutions and sophisticated individuals. They have the wherewithal to monitor hedge funds, and shift assets to the best return-to-risk ratio. They keep the hedge fund manager on his toes. Marketing gimmicks targeting retail investors can put money into the hands of an incompetent manager. Such gimmicks do not work in the hedge fund sector, which is meritocratic and performance-driven. Fearful third world regulators like the RBI harp on the LTCM episode of 1999. Just as one plane crash does not render all plane travel useless, the case for hedge funds is not invalidated by one problem. The recent demise of Amaranth—where losses bigger than LTCM took place—shows improving institutional structures. From a regulatory viewpoint, Amaranth was a pleasant episode. A few rich men lost money, while hedge funds as a whole continued to trade every day, making markets more efficient.
There are two alternative strategies for regulation. On the one hand is the US path, where the government is not involved in the relationship between the hedge fund and his customer. Alternatively, in the UK and in Scandinavia, there is some light-touch regulation. In either case, the activities of hedge funds in securities markets have to comply with all margin requirements, position limits, etc. In India, given the penchant for turning a whiff of regulation into an onerous licence-permit raj, the US route would be better. A US-style policy framework needs to be created, to support both foreign and domestic hedge funds. The international consensus today says that hedge funds engage in rational trades and supply liquidity. The smartest analytical financial economics, the best Ph.D.s, and the best computer technology for trading are now in the hands of hedge funds. India needs their risk-taking, their liquidity provision, their analytical minds, and their systems. Foreign hedge funds are useful since they would not get shaken by the ups and downs of the market in the way that local investors do. On the interest rate and currency markets, India has failed to build meaningful markets; the active and intelligent trading of hedge funds can induce a paradigm shift. On the equity market also, the volatility of May 2006 has given a drop in liquidity which has still not been erased. Monthly traded volumes in equity spot and derivatives markets have dropped sharply. The gutsy retail liquidity providers of India have been shaken by the volatility of May 2006. Globally diversified hedge funds are a useful source of liquidity provision in Indian financial markets.

BS-editorial

Dollar- Uncle Sam's worry

Those who react to last week’s fall in the dollar’s exchange rate and predict that the US currency is set for a further dip, would be well advised to read some of the forecasts made a couple of years ago, when the dollar had suffered a similar decline. Currency experts, bankers and economists were predicting then that the dollar would drop to as low as $1.50 against the euro, even $1.80 and $2.20. None of that happened, the dollar recovered, and life went on as usual. Now there is another round of nervousness, with the dollar dipping noticeably last week and having fallen by about 15 per cent this calendar year (though by barely 2-3 per cent against the rupee).

Is the long-predicted decline of the dollar about to happen at last, or is this another false alarm? That there is reason for worry, if not alarm, is easy to see. US housing has dipped for seven months in a row, US manufacturing has dipped for the first time in two or three years, and if the Federal Reserve drops interest rates (after a five-month hiatus) to try and revive the economy, capital could flow out of the US and further weaken the currency. If the Asian economies that hold foreign currency reserves of between $1.5 trillion and $2 trillion, decide that the dollar is not a safe store of value and look for alternatives, that will put still more pressure on the currency. ( Iran has decided to Euro against USD, thought it’s a different question why???) If, on the other hand, the Fed leaves interest rates untouched (for it is also worried about continuing inflation), it could slow down the US economy even more—and add to problems from another direction.

Surveying the flurry of comment on the subject, the most noteworthy is what has been said by The Economist. In a leading article it argues that, contrary to popular opinion, US productivity levels have not been improving faster than European levels, and that it is Europe which has greater room for productivity improvement. If true, that would argue in favour of a further weakening of the dollar as it argues in favour of switching to the euro as the currency of choice. With the dollar already close to its all-time low against the euro, some new currency benchmarks might well be set in the coming weeks. The other point worth noting is that the dollar has not really gained much ground this year against either the yuan or the rupee. Trade with India is not significant for the US, but that with China is—and if the yuan does not appreciate, much of the gains to be achieved from a cheaper dollar (through a reduced trade deficit) get nullified. From India’s perspective, the economy’s undoubted gains in productivity should help the rupee climb against the dollar, but the continuing weaknesses in the physical and financial infrastructure prevent that from happening, and the Reserve Bank is left with the task of pursuing an otherwise illogical currency policy and continuing to accumulate foreign exchange reserves in order to make up for the failures of the reform programme. There is no gainsaying that the US needs to do quite a lot of course correction in order to tackle its twin deficits (fiscal and trade), but if the dollar does fall further, it will test the quality of response from the other major economies—which now include India. If they fail the test, then global growth will be the casualty

Biocides- Making a killing

According to a new report by Kline & Company, Specialty Biocides 2004-2005, the West European market for speciality biocides is currently the second largest on a global basis behind that of the US. Valued at around €485 million for a volume of around 125,000 tonnes on a 100% active basis, the West European market will continue to exhibit only modest growth (averaging 2-3% overall) over the five years from 2004 to 2009. The US market, by contrast, is worth about €1,175 million, Japan's is worth €185 million and China's €92 million, though growing rapidly.
As Figure 1 shows, Western Europe's speciality biocides market is less driven by water treatment applications than the US market, and more by industrial preservation.

Figure 1 - Main global markets for speciality biocides

However, the latter is far more important in terms of relative market share in Japan and China than it is in either Western Europe or the US, where 'other' applications, notably wood preservation, leather tanning and household and industrial and institutional (HI&I) cleaning products, loom larger.The most significant driver for future biocide consumption in Western Europe is changes in legislation that is currently uncertain and difficult to predict. Such legislation includes the Biocidal Products Directive (BPD) and the potential reclassification of, and increased labelling burden for, selected biocidal actives.
Suppliers of speciality biocides have already invested significant time and resources into generating the data required for the BPD approval process. In many cases, this process has been slow and drawn-out because active ingredients for each application have been reviewed in a stepwise fashion.
Concurrently, companies from China and India have been flooding the market with generic products, driving prices down, further suppressing profitability and generally adding insult to injury for West European suppliers of biocidal actives. However, manufacturers with a smart BPD strategy and strong products could see a healthy long-term return on their investment.
The product and application mix in Western Europe differs in terms of volume and value. Organosulphur biocides, including isothiazolines, dithiocarbamates, pyrithiones and thiocyanates, lead on a value basis, with a 25% market share. Nitrogen-based products rank second with a 23% share; this category include quats, triazines, THPS, oxazolidines among many others (Figure 2).

Figure 2 - West European market for speciality biocides by product chemistry

Figure 3 - West European market for speciality biocides for industrial preservation by application

Looking at the market from an applications standpoint, industrial preservation ranks first, with a 35% share by value of the overall West European market for speciality biocides, excluding formulations. Figure 3 shows the market segmentation for industrial preservation by application
Three key drivers are impacting such industrial preservation applications as marine anti-foulants, paints and coatings, adhesives and sealants, synthetic latex polymers, metalworking fluids, plastics and resins and mineral slurries. These are:

* the BPD
* increased competition from generics suppliers in India and China
* the potential reclassification and/or increased labeling of formaldehyde-releasing biocides and carbendazim

To date, none of the industrial preservation applications has been reviewed under the BPD. However, small-volume biocidal actives that are unlikely to make it through the review process have already been dropped and huge uncertainty exists regarding the final outcome, because biocidal actives will be authorised by individual application. Manufacturers have evaluated the risks and rewards of supporting their actives.
Currently, actives that are not patent-protected, such as bronopol, CIT/MIT and BIT, continue to face increased pricing pressure from Asia On the completion of individual BPD application reviews, foreign generic competitors will not be able to import freely unless they register or cooperate with a current European supplier of the active. This means that traditional European suppliers of these actives will have a level of competitive protection.Overall, speciality biocide consumption in industrial preservation applications is forecast to grow at an average volume rate of 1.25%/year. Similar to other global regions, the bright spot in the Western European market is the plastics and resins end-use segment, particularly for silver-based biocides.

These biocides are more environmentally friendly, protect the integrity of plastics, and offer surface antimicrobial protection. European sales of biocidal actives to the plastics and resins market are expected to grow by 4.5%/year from 2004 to 2009, with silver-based actives growing by 10%/year.
By contrast, consumption of speciality biocides overall will grow by only 1.25%/year and annual growth rates in other market sectors over that period will be 3.0% in synthetic latex polymers, 2.3% in adhesives and sealants, 2% in minerals and slurries, 1.7% in marine anti-foulants and 1.2% in paints and coatings. In metalworking fluids, consumption is forecast to decline by 0.35%/year.

Overall, the growth of organosulphur biocides is relatively flat, at 0.7%/year on a volume basis through to 2009. However, within this category, isothiazolinines and pyrithiones will exhibit above average volume growth, driven by the displacement of older chemistries. Thiocyanates will decline, due to legislation concerns.
Biocide formulations are an important aspect of the West European paints and coatings, synthetic latex polymers, and adhesives and sealants markets. Kline estimates the market for formulated biocides at more than €200 million, with paints and coatings accounting for more than half the market.
The competitive landscape in formulations is relatively fragmented, with Thor (which pioneered the business model), Lanxess, Rohm and Haas and Troy among the leaders. Many suppliers of straight biocidal actives to industrial preservation applications have adopted the formulations business model in order to extract more value from clients.
In most cases, biocidal actives firms have acquired formulations expertise. For example, Clariant acquired Bactria, ISP acquired both Biochemica Schwaben and Progiven and Troy acquired the biocides activities of the former Riedel-de Ha‘n.Overall, the supplier base for speciality biocides for all applications is highly fragmented both from a product and from an application standpoint. More than 30 companies are active. Kline estimates that the top five suppliers of biocidal actives (Arch Chemicals, BASF, Lanxess, Lonza and Rohm and Haas) combined account for only 34% of the market value.
However, selected product and applications are much more consolidated. For example, the top five suppliers of organosulphur biocides in Western Europe (Arch Chemicals, Clariant, Lanxess, Rohm and Haas and Thor) account for 87% of the market. From an application standpoint, water treatment is relatively fragmented, with the top five suppliers accounting for around 40% of the market on a value basis. In contrast, for industrial preservation, the top five suppliers account for 65% of the market.