The sharks can sense blood, and they’re circling. For anyone who has followed London’s luxury property market, news that the shorts are in to Berkeley Group should not come as a surprise.
Berkeley is the main listed player in the sector, and the hedge funds — Odey Asset Management, BlueMountain Capital Management and Anchorage Capital — are betting that top-end houses and apartments are heading for a crash.
The irony is that Berkeley is one of the more carefully managed builders. There are others, mostly private, that are in a far more fragile condition. It’s Berkeley’s misfortune to have made its shares publicly available.
For the past few years, the developers have been propped up by the swathe of overseas investors coming to London. Suddenly, though, they’re not there any more — the Russians and Chinese are no longer so interested, just as thousands of apartments are being built across the centre of the capital.
LonRes, the data analysis firm, reckons 54,000 homes are planned or under construction in the smartest areas of the capital, with most of them priced at £1 million or more. This is even though only 3900 homes were sold at more than £1 million in the whole of 2014 in these districts.
The first sign of what may lie ahead comes from the failure of Asian buyers in particular to complete on their purchases. They put down deposits and now I’m told they’re turning round to the builders and telling them to keep the cash, they’re no longer interested. If the developer wants the rest, it will have to sue them for it they will have to sue, typically in a Chinese court.
This trend, which is sweeping the market, has highlighted one of the practices beloved of some of the sharper operators in the industry. We’ve grown used to boards going up saying “85% sold” when barely a single brick has been laid. Often, the block has been sold off-plan to investors in centres such as Hong Kong, Moscow, Mumbai or Shanghai. They put down a deposit, usually £2000, to secure an apartment. They would use it or, more likely, keep it as a buy-to-let or even leave it empty, so confident were they that London prices will carry on rising.
Now, however, all that has changed. China’s stalling economy, Russian sanctions, the falling oil price and the increase in stamp duty on expensive homes have combined to convince them prices are going to dip. They’d rather cut their losses and say goodbye to the £2000 than follow through on buying the apartment. Developers are left holding properties they thought they’d sold. There’s talk of 50%-plus price falls ahead. The Chinese and Russian withdrawals have exposed the reality behind the claim of “85% sold”. What it really means is “£2000 deposits paid on 85%” and presumably subject to contract.
Nerves are jangling at the thought of all those people who were impressed by the “85% sold” claim now finding themselves sitting in a development for which there is little demand, certainly not at the price they paid, looking at the possibility of seeking compensation. Stand by for possible legal actions against developers and their agents.
I’m not saying Berkeley is affected by any of these things but it could be in the firing line for the over-enthusiasm and misdeeds of a sector.
Does it really add up as BlueCrest dumps ‘2 and 20’ investors to be its own client?
In all my years, I’ve never understood prop trading. Or rather, I’ve never understood how those who have their own partner or employee fund can manage the business to avoid any accusations of treating it differently to their other accounts.
Surely it’s human nature that if the proprietary fund is comprised of your money, you’ll pay more particular attention to it? You’d make sure it got a piece of the best deals and might not take the same risks, wouldn’t you? Not according to the investment bankers and hedgies. They will claim it isn’t like that, and they devote as much, if not more, care and time to managing client cash.
I’m very interested in developments at BlueCrest. The $35 billion (£24 billion) hedge fund, at its peak Europe’s third-largest, had an internal fund known as BlueCrest Staff Management Allocation (BSMA). Set up in 2011 to discourage employees from leaving, it invested for them and for the partners, including co-founder Mike Platt (pictured). BSMA uses a separate group of traders to BlueCrest’s other funds. Its capital is locked up for longer periods and it reportedly uses more borrowed money to trade, which may increase both gains and losses.
BSMA grew to be worth $2 billion on the back of a stellar performance. In the last three years, it was up by nearly 60%. BlueCrest’s flagship fund, BlueCrest International, by contrast, lost 1.56% in 2013, gained just 0.1% in 2014 and dropped 0.17% in 2015. Andrew Dodd, BlueCrest’s chief financial officer, says the firm has procedures in place to protect against conflicts of interest across all of its hedge funds, including making sure funds don’t trade with each other and that one investment vehicle doesn’t trade ahead of another one.
Those procedures apply to BSMA, Dodd told Bloomberg. While BlueCrest employees invest in BSMA, they have put more money in funds that clients invest in, he said. Unlike BlueCrest International, BSMA was not subject to the “2 and 20” charging system, standard in the industry. Hedge funds charge a 2% flat fee, then 20% of the profits.
In early 2014, Albourne Partners, a consultant advising institutional investors, drew attention to BSMA and a potential conflict of interest between BlueCrest management and its investors. The consultant said that “we do not feel that BlueCrest has provided appropriate disclosure to Albourne or to external investors, as far as we are aware”.
Through the rest of 2014 and 2015, BlueCrest haemorrhaged client money as investors grew fed up at the lacklustre showing from BlueCrest International. They were also unhappy at the contrasting returns enjoyed by BSMA. BlueCrest fell to $8 billion under management from $35 billion. The Orange County Employees Retirement System withdrew its investment after its consultant Aksia reported an “increased lack of transparency” at the hedge fund, according to the minutes to the pension fund’s investment committee.
Last December, Platt said he was returning investors’ cash and concentrating on running a private investment fund for partners and employees. “It is no longer a particularly profitable business to run a multi-manager hedge fund on 2% and 20% fees,” he said. “Instead, we are happy to be our own client and run our own amount of leverage. We are going from earning 2 and 20 on clients’ money to earning 0 and 100 on our own.”
Not that Platt himself was short. Aged 48, the Preston-born former JPMorgan star trader is worth an estimated £1.5 billion. A Tory donor and art collector, he lives in Geneva. Platt’s announcement, however, seems to have prompted the authorities to take a look. BlueCrest said in a statement it had “received a number of queries, including from the Securities and Exchange Commission as well as from its other regulators”.
It stressed: “BlueCrest is fully co-operative with all of its regulators and to date has received no accusation of wrongdoing. BlueCrest is in the process of returning all client monies to its third-party investors, and its dialogue with regulators is not expected to have an impact on this process. BlueCrest is a Private Investment Partnership and its relationships with its regulators are confidential. As such BlueCrest, intends to make no further comment on this matter.”
Whether, though, that is the end of it remains to be seen.
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