HANetf, a London-based white-label ETF issuer, recently completed what is believed to be Europe’s first SMA-to-ETF conversion. This trend is also emerging in the U.S., with firms like Tidal Financial Group and Goldman Sachs leading similar conversions. Despite SMAs’ rapid growth, with assets in the U.S. rising from $952 billion in 2017 to $2.2 trillion at the end of last year, some managers and investors are considering the ETF option due to tax benefits and the potential for a broader client base. However, the conversion process may be slow and is expected to have a limited impact on the continued growth of SMAs.

Investors, including large banks, insurers, mutual funds, and rural financial institutions, have been flocking to the bond market, driven by declining stock market confidence and ongoing bank deposit rate cuts. The central bank has expressed concerns about the potential formation of a bond market bubble, warning against reckless buying behavior that could lead to a financial crisis similar to the one experienced by Silicon Valley Bank.

In response, regulators have implemented several measures to temper the bond market surge. These include capping the duration of new bond funds by major mutual fund companies, requiring financial institutions to report daily changes in their long-term treasury bond positions, and large-scale sales of Chinese government bonds by big state banks to drive up yields.

The compliance checks are also reportedly connected to investigations into four rural commercial banks suspected of bond market manipulation, reflecting the regulators’ broader crackdown on market misbehavior.

Commodity-trading advisors (CTAs), or money managers who follow market trends, have registered a “sharp unwind” of long equity positions, short yen, and short Japanese and 10-year German bonds. This shift began following the release of weaker-than-expected U.S. job data on August 2, as noted by JPMorgan in a recent report.

In a related development, Goldman Sachs’ prime brokerage issued a note to clients indicating that long/short equity hedge funds reduced their overall exposure to Japan from 5.6% to 4.8% last week. These funds also cut their overall portfolio leverage by nearly one percentage point, bringing it down to 188.2%.

Moreover, data released on Friday by the U.S. Commodity Futures Trading Commission and LSEG showed that hedge funds have scaled back their positions on the Japanese yen, resulting in the smallest net short stance since February 2023. This indicates a winding down of the yen carry trade.

Macro Concerns and Portfolio Adjustments

Concerns over the U.S. economy are now front and center for portfolio managers, contributing to the de-risking of portfolios. Fears of a recession in the world’s largest economy have escalated following a rise in the U.S. unemployment rate in July.

Edoardo Rulli, Chief Investment Officer at UBS Hedge Fund Solutions, mentioned that while macro hedge funds have profited from the market rout by being long on U.S. rates, they are now reconsidering some positions. “Macro hedge funds still have conviction around the steepening of the yield curve, but they are taking some profits because obviously it’s done very well over the past four weeks,” Rulli said.

The odds of the Federal Reserve cutting rates by either 25 basis points or 50 basis points at its next meeting in September are currently close to even, according to the CME FedWatch tool as of August 12.

Richard Lightburn, Deputy Chief Investment Officer at macro hedge fund MKP Capital Management, emphasized the uncertainty in the market. “If there is a 50/50 chance between the Fed cutting 25 basis points and cutting 50 basis points, that is maximum uncertainty,” Lightburn noted. He is considering potential adjustments to his portfolio to better reflect the unpredictable environment. “That’s telling you something – the market really doesn’t know what’s going to happen, and that means there’s going to be volatility,” he added.

The article also notes Texas’s broader economic success, with multiple cities in the state ranking highly in the 2023 FT-Nikkei Investing in America rankings, thanks to Texas’s pro-business environment, lack of state income tax, and relatively low cost of living. Houston’s unique business ethos, rooted in a “make it work” mentality, continues to attract businesses, leading to its emergence as a leader in energy transition and technological innovation.

Foreign Direct Investment in California
California’s major cities have seen a decline in popularity with foreign investors due to economic uncertainty, high taxes, and restrictions on Chinese outbound investments. Los Angeles, in particular, fell 10 places in the FT-Nikkei ranking of U.S. cities for foreign businesses, now at 37th place out of 91. The number of investment projects by foreign-owned enterprises in LA hit a five-year low in 2022, with only 20 announced in the first seven months of 2023.

California, though still the world’s fifth-largest economy, saw no major cities rank in the top 20 U.S. hubs for foreign businesses. High living costs, taxes, and a demanding regulatory environment have driven some businesses to states like Texas and Florida. However, the state did see a rebound in foreign direct investment in 2022, with significant investments from Japan, the UK, France, and Canada, among others.

 Impact of Chinese Investment Decline
San Francisco and San Diego also dropped in the rankings, with foreign direct investment in the Bay Area falling significantly post-COVID-19. Smaller Californian cities like Sacramento, Irvine, and Anaheim showed improvement but still rank low overall. Los Angeles, once a top destination for Chinese investment, has been hit hard by China’s capital flow restrictions and rising geopolitical tensions, leading to a 14% decline in Chinese-owned enterprises in the state since 2021.

Despite some ongoing investments, the scale has decreased, leaving LA more dependent on Japanese investment, especially as the city prepares for the 2026 FIFA World Cup and the 2028 Summer Olympics.