The End of Dollar Dominance?

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The end of U.S. dollar dominance may be unfolding in front of our eyes. No, we don’t think China’s ascent is the key threat; instead, key to understanding the U.S. dollar may be to understand the money market fund you might hold. Let me explain what’s unfolding in front of our eyes, and what it might mean for the U.S. dollar and global markets.

Typically, when we think about potential threats to the dollar, we think a different reserve currency might take over; or that foreigners might dump their dollar holdings. I will touch on these, but then dive into what may be a much bigger elephant in the room. Bear with me.

Foreigners holding U.S. debt

Yes, foreigners hold trillions in U.S. debt, and if they were to dump all their debt, borrowing cost in the U.S. might rise. Except it hasn’t happened: in our analysis, as foreigners have been selling U.S. Treasuries, the dollar has neither plunged, nor have U.S. borrowing costs skyrocketed. Why is that? As we will discuss below, we believe, in the short-term, other market forces have been even stronger.

That said, the recent decision by Congress to override President Obama’s veto to allow private citizens to sue Saudi Arabia should get our attention. Saudi Arabia has threatened to sell its U.S. assets in case this law passes, as it doesn’t want a judge to freeze their assets. As this chart below shows, this may not be an empty threat:

I write “may be” because there might be other reasons for the Saudis to sell U.S. Treasuries, such as a need to raise cash to deal with the fiscal challenges that have resulted from lower oil prices.

Some say the inclusion of China’s currency into the official basket of reserve currencies (SDRs) by the International Monetary Fund (IMF) is a clear sign that we have the beginning of the end of dollar dominance. In our assessment, this change is mostly symbolic. First of all, the new SDR basket barely changes the U.S. dollar weighting (other currencies were reduced to make space for the yuan); second, no large country manages its reserves according to the formula provided by the SDR; instead we allege that they manage them according to what they believe to be in their perceived self-interest.  Where SDRs come into play is when the IMF provides a loan, as those are typically denominated in SDR. A belief in this theory suggests a great belief in the power of the IMF, an institution that has, ever since its inception, looked for reasons to be relevant. I’m not trying to discredit this theory, but am a firm believer that market forces playing out may well overwhelm the bureaucrats at the IMF for a long time.

It turns out, though, that those that predict the end of the dollar dominance might still be right; not because of the IMF, though, but because of what we believe are massive changes underway in how anyone from foreign governments to foreign banks to foreign and domestic corporations fund themselves.

Understanding Money Market Funds

At the peak of the Eurozone debt crisis in 2011, we cautioned that U.S. investors weren’t immune from potential fallouts because prime money market funds, i.e. the typical money market fund that doesn’t exclusively invest in U.S. government securities, at the time had incredible exposure to European banks. It turns out European banks historically have had great funding needs in U.S. dollars because they extended U.S. dollar denominated loans in emerging markets, amongst others. At the time, we calculated that the average prime money market fund had half of its investment in U.S. dollar denominated commercial paper issued by (often weak) European banks; our analysis showed one money market fund of a major brokerage firm had 75% of its holdings in such paper. We weren’t the only ones warning about this, and, within months, we gauged that the overall quality of investments held by money market funds improved.  Sure enough, though, “everyone” appears to be chasing yield, and your money market fund portfolio manager may not have been immune from it, either.

It turns out that this month, new rules for certain money market funds are being phased in. The regulations focus on institutional money market funds – you might not hold them in your retail brokerage account, but could be invested in one through your 401(k) plan. The new rules make it far less attractive for money market funds to invest in anything that’s not U.S. government paper. Amongst others, institutional money market funds that invest in securities other than U.S. government paper must have a floating Net Asset Value rather than a fixed value of $1; they also must caution investors that their money might be held hostage for a few days in case of a panic in the market. Aside from a shift on how portfolio managers manage money market funds, investors are also thinking twice whether it’s worthwhile to stuff money into money market funds when the returns are near zero, yet the risks are now higher (a floating NAV is riskier than a fixed one; so is the potential inability to withdraw money) than they used to be.

As money market funds have been preparing for the new rules, we have seen seismic shifts in the world of global finance. Basically, until 2008, we believe there was a perception that money market funds were safe. The ‘breaking of the buck’ of a money market fund in 2008 threw cold water on that theory, but what few noticed is that it wasn’t just an illusion for investors. For issuers of debt, it was what might be considered an implicit government guarantee (because the government set the rules on stable net asset value and liquidity), thus allowing issuers to access funding at what we believe was a subsidized rate. Think about it: a world where there’s one place where funding is cheaper. Wouldn’t you want to access that cheap pool of money if you were in need of cash? Well, you may not be large enough, but municipal and U.S. corporate issuers are large enough; so are foreign corporates, foreign banks and foreign sovereigns.

If you have followed the markets since the financial crisis, you have probably heard of the LIBOR market. The U.S. dollar LIBOR rate reflects the cost of U.S. dollar funding outside of the U.S. It’s a benchmark for anyone who isn’t the U.S. government or a U.S. bank that can get financing from the Federal Reserve. If you look at this chart below, you will see that the funding cost has steadily been increasing:

In our assessment, the reason LIBOR has been increasing is because borrowers are no longer able to access U.S. money market funds as cheaply as they used to. With the new rules, I allege they have to pay closer to a true market rate rather than what used to be a subsidized rate. This doesn’t just affect European banks, but also US corporate and municipal issuers. If you want to know why the Fed didn’t raise rates in September, I believe the full phasing in of new money market fund rules is the main reason: the Fed wants to see how LIBOR rates behave.

We believe this additional cost in the LIBOR market may well be permanent. And it may also be ultimately healthy for global markets, as borrowers will have to pay interest at a rate that’s more reflective of their risk profile. However, that doesn’t mean that there aren’t major implications.

End of Dollar Dominance?

If our analysis is correct and there has been a massive subsidy to borrow in U.S. dollars through the old money market fund rules, then we believe this helps explain why so many borrowers wanted to get their funding in U.S. dollars. No wonder the U.S. dollar was so popular when you got a free lunch.

In today’s world, though, a European bank is no longer able to tap into U.S. dollar funding at the same favorable terms, as evidenced by the higher LIBOR rates. That means their clients won’t have access to the same embellished terms, either.  Such clients may well decide to no longer seek a U.S. dollar loan, but instead a euro denominated loan, or a loan denominated in their home country’s currency. This trend might be accelerated by the fact that interest rates in the Eurozone are lower than in the U.S. As much as we love to hate the euro, this trend may let the euro rise as a formidable competitor to the U.S. dollar as a reserve currency.

What does it mean for the markets?

To me, there is no question that this has massive implications for the markets. What implications, however, isn’t quite as obvious. I’ll mention a few here:

  • Liquidity. When borrowing costs go up, liquidity might go down. When it comes to the foreign exchange markets, there’s been a glaring “violation” of a textbook equation that suggests that it is equivalent to buy a bond in a foreign currency or a foreign currency forward contract. It’s equivalent because there is an arbitrage opportunity. Well, not so anymore: covered interest rate parity, as this is referred to, has been broken. Basically, alleged arbitrage opportunities are not swept away. In our view, the increased funding costs are a key reason; the second reason may well be increased regulations that don’t allow banks to gear up their balance sheets anymore to eat what used to be considered a free lunch. For those that like to dig deeper into this topic, please see this report from the Bank of International Settlements for an interesting perspective. To us, this is a sign that liquidity isn’t what it used to be. Differently said, next time there’s a crisis, don’t expect markets to work as expected. Remember, the 1987 stock market crash may have been exacerbated when the link between the cash and futures markets failed, i.e. when liquidity providers could no longer arbitrage market inefficiencies away.
  • Dollar squeeze. If you think the dollar would crash because of these changes, slow down. There are lots of different reasons to issue U.S. dollar denominated debt, and different stakeholders may well act differently. Take the foreign issuer that wanted to get cheap dollar funding. That issuer may have been hedged or un-hedged. If un-hedged, such a borrower might have raised money in U.S. dollars, then sold the dollar to acquire, say, Chinese yuan. In essence, such a borrower is short U.S. dollar. When it is no longer attractive to borrow in U.S. dollar, the loan will be re-paid, causing a dollar squeeze (higher). We think we have seen this dollar squeeze play out until the end of last year. The force may continue to play out, but other forces might be stronger.
  • The example above mentions the Chinese yuan. Aside from the corporate issuer, the Chinese government sees someone buying yuan, but doesn’t like the yuan to appreciate. In this particular case, even if the corporation didn’t hedge, the Chinese government might jump in to gobble up the U.S. dollars, and acquire U.S. Treasuries in the process.
  • The world is complex and there are all kinds of reasons to issue U.S. dollar denominated debt. When positions are currency hedged, the phasing out of such a position might not have any impact at all on the currency.
  • We also see an uptick in U.S. corporate borrowers taking on euro denominated debt. To us, this trend is no co-incidence, as the euro may well become a more formidable competitor. And those of you that roll your eyes because there are issues in the Eurozone, I’m not suggesting that those issues will be solved, just as many U.S. challenges won’t be solved. We will discuss the euro implications in more depth in an upcoming MerkInsight.
  • In the medium term, we expect funding in local currencies to increase. We have already said years ago that this will ultimately create a more stable global financial system. But it has ripple effects to the U.S. With global fixed income markets developing, U.S. fixed income markets might become less relevant. The Chinese government, for example, might not have as a much of a need to purchase U.S. Treasuries. That, in turn, might increase the borrowing cost for all U.S. borrowers, including the U.S. government.

I use words like “may” and “might” not only because there are other scenarios. If I am not mistaken, for example, the U.S. cannot really afford much higher interest rates, especially if I look at the trajectory of U.S. deficits. As such, it’s quite possible that the Federal Reserve may keep borrowing rates low. But I am a firm believer that there will be a valve; that valve may well be the U.S. dollar, which may decline in the process. Have I mentioned that we believe the U.S. dollar isn’t exactly cheap right now? If you look at the chart below, you will see that we continue to be about two standard deviations above its longer-term moving average:

Some say that the dollar has to rise because U.S. rates may go up. In our analysis, real interest rates, i.e. those after inflation, may not go up as the Fed is at risk of falling further behind the curve; at the same time, interest rates in part of the rest of the world may have reached their lows. In this context, we see it is quite conceivable that the U.S. dollar could continue to weaken.

Alex Merk manages the Merk Hard Currency Fund (MERKX), a mutual fund that seeks to profit from a rise in hard currencies versus the U.S. dollar.

 

SEC´s Enforcement Actions Against Investment Advisors Hit Record High

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SEC´s Enforcement Actions Against Investment Advisors Hit Record High
foto: Morgaine . El número de acciones legales contra asesores de la SEC marca nuevo récord anual

The Securities and Exchange Commission has announced that, in fiscal year 2016, it filed 868 enforcement actions exposing financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers, as the agency continued to enhance its use of data to detect illegal conduct and expedite investigations.

The new single year high for SEC enforcement actions for the fiscal year that ended September 30 included the most ever cases involving investment advisors or investment companies (160) and the most ever independent or standalone cases involving investment advisors or investment companies (98).  The agency also reached new highs for Foreign Corrupt Practices Act-related enforcement actions (21) and money distributed to whistleblowers ($57 million) in a single year.

The agency also brought a record 548 standalone or independent enforcement actions and obtained judgments and orders totaling more than $4 billion in disgorgement and penalties.

“By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions,” said SEC Chair Mary Jo White.  “Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets.”

 

Microsoft and Bank of America Merrill Lynch Collaborate to Transform Trade Finance Transacting

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Microsoft and Bank of America Merrill Lynch announced a collaboration on blockchain technology to fuel transformation of trade finance transacting.

As part of this collaboration, the two companies will build and test technology, create frameworks, and establish best practices for blockchain-powered exchanges between businesses and their customers and banks. Microsoft Treasury experts will serve as advisors and initial test clients, establishing the first Microsoft Azure-powered blockchain transaction between a major corporate treasury and financial institution.

“By working with Bank of America Merrill Lynch on cloud-based blockchain technology, we aim to increase efficiency and reduce risk in our own treasury operations,” said Amy Hood, executive vice president and chief financial officer at Microsoft. “Businesses across the globe – including Microsoft – are undergoing digital transformation to grow, compete, and be more agile, and we see significant potential for blockchain to drive this transformation.”

Currently, underlying trade finance processes are highly manual, time-consuming and costly. With blockchain, processes can be digitized and automated, transaction settlement times shortened, and business logic applied to related data, creating a host of potential benefits for businesses and financial institutions including: more predictable working capital, reduced counterparty risk, improved operational efficiency, and enhanced audit transparency, among other benefits.

“The potential benefits of blockchain will help drive meaningful supply chain efficiencies to the clients of both Microsoft and the bank. This project is another example of our continued commitment to introduce financial innovations for the betterment of global commerce,” said Ather Williams, head of Global Transaction Services at Bank of America Merrill Lynch. 

“We are excited to be working with Microsoft on this groundbreaking blockchain proof of concept that has the potential to help redefine, digitize, and improve how trade finance instruments are executed today,” said Percy Batliwalla, head of Global Trade and Supply Chain Finance at Bank of America Merrill Lynch. 

Development and testing of the initial application, built to optimize the standby letter of credit process, is currently in progress. The Microsoft and Bank of America Merrill Lynch teams will demonstrate the technology at Sibos in Geneva, Switzerland. Following the initial development and testing, the teams will work to refine the technology and evaluate applications to include more complex use cases and additional financial instruments.

Income-Driven ETFs Take Center Stage

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Exchange-traded funds aimed at generating income have become one of the fastest-growing sectors in Europe as investors in search of yield increasingly shun costly active products, according to The Cerulli Edge-European Monthly Product Trends Edition.

Cerulli Associates, a global analytics firm, also notes that investors are increasingly using ETFs for tactical as well as strategic allocation, pointing to the lead role ETFs played in the recent resurgence of flows into emerging market funds. Cerulli believes that the trend towards negative government bond yields may further encourage the use of ETFs as investors look for vehicles that allow easy access and easy exit in the face of volatility caused by factors such as Brexit.”While the majority of assets under management (AUM) in European-based ETFs are admittedly equities, fixed-income ETFs are growing faster,” says Barbara Wall, Europe managing director at Cerulli.

Cerulli says that low-volatility ETF products are also attracting more interest from cautious investors, partly because such strategies have tended to outperform, thanks to phenomena such as the low-volatility anomaly. By combining low volatility with high dividends, providers such as Invesco PowerShares have added an extra dimension.

“Europe still has some way to go before its ETF market catches up with that of the United States. Nevertheless, income-oriented products may well offer the best growth opportunities for providers,” says Wall.
 

Warren Buffett has Never Used a Carryforward and in 2015 Gave Away $2.88 billion

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Republican presidential candidate Donald Trump, during the second presidential debate, took some stabs at wealthy Clinton supporters like Warren Buffett, saying:

“Now, the taxes are a very simple thing. As soon as I have — first of all, I pay hundreds of millions of dollars in taxes. Many of her [Clinton’s] friends took bigger deductions. Warren Buffett took a massive deduction.”

The Oracle of Omaha answered with a letter clarifying his position on taxes. The letter, published on BusinessWire read:

“Answering a question last night about his $916 million income tax loss carryforward in 1995, Donald Trump stated that “Warren Buffett took a massive deduction.” Mr. Trump says he knows more about taxes than any other human. He has not seen my income tax returns. But I am happy to give him the facts.

My 2015 return shows adjusted gross income of $11,563,931. My deductions totaled $5,477,694, of which allowable charitable contributions were $3,469,179. All but $36,037 of the remainder was for state income taxes.

The total charitable contributions I made during the year were $2,858,057,970, of which more than $2.85 billion were not taken as deductions and never will be. Tax law properly limits charitable deductions.

My federal income tax for the year was $1,845,557. Returns for previous years are of a similar nature in respect to contributions, deductions and tax rates.

I have paid federal income tax every year since 1944, when I was 13. (Though, being a slow starter, I owed only $7 in tax that year.) I have copies of all 72 of my returns and none uses a carryforward.

Finally, I have been audited by the IRS multiple times and am currently being audited. I have no problem in releasing my tax information while under audit. Neither would Mr. Trump – at least he would have no legal problem.”

Forbes ranks Buffett, CEO of Berkshire Hathaway, at #3 on the Forbes 400, just behind Bill Gates and Jeff Bezos, with an estimated net worth of $65.3 billion. In September, Forbes pegged Trump’s worth at $3.7 billion.

U.S. Election – An Ugly Debate Keeps Trump Alive

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For PIMCO, the events over the weekend have only underscored the unconventional – and some would argue unstable – nature of this year’s presidential election cycle. Reeling from the release of a video in which he made lewd comments about women, a vital demographic constituting 53% of the electorate, Trump’s objective going into Sunday night’s debate was to stop the bleeding and tame the calls for him to leave the race.

According to Libby Cantrill, PIMCO’s head of public policy, in this regard, Trump succeeded. “Although he floundered in the first 20 minutes, he regained his footing later on by attacking Clinton constantly on those issues where she is most vulnerable, including her emails and paid speeches to Wall Street. Clinton, for her part, came off as prepared and policy-oriented, but left some unsatisfied with a number of her answers and failed to land any serious blows.”

“While Trump may now be off life support, his debate performance is unlikely to achieve what it needed to do: Broaden his appeal and convince the higher-than-usual proportion of undecided voters this election to support him. There was plenty of red meat for his base, including many assertions that would likely be disqualifying in any other election cycle, including a call for Clinton’s imprisonment. But those personal attacks are unlikely to draw-in the needed swing voters, especially undecided women.” She states.

What should investors look out for in the remaining days until the election?

The third and final debate will be held next Wednesday, October 19th and will be another important inflection point in the race. In the meantime, Cantrill recommends paying attention to how the Trump videotape plays out over the coming days, and specifically whether it leads to any further disavowals from establishment Republicans. Whether vice presidential candidate Mike Pence remains on the ticket will also be critical. “While still a low probability, Pence leaving the ticket could be yet another destabilizing event in what has already been a volatile election cycle.”

Lastly, she recommends watching the polling in the ten key swing states that will likely dictate the outcome in November, with a specific focus on Florida and Ohio. “These are two must-win states for Donald Trump, and two in which he is now trailing Clinton. If Trump can claw back and overtake her lead in those states, he may have a fighting chance to win the White House. But without them, it is difficult to imagine a scenario in which he secures the needed 270 electoral votes required for victory in November.” She concluded.

Fiera Capital to Acquire Charlemagne Capital

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Canadian asset manager Fiera Capital has announced an agreement has been reached for a cash transaction including the full acquisition of emerging markets boutique Charlemagne Capital and the payment of a special dividend by Charlemagne Capital.

If completed, the deal will provide Fiera Capital with an entry into the emerging and frontier markets asset class and create a European platform to boost the growth and distribution of Fiera Capital’s existing investment funds.

“Under the terms of the Transaction, Charlemagne Capital shareholders will be entitled to receive 14 pence in cash in aggregate for each Charlemagne Capital share. The 14 pence is composed of 11 pence in cash for each Charlemagne Capital share and a special dividend of 3 pence per Charlemagne Capital share conditional on the Scheme becoming effective,” Fiera Capital said.

The 11 pence per share to be paid by Fiera Capital together with the special dividend of 3 pence per share, values the transaction at approximately £40.7m, the firm specified.

“The acquisition of Charlemagne Capital would be an important step in advancing our global presence by teaming up with a high quality emerging and frontier markets specialist, with an excellent track record of performance, a proven team of investment professionals and a strong culturally aligned management team,” said Jean-Guy Desjardins, chairman and CEO of Fiera Capital.

“The addition of emerging and frontier markets strategies to our strong global offering in equities would benefit our clients who are consistently looking for diversification opportunities,” he added.

Jayne Sutcliffe, Chief Executive Officer of Charlemagne Capital, commented : “Fiera Capital is a performance driven, client-focused firm with a strong emphasis on teamwork. As such, Fiera Capital has committed to preserve and support the culture and infrastructure of Charlemagne Capital. Our board believes that this transaction is an excellent solution for our broad range of institutional and wealth management investors, who will benefit from being part of Fiera Capital with its complementary culture, financial strength and North American distribution network. In our view, as the fund management industry evolves, investors will increasingly take comfort from entrusting assets with a firm which has a strong balance sheet, diversified product offering and global distribution.”

Charlemagne Capital was founded in 2000 and has currently assets under management in excess of $2bn (€1.78bn).

Fiera Capital has C$109bn (€74bn) of assets under management.

Spectacular Crowdfunding Fails And Their Impact On Entrepreneurship

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Before I proceed, let me make it absolutely clear that I have nothing against crowdfunding. I believe the basic principle behind crowdfunding is sound, and, in a perfect world, it would boost innovation and provide talented, creative people with an opportunity to turn their dreams into reality.

Unfortunately, we live in the real world, and therefore it’s time for a reality check:

   Reality /rɪˈalɪti/
    noun

  1.         The state of things as they actually exist.
  2.         The place where bad crowdfunded ideas come to die.

While most entrepreneurs may feel this mess does not concern them because they don’t dabble in crowdfunding, it could have a negative impact on countless people who are not directly exposed to it:

  1.     We are allowing snake oil peddlers to wreck the reputation of crowdfunding and the startup scene.
  2.     Reputational risks extend to parties with no direct involvement in crowdfunding.
  3.     By failing to clean up the crowdfunding scene, we are indirectly depriving legitimate ideas of access to funding and support.
  4.     When crowdfunded projects crash and burn, the crowd can quickly turn into a mob.

But Wait, Crowdfunding Gave Us Great Tech Products!

Indeed, but I am not here to talk about the good stuff, and here is why: For every Oculus Rift, there are literally hundreds of utterly asinine ideas vying for crowd-cash.

Unfortunately, people tend to focus on positive examples and overlook everything else. The sad truth is that Oculus Rift is a bad example of crowdfunding, because it’s essentially an exception to the rule. The majority of crowdfunding drives don’t succeed.

How did a sound, altruistic concept of democratizing entrepreneurship become synonymous with failure? I could list a few factors:

  •     Unprofessional media coverage
  •     Social network hype
  •     Lack of responsibility and accountability
  •     Lack of regulation and oversight

The press should be doing a better job. Major news organizations consistently fail to recognize impossible ideas, indicating they are incapable of professional, critical news coverage. Many are megaphones for anyone who walks through the door with clickbait.

The press problem is made exponentially worse by social networks, which allow ideas to spread like wildfire. People think outlandish ideas are legitimate because they are covered by huge news outlets, so they share them, assuming the media fact-checked everything.

Once it becomes obvious that a certain crowdfunding initiative is not going to succeed, crowdfunding platforms are supposed to pull the plug. Sadly, they are often slow to react.

Crowdfunding platforms should properly screen campaigns. The industry needs a more effective regulatory framework and oversight.

Realistic Expectations: Are You As Good As Oculus Rift?

Are you familiar with the “Why aren’t we funding this?” meme? Sometimes the meme depicts awesome ideas, sometimes it shows ideas that are “out there” but entertaining nonetheless. The meme could be applied to many crowdfunding campaigns with a twist:

    ”Why are we funding this?”

This is what I love about crowdfunding. Say you enjoyed some classic games on your NES or Commodore in the eighties. Fast forward three decades and some of these games have a cult following, but the market is too small to get publishers interested. Why not use crowdfunding to connect fans around the globe and launch a campaign to port classic games to new platforms?

You can probably see where I’m going with this: Crowdfunding is a great way of tapping a broad community in all corners of the world, allowing niche products and services to get funded. It’s all about expanding niche markets, increasing the viability of projects with limited mainstream appeal.

When you see a crowdfunding campaign promising to disrupt a mainstream market, that should be a red flag.

Why? Because you don’t need crowdfunding if you have a truly awesome idea and business plan with a lot of mainstream market appeal. You simply need to reach out to a few potential investors and watch the money roll in.

I decided against using failed software-related projects to illustrate my point:

  •     Most people are not familiar with the inner workings of software development, and can’t be blamed for not understanding the process.
  •     My examples should illustrate hype, and they’re entertaining.

That’s why I’m focusing on two ridiculous campaigns: the Triton artificial gill and the Fontus self-filling water bottle.

Triton Artificial Gill: How Not To Do Crowdfunding

The Triton artificial gill is essentially a fantasy straight out of Bond movies. It’s supposed to allow humans to “breathe” underwater by harvesting oxygen from water. It supposedly accomplishes this using insanely efficient filters with “fine threads and holes, smaller than water molecules” and is powered by a “micro battery” that’s 30 times more powerful than standard batteries, and charges 1,000 times faster.

Sci-Tech Red Flag: Hang on. If you have such battery technology, what the hell do you need crowdfunding for?! Samsung, Apple, Sony, Tesla, Toyota and just about everyone else would be lining up to buy it, turning you into a multibillionaire overnight.

Let’s sum up the claims:

  •     The necessary battery technology does not exist.
  •     The described “filter” is physically impossible to construct.
  •     The device would need to “filter” huge amounts of water to extract enough oxygen.

Given all the outlandish claims, you’d expect this sort of idea to be exposed for what it is within days. Unfortunately, it was treated as a legitimate project by many media organizations. It spread to social media and eventually raised nearly $900,000 on Indiegogo in a matter of weeks.

Luckily, they had to refund their backers.

Fontus Self-Filling Water Bottle: Fail In The Making

This idea doesn’t sound as bogus as the Triton, because it’s technically possible. Unfortunately, this is a very inefficient way of generating water. A lot of energy is needed to create the necessary temperature differential and cycle enough air to fill up a bottle of water. If you have a dehumidifier or AC unit in your home, you know something about this. Given the amount of energy needed to extract a sufficient amount of water from air, and the size of the Fontus, it might produce enough water to keep a hamster alive, but not a human.

While this idea isn’t as obviously impossible as the Triton, I find it even worse, because it’s still alive and the Indiegogo campaign has already raised about $350,000. What I find even more disturbing is the fact that the campaign was covered by big and reputable news organizations, including Time, Huff Post, The Verge, Mashable, Engadget and so on. You know, the people who should be informing us.

Just because something is technically possible, that doesn’t mean it’s practical and marketable!

I have a strange feeling the people of California, Mexico, Israel, Saudi Arabia and every other hot, arid corner of the globe are not idiots, which is why they don’t get their water out of thin air. They employ other technologies to solve the problem.

Mainstream Appeal Red Flag: If someone actually developed a technology that could extract water from air with such incredible efficiency, why on Earth would they need crowdfunding? I can’t even think of a commodity with more mainstream appeal than water. Governments around the globe would be keen to invest tens of billions in their solution, bringing abundant distilled water to billions of people with limited access to safe drinking water.

Successful Failures: Cautionary Tales For Tech Entrepreneurs

NASA referred to the ill-fated Apollo 13 mission as a “successful failure” because it never executed a lunar landing, but managed to overcome near-catastrophic technical challenges and return the crew to Earth.

The same could be said of some tech crowdfunding campaigns, like the Ouya Android gaming console, Ubuntu Edge smartphone, and the Kreyos Meteor smartwatch. These campaigns illustrate the difficulty of executing a software/hardware product launch in the real world.

All three were quite attractive, albeit for different reasons:

  •     Ouya was envisioned as an inexpensive Android gaming device and media center for people who don’t need a gaming PC or flagship gaming console.
  •     Ubuntu Edge was supposed to be a smartphone-desktop hybrid device for Linux lovers.
  •     The Kreyos Meteor promised to bring advanced gesture and voice controls to smartwatches.

What went wrong with these projects?

    Ouya designers used the latest available hardware, which sounded nice when they unveiled the concept, but was outdated by the time it was ready. Soft demand contributed to a lack of developer interest.
    The Ubuntu Edge was a weird, but good, idea. It managed to raise more than $12 million in a matter of weeks, but the goal was a staggering $32 million. Although quite a few Ubuntu gurus were interested, the campaign proved too ambitious. Like the Ouya, the device came at the wrong time: Smartphone evolution slowed down, competition heated up, prices tumbled.
    The Kreyos Meteor had an overly optimistic timetable, promising to deliver products just months after the funding closed. It was obviously rushed, and the final version suffered from severe software and hardware glitches. On top of that, demand for smartwatches in general proved to be weak.

These examples should illustrate that even promising ideas run into insurmountable difficulties. They got plenty of attention and money, they were sound concepts, but they didn’t pan out. They were not scams, but they failed.

Even industry leaders make missteps, so we cannot hold crowdfunded startups to a higher standard. Here’s the difference: If a new Microsoft technology turns out to be a dud, or if Samsung rolls out a subpar phone, these failures won’t take the company down with them. Big businesses can afford to take a hit and keep going.

Failure in the tech industry is not uncommon.

But, failure is a luxury most startups cannot afford. If they don’t get it right the first time around, it’s game over.

Why Crowdfunding Fails: Fraud, Incompetence, Wishful Thinking?

There is no single reason that would explain all crowdfunding failures, and I hope my examples demonstrate this.

Some failures are obvious scams, and they confirm we need more regulation. Others are bad ideas backed by good marketing, while some are genuinely good ideas that may or may not succeed, just like any other product. Even sound ideas executed by good people can fail.

Does this mean we should forget about crowdfunding? No, but first we have to accept the fact that crowdfunding isn’t for everyone, that it’s not a good choice for every project, and that something is very wrong with crowdfunding today:

  •     The idea behind crowdfunding was to help people raise money for small projects.
  •     Crowdfunding platforms weren’t supposed to help entrepreneurs raise millions of dollars.
  •     Most Kickstarter campaigns never get fully funded, and successful ones usually don’t raise much money. One fifth of submitted campaigns are rejected by Kickstarter, while one in ten fully-funded campaigns never deliver on their promises.
  •     Even if all goes well, crowdfunded products still have to survive the ultimate test: The Market.

Unfortunately, some crowdfunding platforms don’t appear eager to scrutinize dodgy campaigns before they raise heaps of money. This is another problem with crowdfunding today: Everyone wants a sweet slice of the crowdfunded pie, but nobody wants a single crumb of responsibility.

That’s why I’m no optimist; I think we will keep seeing spectacular crowdfunding failures in the future.

Why Nobody Cares About Your Great Idea

A wannabe entrepreneur starts chatting to a real entrepreneur:
    “I have an awesome idea for an app that will disrupt…”
    “Wait. Do you have competent designers, developers, funding?”
    “Well, not yet, but…”
    “So what you meant to say is that you have nothing?”

This admittedly corny joke illustrates another problem: On their own, ideas are worthless. However, ideas backed up by hard work, research, and a team of competent people are what keeps the industry going.

Investors don’t care about your awesome idea and never will. Once you start executing your idea and get as far as you can on your own, people may take notice. Investors want to see dedication and confidence. They want to see prototypes, specs, business plans, research; not overproduced videos and promises. If an individual is unwilling or incapable of making the first steps on their own, if they can’t prove they believe in their vision and have the know-how to turn it into reality, then no amount of funding is going to help.

Serious investors don’t just want to see what people hope to do; they want to see what they did before they approached them.

Why not grant the same courtesy to crowdfunding backers?

Column by Toptal written by Nermin Hajdarbegovic

PwC Luxembourg Announces Joint Business Relationship with Accelerando Associates

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CC-BY-SA-2.0, FlickrFoto: Oscar F Hevia. Cambio de conversación

PwC Luxembourg’s Market Research Centre and Accelerando Associates announced a joint business effort to deliver a series of asset and wealth management country reports on the following European markets: France, Germany, Italy, the Netherlands, the Nordics, Spain and the UK.

By combining PwC’s expertise of the asset management industry with Accelerando’s understanding of Europe’s fund selector and investor landscape, these reports will give asset managers in-depth insight into the asset management institutional and wholesale fund selector market in various European countries. The reports are also useful tools to guide asset managers in their business development.

“We are excited about the collaboration with PwC Luxembourg. The combined resources, different insights and perspectives will set new standards in terms of asset management and fund distribution country reports in the industry. The joint forces ensure thorough, complete and highly practice relevant intelligence for asset managers worldwide,” said Philip Kalus, founder & managing partner of Accelerando.

“Combining our forces with accelerando will allow us to serve even better the asset management community, providing valuable European country reports to help them define the right fund distribution strategy”, added Steven Libby, partner and Asset & Wealth Management Leader at PwC Luxembourg.

AXA IM Creates Global Platform for Alternative Credit

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 AXA Investment Managers (AXA IM) recently announced the merger of its Alternative Solutions and Structured Finance teams to create a single global alternative credit platform under the leadership of Deborah Shire, Head of Structured Finance.

Commenting on the announcement, John Porter, Global Head of Fixed Income & Structured Finance at AXA IM, said: “AXA IM’s Structured Finance team has been a pioneer in the disintermediation of credit markets since its inception in the late 1990s and today provides a length of track record across credit cycles, volume of assets under management, and a breadth and depth of expertise that few asset managers can rival. We believe that by combining the talent, resources and skillset of our Alternative Solutions team we can create a simpler and more agile structure to the benefit of our clients.”

The merger will create a single alternative credit platform with a presence in Paris, London and Greenwich (Connecticut). The combined team will encompass 100 professionals providing management and advisory services to over €31 billion of assets covering loans, private debt, collateralised loan obligations, insurance linked securities, asset backed securities, fund of hedge funds and impact investing.

Porter added: “Deborah has more than 20 years of experience across alternative asset classes and under her leadership our structured finance offering has experienced strong growth with assets under management rising by 29% since she took over in September 2014 and capital raised to date this year of €3.5 billion. We are confident that under her direction our alternative credit platform will continue to grow and excel in delivering innovative solutions to meet clients’ needs.”

Deborah Shire said: “AXA IM’s integrated alternative credit platform will offer better visibility and a wider range of investment opportunities to our existing and future clients. In the context of a low rate environment investors are increasingly looking for high yielding and  diversifying assets to provide returns but they also want peace of mind i.e. transparency and a trusted partner who aims to deliver consistently throughout credit cycles. I believe our disciplined management style combined with our strong fundamental credit skills and market knowledge will enable us to continue to earn our clients’ trust. I look forward to working with my colleagues to expand AXA IM’s footprint as a market leader in the alternative credit space.”

Eric Lhomond, previously Global Head of the Alternative Solutions team, has decided to leave AXA IM in order to pursue a new opportunity.

Julien Fourtou, Global Head of MACS & TSF, said: “Eric has worked across the AXA Group for over 17 years. He spent the last two years at AXA IM leading our Alternative Solutions team which encompasses fund of hedge funds, impact investing and alternative credit solutions. We would like to take this opportunity to thank him for his significant contribution and to wish him all the very best for the future. Eric will be working closely with the team to ensure as smooth a transition as possible.”