BlackRock, Inc. (BLK), Legg Mason, Inc. (LM): How Central Bank Decisions Affect Hedge Funds

Last week, the Bank of Japan’s decision to maintain its monetary easing policy wasn’t taken at face value by the markets. The fear is that central banks could start to unwind some positions and reduce asset purchases. The Bank of Japan’s resolution caused the yen to rise against the dollar and pushed stocks lower.

There is a big concern about what hedge funds will do if the easing is slightly tapered. The central bank decisions are intimately related to hedge funds because a decline in the money injection scheme could shrink their assets under management base or halt their growth. Even though the Bank of Japan has not modified its plan, the markets reacted negatively and the implied equity volatility index (VIX) rose to 18 points, exhibiting the fragility of the market environment.

BlackRock has lots of tools

Regarding BlackRock, Inc. (NYSE:BLK), its shares lost almost 4% early last week. Why did BlackRock, Inc. (NYSE:BLK) face this volatility? For starters, it is the largest asset manager worldwide with $3.8 trillion in assets under management (AUM). And it has a diversified product mix: equity (53%), fixed income (36%), multi-asset (8%), alternatives (3%), and mainly institutional clients (66%) with some of its assets in ETFs (iShares, 22%) and another part in retail.

This client and product mix along with geographical diversification give BlackRock, Inc. (NYSE:BLK) good tools to weather the storm. It has also been increasing its market share in iShares, its managed ETFs, totaling 33% of market share accounting for $85.2 billion in 2012. Moreover, it managed to reach an excellent operating margin of 40.4% in 2012 compared to peers’ 35.4%.

Finally, the company, together with Euroclear Bank, is trying to create a single market for a new iShares ETF that could settle across borders in Europe. This is totally new as settlements are usually done nationally and could generate saving of up to €200 million a year. Liquidity seems the only concern. On June 18, BlackRock, Inc. (NYSE:BLK) will host its first investor day which will be closely monitored by investors as management will probably give deeper guidance regarding its strategy.

Troubling times for smaller asset managers

Legg Mason, Inc. (NYSE:LM) is having a hard time. It ended fiscal 2013 with a net loss of $353.3 million and fourth-quarter results were not encouraging as operating expenses increased 8% to $624.8 million and net income decreased 38% compared to the first quarter of 2012. It also suffered $3 billion in withdrawals from investors.

Answers may be found in trying to diversify risk from the American market. Legg Mason, Inc. (NYSE:LM) bought in March Fauchier Partners, a European money manager that could give more exposure to the firm in that continent and could decelerate the constant outflows of funds the company has been experiencing. Nevertheless, the situation for Legg Mason, Inc. (NYSE:LM) seems far from prosperous.