The Global Fund (USD) lost 0.19% in February bringing the YTD return to 0.43% and the rolling annual return to 5.68%.
February was a month in which both manager and theme returns were tightly clustered. The power of fiscal stimulus policies and GDP growth to act as the dominant drivers of markets, is diminished. But the timing, mechanics and consequences of the exit are not yet clear enough to have taken over.
Three themes made a contribution of 10bp or more. All the managers in Credit Spreads in Transition made money, despite a slight widening of spreads. Energy Market Opportunities and Inflation/Deflation Uncertainty were also profitable. A senior IMF economist (named Blanchard as it happens), produced a paper arguing that recent Central Bank Inflation fighting practice has been misconceived. He thinks that setting a 2% inflation target is like asking a pilot to fly so close to the ground, that any error has dire consequences. Better to aim a little higher, say 4%, and allow more latitude for the imprecision of economic policy making. It will be some time before we can see the impact of this, but the article offers a first building block in the construction for the case for looser inflation policies.
Governments have largely socialised the debt excesses of the ‘Great Moderation’. According to Credit Suisse, the net issuance of debt by the governments of the US, Japan, Europe and the UK in the years 2002-7 amounted to $1t in total. In 2009 net issuance was $3.25t, but Governments, through their Central Banks, bought a big chunk of this themselves. In 2010 $2,25t of net new money is to be raised. Against this background, the creditworthiness of governments cannot escape scrutiny. But that does not mean that hedge funds are about to perform a repeat of George Soros famous 1992 coup in hounding Sterling out of the European Exchange Rate Mechanism. In fact, round 1 has been won by the politicians. The threat of regulation of naked Sovereign CDS trading (well, regulation of buying protection anyhow) has rendered that market toothless, and the Greeks have persuaded capital markets to continue providing them with support for now.
This interim victory does not address the fundamental flaws in the Euro construct. The treaties creating the euro deliberately exclude a bail out methodology and there is no institutional framework to provide remedial support to struggling economies. The politics of such support will not work without the threat of worse to come, in other words a rescue plan will only sell in a crisis. We do not know whether the sternest test will come now, as the weak Euro countries ramp up borrowing, or later, if the forecast success of today’s rescue policies fails to materialise. But it does not seem likely that current spread relationships reflect what is in store. In the month, Relative Sovereign Opportunities was the worst performing theme, costing the portfolio 15 basis points.
The Japan and Financial Sector themes also made small losses, while the remainder of the portfolio had no significant impact.