The Global Fund (USD) gained 0.67% in December bringing the YTD return to 37.46%.
It may seem odd now, but in the first half of 2007, some commentators were arguing that low volatility had become a lasting feature of financial markets. Mind you, for some time, Politicians have been loudly proclaiming the end of the business cycle, so maybe some market participants were ‘believers’. December saw plenty of volatility. Market expectations on US rates swung back and forward. This was partly thanks to Mr Bernanke, and partly because of misunderstanding over the nature of the credit problem we are living through. At the beginning of December, markets wanted to believe that the worst of the bad news on credit was out. But then a number of major Banks set out to raise new capital in impressive chunks, producing public statements on the merits of being overcapitalised. It didn’t take long for the market consensus to interpret this as a sign of worse news to come and adjust accordingly. This adjustment process has a great deal further to run. Credit markets do not synthesise news into an immediate public market price change. It will take a long time for the problems to work through and for the extent of the US slowdown and its implications for the other major economies to emerge. We intend to circulate a more detailed analysis of our views on the prospects for 2008 in the next few days.
Two themes detracted from performance in the month. The managers in technology digitisation change were faced with a very sharp reversal in the market view of the prospects in their space. Interestingly, they are seeing increasing numbers of single stock short opportunities. Both the debt market opportunities managers also made small losses. The remaining eight themes were all profitable. Despite the gyrations of the Nikkei, the Japan managers made money, with the recently added event specialist leading the field. He continues to report a good flow corporate activity involving domestic players. The US recession theme made a very solid contribution to the performance for the month. All six managers in the theme made money. Three of the four asia consumer power managers produced positive returns too. In our dislocation insurance theme, there are two regional macro managers who are focussed on Asia. They are there in the expectation that the conditions the Asian stock pickers find difficult will suit these regional macro funds better. In December, there were opportunities for both; indeed one of the macro funds had its best month of the year. All the managers in the credit theme made money too, despite a savage profit taking decline in credit spreads just before year end.