The H Fund (USD) lost 0.64% in November bringing the YTD return to -12.35% and the rolling annual return to -11.70%.
Three of the eight themes in the portfolio made money in the month while the remaining five did not. Of our two holdings in the Credit Spreads in Transition theme, although one was slightly net short in November and the other was definitely long, frustratingly they both lost money. Credit spreads are still trading at outlandish levels, and commentators want to extrapolate the past relationship between spreads and subsequent default rates in order to see what is in store. The alarming results suggest that as IRAX Crossover Index spreads are above 1000bp’s then 50% of the bonds involved will default in the next 5 years, which is a forecast that the world will soon stop turning. A better explanation is that credit markets are not working well enough to offer useful predictions of what is to come. This dysfunction causes frustration and alarm for investors today, but the pick of these mispriced assets will reward their owners richly in due course. We have a number of ideas about how to make the most of this opportunity, but for the moment, the key ingredient is patience.
The Global Financial Sector Dislocation theme appeared here for the first time in October although one of the managers involved was formerly part of the Credit theme as the two themes have a common root. Despite recent casualties, there are still over 10,000 Banks in the US and a large population internationally. None are having a great time, but their circumstances are not identical, and some are doomed while others will survive. Add in the Insurance and Asset Management sectors and it takes meaningful research resources to be able to identify and track the opportunities. Both managers have that strength and the theme produced an excellent result for the month. Japan Corporate Event Opportunities has been one of the most consistent contributors to our returns this year, making money in November also. Dislocation Insurance has been a fourth very effective ‘hedging’ theme during the course of 2008. Our strong results in the theme reflect two things: the identification two years ago of an environment in which multiple dislocations might occur, and the selection of managers who can construct a portfolio which expresses their concerns about the prospects for world GDP growth within a disciplined risk management framework.
Technology Digitisation made a small loss for the month despite the manager’s valiant efforts to protect the portfolio by raising cash and use indices to increase his short. Although we have complete faith in the manager’s skill, we do not believe that the market will allow him the opportunity to make money from small tech companies in the foreseeable future so we have decided to terminate the theme, seeking better opportunities elsewhere.
There has been no change in the liquidity terms of any of our underlying managers since our report a month ago. As always, please calls or e-mail with any questions you may have.