The H Fund (USD) gained 0.74% in December bringing the YTD return to 44.90%.
Industry data indicates that $200bn of new money flowed into the Hedge Fund sector in 2007. Yet in December, markets behaved as though they were dominated by fund managers preparing for year end redemptions. Profits were being taken in a number of areas so many of the things that had worked in preceding months began to behave oddly at the approach of year end. Trends were difficult to discern. Our technology digitisation manager lost money as the tech sector came in for a major reassessment. Small cap opportunities have been few and far between in the past couple of months, but one of the two remaining managers in the theme had a very strong month. Asian consumer power was a similarly mixed bag; two out of three managers were profitable. The dislocation insurance theme did pay out during the month. Volatility plainly helps in this sphere and for one of the managers, December was his best month of the year. Our event specialist in Japan reported a strong flow of corporate activity enabling him to deliver a strong positive contribution. The BIC Managers all made money. So did each of the managers in the widening sub prime and credit spread theme.
Major valuation relationships appear to be shifting. In equities, consider the behaviour of growth vs value stocks, large cap stocks vs mid and small cap and big users of leverage vs the cash rich. It is odd to see a positive slope to the US yield curve when GDP growth is slowing. Currency volatility has started to reflect widely differing economic prospects. Real Estate valuations are diverging radically. Oversimplifying, commercial real estate markets in the US and Europe are weak, while in Asia, they are strong. Then there is the Credit market, which, below high grade, is basically shut. The credit issue has been the dominant factor in asset market valuation for the past 6 months and seems likely to remain in this position. Lower US rates will not change the availability of credit. This has been shrinking since the middle of 2007 as a result of a combination of diminished investor appetite and shrinking bank capital. The banks are losing money, but don’t know how much they have lost. Until the US housing market stops falling they won’t be able to find out. The impact of the Housing Market fall is clearly showing through in the consumer credit market. It will inevitably take some time before the extent of the US slowdown is clear, let alone its impact elsewhere. In the meantime, we expect markets to spend more time worrying about bad news than celebrating good and are positioned accordingly. We intend to circulate a more extensive analysis of our reviews on the prospects for 2008 shortly.