The H Fund (USD) gained 2.16% in December bringing the YTD return to -10.45%.
During 2008, the crisis that began in US Subprime Mortgages became a Global Financial crisis. We expect 2009 to be the year in which it spreads far beyond property and finance to be felt acutely in the real economy globally. Precipitate falls in a wide range of indicators of economic activity warn of this. Economic Policy and the tools used to advance it are unrecognisable from 6 months ago. For Governments to take responsibility for addressing these problems quickly must be good and their actions are broadly helpful. But we do not know how fast these actions will take effect, or what their entire impact will be. The political climate has also changed totally. Government intervention to address the shortcomings of markets is now the standard. While we confront deflationary slowdown today, fiscal laxity and printing money increase the ultimate threat of inflation. Social and taxation policy will change to redress the excesses of the era of ‘greed’. This feels like a different world.
In December, the H fund was up 2.16%. The best performing theme was Japan Corporate Event Opportunities which also generated a strong return for the year. Asian Consumer Power made a welcome positive contribution. The Global Financial Sector theme made a solid profit as did Dislocation Insurance. This theme was first introduced into the portfolio to offset the danger posed to our Asian specialist managers in the event of a slowdown in global growth. In the sense that the theme produced a strong positive return in 11 out of the past 12 months this hedge worked. But the scale of the returns was insufficient to offset the losses incurred over the year in Asia and, in hindsight the weighting of the Asian theme was not reduced fast enough. Although its economies have weakened, Asia faces a much more positive economic future than any other region. Our 3.6% weighting in the theme represents an option on recovery.
For the year 2008, the Fund was down 10.45%. In addition the Asia, the BIC Independent Growth caused losses in the final third of the year. Small Cap (2% weight today) & Technology (now zero) also subtracted from performance. Even the best stock pickers are susceptible to being crushed in this environment.
Over the year, we saw a positive contribution from the Global Financial Sector theme, another of the ‘hedging’ themes in the portfolio, along with Dislocation Insurance and Credit Spreads in Transition. The Credit theme represents the greatest frustration of 2008. Three of the four managers involved were profitable or very profitable. But one lost enough money to tip the whole theme negative. As credit melted down, his view of the fundamentals convinced him that markets were overstating default risk and understating recoveries, so, as they became more costly to maintain, he reduced his hedges. He may be vindicated in future, but the mark to market hit leaves a bitter taste in the meantime. As we enter 2009, these three ‘hedging’ themes continue to offer good opportunities.
There has been no change in the liquidity of the underlying funds in the portfolio since our last report.