The H Fund (USD) gained 6.59% in October bringing the YTD return to 45.48% and the rolling annual return to 57.94%.
In the past few weeks, credit has reasserted itself as the dominant influence on market sentiment and on US economic prospects. Write offs by the major Banks on their portfolios of sub prime debt have increased sharply. At $40bn, they are already big enough to cause trouble. Falling collateral values and a declining market for housing make it difficult to assess the scale of the damage that these securities could still cause, but $200bn represents the middle ground in the range of considered estimates. The Banks are not likely to bear 100% of any ultimate loss, but viewed in the context of total Tier 1 capital resources of $2000bn for US and EU Banks, the issue has the potential to cause more problems. And this only deals with the impact of sub prime securities losses. It remains to be seen how the CMBS and other structured credit markets cope with falling collateral values and the coming US slowdown. We expect the losses on the books of the Banks and the opportunities for Hedge Funds that understand credit, the financial services industry and real estate markets to multiply hand in hand.
Our widening sub-prime and credit spreads theme made the largest contribution to the October result. Dislocation insurance did not pay out in October, with one manager profitable and one recording a small loss. On the flip side of this, the managers pursuing the Asia consumer power theme had an excellent month. So did the India and South America specialists, with one of the India managers producing the Funds highest nominal return for the month. We have decided to reduce the exposure of the portfolio to small cap stocks. In an environment where liquidity is constrained and US growth likely to decline, we expect market conditions to be unhelpful to managers in this space, however skilled they may be. The new European manager made a sober start.