Macro Tsimmis

intelligently hedged investment

4Q10 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 14 Jan 11

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 31 December 2010:

Position Bought Shares Paid Cost Now Value Change YTD ROI CAGR
FXI 29 Dec-06 243 37.15 9,035.45 43.09 11,113.05 0.97% 3.29% 22.99% 5.30%
IFN 29-Dec-06 196 45.90 9,004.40 35.11 10,919.16 7.82% 21.11% 21.26% 4.93%
DBA 13-Mar-08 235 42.50 9,995.50 32.35 7,708.00 17.69% 24.05% -22.89% -8.86%
EWZ 3-Aug-09 165 60.39 9,972.35 77.40 13,614.94 3.75% 3.74% 36.53% 24.71%
GLD 21-May-10 95 115.22 10,953.90 138.72 13,183.34 8.45% 29.27% 20.35% 35.27%
SLV 21-May-10 636 17.29 11,004.44 30.18 19,227.55 41.52% 82.47% 74.73% 148.42%
UDN 21-Oct-10 399 27.54 10,996.46 27.10 10,812.90 n/a -1.60% -1.67% -8.30%
RSX 31-Dec-10 316 37.91 11,987.56 37.91 11,979.56 n/a 22.13% -0.07% n/a
cash 17,049.94 29,492.49
Overall 31-Dec-06 100,000.00 128,051.00 5.32% 3.96% 28.05% 6.38%
Macro HF 31-Dec-06 100,000.00 126,889.20 2.52% 8.10% 26.89% 6.13%
S&P 500 31-Dec-06 1,418.30 1,257.64 10.20% 12.78% -11.33% -2.96%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the virtual money Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2010 inclusively) provides a CAGR of around 13.8%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.4%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance. Finally, the “cash” line for the “Cost” column is reduced each quarter by a management fee (annual rate of 1% of the principal under management). More information about how the IMSIP is managed can be found here.

Transactions: OK, so much for the theory that less volatility invariably begets fewer transactions…when you are positioned for a potential apocalypse and instead everyone drinks the Fed’s Kool-Aid and starts singing kum-ba-ya, some significant maneuvers are called for.

Performance Review: Another modest gain which—for the second consecutive quarter—failed to keep pace with the market. We were up 5%, which normally is good, but we lost to the S&P 500 index (+10%) by five points. We did beat the macro hedge fund index (+3%) by two points.

Tactically, we ditched our index shorts for losses in November in the face of a second round of quantitative easing from the Fed. This $600 billion flood of money may not do much to heal the economy—in our view, it hurts us by propping up zombie too-big-to-fail financial institutions whose existence exacerbates structural problems and impedes recovery—but combined with continued low interest rates it is driving investment funds into the equities markets. Under those circumstances, being short the market may be philosophically appropriate but it sure generates a lot of red ink in a hurry. We also sold our high-grade corporate bond ETF (LQD, for a tiny loss) due to concern that QE2 will result in higher interest rates and took a short position on the dollar (UDN) due to concern QE2 will weaken the greenback.

As the year ended, we added the fourth BRIC component, Russia, to the portfolio for the first time via the Market Vectors Russia ETF (RSX). The other three BRIC ETFs overall were all up in the quarter, though all trailed the market: India (IFN, +8%), Brazil (EWZ, +4%), and China (FXI, +1%). The commodity ETFs outperformed on average, with SLV (silver) the star of the port at +42%, DBA (basket of agricultural commodities) +18%, and GLD (gold) +8%. The three index short ETFs had a tough quarter, of course: DOW (DOG) -11%, NASDAQ (PSQ) -14%, and S&P 500 (SH) -11%. Our newly acquired shot dollar fund (UDN) was down 2% in a month-and-a-half.

For 2010 overall, we trailed both both the macro hedge fund index and the S&P 500 index, +4% for us compared to +8% for the hedgies and +13% for the market. DBA was +24%, IFN +21%, EWZ +4%, and FXI +3% for the year. Although we only held them for part of the year, SLV was +75% for us and GLD was +20%.

We are now 39 points ahead of the market in terms of total return-on-investment: +28.1% for us and -11% for the S&P 500 in the four full years since the inception of the IMSIP at the end of 2006. This puts us just slightly ahead of our benchmark, the GAI Global Macro Hedge Fund Index, which is +26.9%. In terms of compounded annual growth rate, after four years IMSIP is +6.4%, the GAI hedgies are at +6.1%, and the S&P 500 is -3%.

4Q10 Reprise: Here are some topical 4Q10 links, organized by subject:

BRICs

Deep Capture

The Dollar

Eurozone

QE2

Analysis: Well our portfolio looks a bit different now (36% emerging markets, 31% commodities, 8% short the dollar, and 25% cash) than it did a quarter ago (27% emerging markets, 26% commodities, 9% bonds, 26% short the market, and 12% cash). Three months ago we were 26% short and now we are only 8% short…but that doesn’t mean we think things are looking up.

There is no arguing the fact that one thing is looking up, however: the market. Volatility—how much the market moves up or down—is a good measure of perceived risk: as investors perceive the market as more risky and uncertain and tend to sell, prices fall and volatility generally rises. But volatility has been declining sharply since the 2008 crash—as market values have risen—and in 4Q10, volatility for the S&P 500 fell below the 50-year average for the first time in over three years. Evidently, investors collectively believe that the risk of something bad happening has been reduced.

We demur.

We see giant multi-national banks that are still stuffed with toxic assets and riding for a fall, a USA real estate market with property values that are still overvalued, developed economy consumers who are still underemployed and overleveraged (especially in the USA), fast-growing emerging market economies that are by their very nature vulnerable to bubbles, and material sovereign debt risk. And, unfortunately, regardless of whether we put Republicans or Democrats in control of the government, our political leaders seem invariably intent on treating the symptoms of our illness, avoiding challenges to any entrenched elites, and hoping and praying they can muddle through with no ultimate crisis on their watch…even at the cost of leaving us with fewer resources to deal with our structural problems when we finally run out of effective delaying tactics.

Be that as it may, central banks in general are working in concert to hold down interest rates and expand liquidity in order to “stimulate” the economy. The Fed in particular is dispensing out $600 billion of financial Kool-Aid with their latest quantitative easing scheme (“QE2”), and funds are flowing into equities, driving market prices higher. Between the value distortions foisted on the market by the manipulations of the central banks and the machinations of the high frequency traders constantly threatening us with a flash crash or worse, the investing waters that appear so calm on the surface are actually quite roiled.

Conclusion: We are in the eye of the storm, and most everyone is sipping the QE2 Kool-Aid and singing Kum-Ba-Ya. Accordingly, it is time to make love, not war…but we remain prepared for both.

We now hold all long emerging market ETFs for all four BRIC nations in the portfolio: Brasil (EWX), Russia (RSX), India (IFN), and China (FXI). We believe that in a deleveraging environment, the economies that are still growing will fare far better than those that are not and we expect that non-dollar-denominated assets to do better than those tied to the greenback. Thus these emerging market long positions will be the last we will surrender if and when things get really dicey.

In the face of QE2 and the continued runup in the price of equities, we dumped our index shorts and—out of concern for possibly rising interest rates—our corporate bond fund. So far, the combination of continued slack consumer demand and Eurozone sovereign debt risk has kept the dollar strong, but against the likelihood that its decline will resume and even speedup, we added the short dollar ETF (UDN). We also still have three long commodity plays: the agriculture ETF (DBA) and precious metals ETFs for gold (GLD) and silver (SLV).

Although we are mostly long now in congruence with the prevailing love fest, we remain vigilant as to a potential turning of the tide. In times of heightened uncertainty, valuations can fluctuate wildly and the preservation of capital takes precedence over meeting any target ROI. To that end, when the phantasmic prospect of sustained economic growth sans serious deleveraging fades—that is, when the Kool-Aid runs out—we are prepared to unload our long positions, possibly excepting the precious metal funds, and short the indices again.

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