Is It Time To Start De-Risking Again?

By Top Gun Team

July 22, 2011

With the U.S. stock market having spent the last five months moving sideways and the macro picture looking downright ugly going forward, it seems that some of the big names in the investment business are starting to de-risk their portfolios once again. The bottom line here is it has been all too easy for managers not focused solely on U.S. large caps to lose money this year and experience has taught some of the big boys that conditions such as these means it may be time to take a step back.

For example, as of June 30, the average Global Macro Hedge fund was down on the year- this according to the Barclay Global Macro Index, generated from the performance of more than 10 Global Macro funds. And with Global Macro managers having lost money in both May (-1.45%) and June (-1.49%), investors may be getting anxious.

The Financial Times reports that some of the world�s largest hedge fund managers have been left �nursing significant losses� as of the mid-year reporting point. FT says that the average hedge fund is underperforming and that many big names are struggling. Even the veterans are finding the going a little rough this year as Paul Tudor Jones� flagship fund is down more than -3% as of June 30. This return would be the envy of the John Paulson�s investors (remember that Paulson made his name shorting sub-prime in 2008), who find themselves down -18.4% this year. And MLM Macro fund has seen nearly a quarter of its capital wiped out by the volatility in the markets.

Financial Times explained that choppy global markets and political uncertainty are factors prompting many to drastically scale back risk, with cash piling in funds as a result.

Keith Anderson, who runs the $25.5 billion Quantum Endowment Fund based in New York City pulled back on trades toward the middle of last month. Concurrently, the fund is now nearly 75% cash, in hopes of better market opportunities and clarity on global events in the near future.

According to a recent Bank of America corporate survey, Quantum and similar funds that track macroeconomic trends have performed particularly poorly thus far in 2012.

�I find the current situation much more baffling and much less predictable than I did at the time of the height of the financial crisis,� said billionaire George Soros, Anderson�s boss at the Quantum Fund, said.

Bloomberg data revealed that the risk-aversion mentality currently flooding the market is reflected in trading volumes, down to 4.11 billion shares last month, the lowest level since August 2008.

�Instead, managers have focused on tactical trading; shorting when markets are bullish and then covering into panic-driven selling,� CIO at Hong-Kong based SAIL Advisors Ltd., Harold Yoon said.

Yes, some experts are playing it safe as the economy and political scenes are unsteady at best.

�The markets are inherently unstable. There is no immediate collapse, nor no immediate solution,� Soros, 80, said.

Yet, others who were previously treading lightly, such as Hennry Lengsfield, co-founder of KLS Diversified Asset management have regained their positivity and are now prepared to play the game once again.

�While de-risking was the right thing to do, we�re getting close to the end now.� His New York-based fund manages $900 million. �We�ve seen a significant widening of spreads which throws up a number of good opportunities over the coming weeks.�

So, it seems that the advice of the day is fairly simple -- play it safe but keep your head up.

All the best,

David D. Moenning

Disclosure - Mr. Moenning owns positions in securities mentioned: None

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