The composition of this portfolio is governed by the following criteria:
• The overall portfolio will have a max leverage of 200%.
• 25% of the capital will be allocated to Equities. 20% will stem from our Mean-Reversion Model for Equities. The remaining 5% will be a discre-tionary long or short indices position.
• 20% of capital will be allocated to do Market Neutral Equity trades. This part of the portfolio has been under revision due to a lack of per-formance. Going forward, we will base this part of the portfolio on our Fundamental Ranking Model.
• 35% of capital will be used to play FX Order Book break-outs and to hold FX mid- to long-term positions like Carry Trades and fundamental plays.
• 20% of capital will be allocated for other strategies such as fixed in-come and commodity spreads and other Market Neutral strategies. Other inputs will be pure commodity plays, FX options and single stock trades.
• The maximum drawdown on the entire portfolio from any single posi-tion will be 0.5%.
• The correlations between the positions composing the portfolio will be under constant scrutiny in order to ensure stable returns.
Performance since inception (4th of June 2007) = -417 bps.
Open Positions
Open Orders
There are currently no open orders.
Equities: Week in review and Positions
This weeks and the rest of Decembers highlight was the interest announcement by FED Tuesday. As expected by 60% of the market Fed funds rate was cut by 25 bps, but the discount rate was only cut by 25 bps whereas the market expected a 50 bps cut. This made stocks go lower across the board in the US due to that most stock traders were disappointed on the 25 bps cut of the Fed funds rate. The trend continued in the Asian and European session Wednesday.
Wednesday afternoon the FED and the ECB announced that they will coordinate an ex-traordinary effort to provide liquidity to the market by establishing a fund which purpose is to provide cheap liquidity to the market. This made stocks surge in the US, but after some reconsideration of the initiative the market decided that this may not be sufficient to contain the credit crisis. And the result was that in the Asian and European session Thursday went down.
Let’s elaborate a bit further on why this initiative by ECB and FED is not going to solve the credit crisis. The Central Banks has in recent time kept interest rates low and as a consequence the liquidity is cheap and investors are investing in a lot of very risky prod-ucts under the assumption that the current market conditions continues in eternity. But when activity becomes too high inflation rises and Central Banks will raise interest rates. The assumptions under which the investments were made no longer sticks and investors’ starts loosing money. The answer from the Central Banks is then to cut interest rates fur-ther, but if you take a look at the interbank rate they are not moving with the same speed as cuts in the interest rate. The recent history shows that if Central Banks cut the interest rate by 25 bps the interbank rate moves down by 2-3 bps. So this will not do the trick. The problem lies in the risk portfolio of the commercial banks. Banks live by com-mission and in order to maximize the volume they have eased on their internal regula-tions on who is able to loan money – in this case due to the significant increase in housing prices. And when the tide turns – the decrease in housing prices as is currently occurring – some people are not able to pay back their loans. This is the case now and commercial banks will not assume any further risk by lending money to other banks. This issue is not going to be solved by providing cheap liquidity to the market by Central Banks.
Yesterday’s strong reading in PPI and retail sales from the US made equities go further down. The fear is that the FED will not cut interest rates further due to the fear of inflation.
Today the markets are dominated by Citigroups’ announcement that they will write down assets of $49 bln due to that they will bail out their SIV (Structured Investment Vehicle) group. This made the Asian stocks go lower and it has also made European stock retrace. This afternoons’ big event will be the announcement of the CPI’s figures from the US. If the CPI numbers is stronger than expected and thereby in line with the increase in PPI yesterday we will see stocks go significantly lower on increased fear that FED will not cut interest rates in January. If numbers are weaker than expected then stocks will go higher.
Fundamental Ranking Model (20% Maximum Exposure)
We have currently no positions.
Mean Reversion Model (20% Maximum Exposure)
We have currently no positions.
Equities - Discretionary Long/Short (5% Maximum Exposure)
The intention with this part of the portfolio is to enter long or short positions in major stock indices based on our fundamental outlook for the stock markets. The indicator is deciding the leverage of our S&P500 exposure.
In the past three weeks, the indicator has turned sharply higher and will probably be flashing a “buy, double leverage” signal next week.
We went long S&P500 at 1519. From now on, the indicator will determine the leverage and direction (long/short) of the trade.
Note: This index is composed of the acceleration/deceleration of the underlying index components measures by the change in yearly changes of these. One of the components has seemingly run into a brick wall in the past couple of weeks and we might chose to close the position prematurely, since this is an extraordinary event.
FX Positions
The high-yielding emerging market currencies, such as TRY and ZAR, were clearly disappointed with FOMC’s 25 bp cut earlier this week, with the ensuing price action indicating that the outside chance of a 50 bp was what was needed for a strong rally in the riskier class of assets. With even lower yielding currencies, considered to be safer heavens in the emerging market universe, such as Czech koruna or, Polish zloty, the best performer of past two weeks, selling off sharply after briefly revisiting the all-time lows achieved against euro earlier this week, a sense of weariness is coupling with the tight end-of-year liquidity.
Our two emerging market trades this week, which are likely to also constitute our final emerging market trades for this year, also fell prey to the highly volatile and uncertain trading ranges, cur-rently overshadowed with confusion of conflicting central bank statements and lack of liquidity:
On 10th of December, we established, yet again, a short position on EURCZK, from a 26.070 stop offered. After trading near 25.900 later in the week and defensively riding out the FOMC-decision, EURCZK rebounded strongly yesterday in what seemed to be temporary but sharp correction higher and taking us out of our position at 26.205 bid. We booked a carry adjusted 211 points. Go-ing into next year, we look to establish new CZK-long positions at the resumption of the long-term downtrend in EURCZK.
Similary, we had gone short USDSKK at 22.439 offered on the same day we took the above posi-tion. After breaking lower from the key support level of 22.400, the pair has experienced a sustained buying action for the remainder of the week. The Slovak koruna selling was driven by a risk rever-sion and the general unwinding of carry trades which collectively suppressed the positive, funda-mental Slovak data that has come throughout December. Similar price action in EURSKK confirmed the outlook of risk avoidance and we were taken out of this position at 22.650 bid, for a carry ad-justed loss of 305 points.
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