‘Extreme views’

You may have noticed that the title to this post is a quotation.

A hedge fund manager we met recently told us he was always interested in hearing ‘extreme views’. We were not offended, rather we were somewhat amused.

This hedge fund manager runs a medium-sized fund and has been around for a few years.  We discussed how his fund had hedged and performed during the credit crunch crisis. Sadly, his investors had lost around 35% overall. Our clients gained around 15% during the crash period by the way, but only because we saw it coming and acted accordingly to move away from risk assets entirely.

The hedge fund manager was very proud of his performance over the past 5 years though. He seemed unaware of the irony of regarding the recouping of losses as ‘doing well’, but that’s the investment industry for you: when it’s going up the manager will always claim to be driving that performance with superb investment choices; when it’s going down it’s ‘just the market’, and certainly never the managers fault. Many of them are mandated to be solely long-only equities, what hope do they have?

So, if you’re sat on fat gains right now after a few good years, perhaps there are some extreme facts you might ponder, which we list below. Of course, we can’t give away the implications of such facts here in this post, but if you fail to grasp the significance of some or all of these facts, perhaps you will reflect back on any action you may or may not have taken in October 2014 in the years ahead.

Some facts:

  • Divergences abound in risk markets. Notably small cap stocks and junk bonds in the US, as well as several major EM market indices.
  • Yields on Bunds have been negative for several months, up to and including 2 year durations.
  • The housing market in China continues to weaken, with sales and prices falling at a brisk pace.
  • Commodity prices are being hammered, with oil down, copper down, silver down and lumber down in price during 2014.
  • The dollar is rising, and the Yen is falling.
  • The BIS, the IMF and many individual central banks are warning about the risks of market complacency built on a five-year period of zero interest rates and trillions of QE.
  • Stocks in America are overbought, overvalued and investors, advisers and fund managers have rarely been this bullish about the future. Perhaps you are firmly in the bullish camp.

What does it all mean?

It’s crystal clear to us, but trend-following investors and managers rarely do anything other than…follow the trend. Some are curious about ‘extreme views’, but unwilling to learn a few new tricks. Especially when the cheque book needs to be opened to access information they would never have even considered before: such matters as monetary evolution for example.

 

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