market folly

Today we present you the annual letter from Paolo Pellegrini and his global macro hedge fund PSQR Capital. They ended up 2009 up 61.6%, largely due to a short treasuries trade they put on very early in the year. (You can see how PSQR fared against other hedge fund performance numbers here). Pellegrini of course left John Paulson's hedge fund Paulson & Co to start his own firm after enjoying large success shorting subprime.

In the past, we've gotten a glimpse at Pellegrini's portfolio and have posted up a previous investor letter. His annual letter, however, is chalk full of much more in-depth macro insight. PSQR's outlook for 2010 is entitled 'The Rubber Meets the Road' and they have expressed the following investment views:

- Short US fixed income
- Short US equities
- Short US dollar
- Long commodities

These are by no means new revolutionary investment theses. After all, we've covered how many hedge funds have had similar trades on. PSQR though believes that 2010 will present structural problems and expect cyclical indicators to peak in the first quarter of this year and then decelerate after that. Pellegrini notably ends his letter with a gloomy outlook as he writes, "Both the US and the global economy continue to suffer distortions from a refusal to come to grips with this reality, whether through lack of understanding or because of political calculation, or some combination of the two. Eventually, there must be a reckoning. In our judgment, that day may be much sooner than the markets suggest."

Embedded below is PSQR's 2009 annual letter and RSS & email readers will need to come to the site to view the document:




Simply put, Pellegrini notes that structural changes around the world still persist and there are many problems left unsolved. Many won't argue that point. On the equities side of things, it mainly becomes a question of whether or not a rally can persist after the liquidity-driven portion of the run-up has ceased. We'll just have to wait and see how things play out, but Pellegrini certainly lands in the "still bearish" camp.

For more great hedge fund letters full of investment insight, head to our coverage of:

- David Stemerman's Conatus Capital Q409 letter
- Perry Partners' annual letter
- Lee Ainslie's Maverick Capital annual letter
- David Einhorn's Greenlight Capital commentary
- Global macro hedge fund Woodbine Capital's thoughts
- Prologue Capital's macro takeaways
- Annual letter from Whitney Tilson's hedge fund T2 Partners
- Cheyne Capital's investor letter
- Corsair Capital Management's fourth quarter letter