market folly

Today we present you with the first quarter 2010 investor letter from hedge fund Moore Capital. Louis Bacon's commentary details the 20 year history of his hedge fund and provides an update as to the current financial market landscape. Moore Capital is of course one of the most prominent hedge funds out there and Louis Bacon recently appeared on Forbes billionaire list. It's been a while since we covered this global macro hedge fund giant, but we previously detailed how Moore added to an insurance play in their portfolio.

Moore's Remington Investment Strategies fund was up 21.58% for 2009 and was up 2.3% for the first quarter in 2010. We noted last month that thus far in 2010, global macro funds have lagged. Moore's Global fund was up 20.6% for 2009 as outlined in our list of hedge fund performance numbers. Outlining today's risks for hedge funds, Bacon feels that there are two major headwinds: investor risk and regulatory risk. But first, we'll outline his stance on the markets.

Market Risk

Moore Capital has been playing the cyclical economic bounce caused by the inventory cycle and various stimulus packages. Bacon then goes on to write, "I expect there are a number of positives in the markets and economies that will start to turn retrograde and we should see a resumption of a bearish market amid the secular softening of U.S. economic might. Markets could well be worrying about 'stall speed' by the end of the year."

He also made it clear that there are a large number of uncertainties out there right now and that he is wary of committing long-term capital. However, he sees ripe opportunity for global macro trading as there are divergences a plenty within the global investment landscape as each country and region deals with fiscal and monetary reactions to the crisis. Focusing specifically on Europe, Bacon sees "long-term disastrous consequences for the (European) Union and Europe."

Investor Risk

Focusing next on investor risk, Bacon prudently notes that, "There are times an almost unlimited amount of assets can be put to work - as in the second half of 2009 - but these are normally the times that the flow of clients' funds are redeeming, as happened last year." Moore Capital only saw limited losses in 2008 (down only 4.8%) as they did a good job of protecting investors compared to most hedge funds. However, in a time where everyone seemingly needed liquidity, even those with solid performance were hit by redemptions. For 2010, Bacon feels like the investment landscape is more divided and highlights that Moore proprietary capital represents by far their largest investor. He feels they've made successful adjustments in order to mitigate the risk of investors fleeing en masse should a liquidity crisis occur again in the future.

Regulatory Risk

Turning to regulatory risk, Bacon focuses on the increasing divergence between the US and European financial systems. The US has been reducing systemic risk while 'too big to fail' money-center banks have now become 'too big to bail out.' While increased regulation regarding hedge funds in the US seems inevitable, Bacon thinks it will be 'on the benign side.' Conversely in Europe, legislation is being proposed that could decidedly shift the alternative asset management industry.

Bacon then turns the topic of his letter to an insightful archive of his firm's past. For the entirety of Moore's 20 year history, we defer to the investor letter itself. However, we wanted to point out two intriguing lessons that Bacon learned in 1994, his fund's worst year. Bacon learned that, "a huge positive year does not absolve you of the collateral damage of much smaller losses in the following; being right in the long run, making money, and surviving can be exclusive and non-reinforcing outcomes."

Embedded below is Louis Bacon's latest market commentary from Moore Capital's first quarter investor letter:



You can download a .pdf here.

A great historical look at one of the most prominent global macro hedge funds in the game. We're always fascinated with the wide range of reasons as to how hedge funds are named, so we'll leave you with the origination of Moore Capital Management directly from Bacon himself. "The Moore moniker was arrived at partly due to my brother, Zack Bacon, having already taken up the Bacon name in his company and to another of my mentors, Paul Jones, who used his middle name - Tudor - for his own company. And 'Moore' acknowledged my mother's name in that my slim inheritance from her of some $25,000 was the genesis of my track record around which I raised my first fund."

It's a rare treat to see Bacon's insight and clearly the investment landscape is littered with opportunity on both the long and short sides in numerous asset classes. His fund has generated obscenely good performance so when Mr. Bacon talks, you listen (or in this case, read). We've covered numerous other prominent hedge fund investor letters as of late and we also highly recommend reading Ricky Sandler's letter (Eminence Capital), the latest letter from David Einhorn's Greenlight Capital, as well as Jay Petschek's latest commentary from Corsair Capital.