market folly

Josh Berkowitz and Marcel Kasumovich founded Woodbine Capital, a global macro hedge fund in January of last year after leaving George Soros' hedge fund firm Soros Fund Management. Previously, we'd seen Woodbine's thoughts on the often talked about precious metal in their commentary, Gold: The Anti-Goldilocks. In their recent December 2009 letter to investors, we got a glimpse at five current investment themes that Woodbine is playing in its portfolio that are detailed below. Additionally, we covered some of their macro takeaways in a separate post.

1. Exit strategies from monetary policies: In order to play this, they are long fixed income and long exchange rates in regions that have seen aggressive exit strategies. In this aspect, they are fond of Israel, Norway, and Australia. They write, "Emerging markets and countries benefiting from their demand recovery will be exiting from accommodative policies faster than others." What's also interesting here is that the market believes an interest rate increase will occur by July and that a return to historically normal short rates is expected over the next three years. They disagree with both of those notions.

2. Fiscal consolidation: To play this theme, they have bullish risk positions in countries like Hungary and bearish risk positions in countries like the UK (with the bulk of their focus on reactive countries). They note that tightening is moving away from developing countries to industrialized countries and they are "implementing spread trades to capture relative mispricing of sovereign credit risks."

3. Capital goods divergence: This is a newer theme that they've added and they are playing it by trying to capture the mid-cycle capital goods expansion and are focused on emerging markets. Berkowitz's hedge fund is "long capital goods providers tied to the emerging world and short companies providing capital to sectors in industrialized countries with excess supply." In emerging markets specifically, they like energy and agriculture as a long and they would like to be short "overstocked capital goods in the industrialized world." They specifically cite apartment REIT companies that are reporting price declines yet are priced for growth as short candidates.

4. Emerging market demand: They have bullish Asian forex positions here and think stronger currencies will be found in countries that will be forced to raise rates. They take their thoughts one step further by saying that, "financial intermediation will remain at the core of the next global expansion. Boring banking is back ... and we see the bulk of these opportunities residing in emerging markets. It is not the banks themselves that present the most efficient investment opportunity, but rather the areas where the banks are lending that will provide beta in the cycle." They are likely to increase their exposure to equity markets if exchange rate policies in Asia adjust and they also outline an example of shorting the US dollar against the Chinese yuan in short dated tenors.

5. Dispersion: Lastly, we see that Woodbine has also added this other new theme to its portfolio and they are shorting volatility in areas where there is excessive premium and in turn are buying tail risk options. They write that, "Structures to capitalize on elevated USD-JPY volatility are one component of the dispersion theme."

Overall, they sum things up by saying, "After last year's correlated upturn, our focus is on the implied dispersion between the emerging and industrialized worlds. That's the common thread across the themes in our portfolio." They also mentioned that future themes will include emerging market policy decisions that will be focused on higher exchange rates, trade surpluses of smaller size, and strong domestic demand.

In his three years at Soros before starting Woodbine, Berkowitz returned an annual average of 34% net of fees. Woodbine is already closed to new investors as they started with $185 million and now have $2.5 billion in assets under management. They ended 2009 up 13.15% and we are tracking them for solid perspective on the global macro arena. For more insight from Woodbine, head to their earlier thoughts on a possible early cycle slowdown and their piece on Gold: The Anti-Goldilocks.

Before everyone gets their knickers in a twist asking for the letter: we apologize, but we are not allowed to post it and figured a summary was better than nothing. Stay tuned for a second post this morning for some of Woodbine's global macro takeaways.