market folly

As many of you are already aware, Paolo Pellegrini's hedge fund PSQR Capital is returning outside investor capital. He is winding down because he believes that "substantial additional work" will be needed to profit from his global macro strategy. The investment vehicle will continue to manage Pellegrini's own money in the mean time. Through the end of July, PSQR was down over 10% for the year.

Pellegrini of course gained his claim to fame by calling the housing bubble while working with John Paulson at hedge fund firm Paulson & Co. Their collective story is chronicled in Gregory Zuckerman's enticing book, The Greatest Trade Ever. Afterward, Pellegrini struck out on his own, founding PSQR Capital. While he's currently closing to outside investors, he may re-open at some point in the future.

Given PSQR's abrupt closure to outside investors, we thought it would be prudent to examine Pellegrini's most recent thoughts via his last market commentary and analysis. Since we may not see his thoughts for an extended period of time, global macro enthusiasts are encouraged to soak this all in. Pellegrini's second quarter letter focuses on his brief notion that "equities will retrace further". On the policy side of things, he feels the government is digging the hole deeper and that using sovereign debt instead of private debt is the wrong move.

In terms of scanning the economy, Pellegrini highlights that workers' pay still lags and since consumer spending makes up such a large part of our economy, we're in for continued rough waters. This ties into his past concern that so few people are saving money these days. He goes on to write, "While some feel that the economy has stabilized and can only go up - and all the faster because it is rebounding from such a low level - the reality is that the exceptional amount of government borrowing has failed to add up to final demand sufficient to spur economic activity to anything approaching the cyclical upswings typical of post-war recoveries."

Embedded below is PSQR Capital's second quarter letter to (now former) investors:



You can download a .pdf copy here.

You can view the rest of Pellegrini's past commentary here. To see what other prominent hedge funds have been buying and selling, check out our brand new quarterly newsletter: hedge fund wisdom.