Em Hedge Funds

Just checking that I can upload graphs now! Yaay...

This is the graph of factor loadings of Emerging Markets Hedge Funds... interesting how much of their returns can be explained by BRIC MSCI, Put Call ratio, Istanbul Index, Fama French Size Factors, and U.S. GDP growth...
We did know that there is little diversification in EM funds, but we didn't know that the EM funds were quite dependent on the U.S. GDP to this extent...

Credit Card Defaults

The S&P is rallying back and we are full of confidence... I am still bearish and think that credit card defaults are a big reason to be so...

U.S. Credit Card Delinquencies At Record Highs: Same Dynamics As Mortgages?
• U.S. credit card defaults rise to 20-year high. Analysts estimate credit card charge-offs could climb to between 9 and 10% in 2009 from 6 to 7% at the end of 2008. In that scenario, such losses could total $70bn to $75bn in 2009. The $5 trillion in outstanding credit card lines (of which $800bn is currently drawn upon) are being trimmed even for credit worthy borrowers with Meredith Whitney estimating that over $2 trillion of credit-card lines will be cut in 2009 and $2.7 trillion by the end of 2010
• Losses are particularly severe at American Express and Citigroup amid a deepening recession. AmEx, the largest U.S. charge card operator by sales volume, says net charge-off rate rose in February 2009 to 8.7% from 8.3% in January 2009 as job losses accelerated and the economy deteriorated. For Citigroup, one of the largest issuers of MasterCard cards, default rate soared to 9.33% in February 2009 from 6.95% in January 2009

What's going on?

The S&P has slipped below 800 to 750 levels with such ease that I fear we are indeed going to 600 as I thought earlier.


Here are the main views:
Real Economy

* Pain in the real side of the economy. Look for S&P to keep going lower

* The stimulus package will be moderately ineffective, inefficient and quite small. I think the market is falling in part because the REALIZATION of Obama's plan was far lower than the EXPECTATION!. We were hopeful but are disappointed that he, the smart new prez, has no magic bullet

- Currency views:

* EUR is under severe danger over the medium term- all the differences in various countries' political economies will come to fore... the interest rates will have to be drastically cut for a longer term than is currently priced in AND the stability of EUR currency itself is threatened.
* The short EURUSD trade has made a lot of money so far. Also long USDJPY may be the trade to get into... with Japan's horrible GDP numbers.

Below is something I read in a publication that shows how badly the small countries are doing...

Dubai Receives Capital Injection To Ease Debt Burden
• As concerns about the emirate of Dubai's financing needs mount, it launched a bond issue, the first tranche ($10b) of which was fully subscribed by the Central bank of the UAE. Dubai is estimated to have $14b in interest and principal payments due in 2009 (EFG-Hermes via WSJ) and it is slated to run a fiscal deficit in 2009
• Central bank of the UAE had $44.5 billion in fx reserves in September (most recent data) but has since provided liquidity to several of the country's banks. Instruments are five-year bonds that carry an annual interest rate of 4 percent
• The loan, the first major step of a long-anticipated support from oil-rich Abu Dhabi via the federal government, should ease the cost of insuring against a default, which in recent weeks saw five-year credit default swaps on Dubai debt rising to levels similar to Iceland (FT) Doing so might also lower risk premia on Dubai banks

JPY view from I Banks

Below is the view of one of the investment banking analysts that is quite respected in the industry-

Essentially the analyst is saying that the yen is done rallying. It may definitely seem that way looking at the fact that USDJPY hasn't moved from the 88- 90 range. My view is that USDJPY will move in that range 85- 92 for a while. ...



Cyclical and Structural Drivers of the Yen

Since the credit crisis broke in the summer of 2007, the Japanese yen has
been by far the best performing major currency. Since its lows in July
2007, the yen has risen by 43% in trade-weighted terms, 37% against the
dollar, 40% against the euro and it doubled against sterling and the New
Zealand dollar. Over this period, the yen outperformed the other risk
aversion currency, the Swiss franc, the second best performer, by a hefty
30%.

This strong performance reflected the confluence of a set of supportive
factors: cheap initial valuation, narrowing yield differentials, rising
risk aversion and, in the initial stages, a strengthening basic balance.
Just prior to the onset of the credit crisis in July 2007, the yen had
cheapened against the dollar to 20% below fair value, which we view as the
boundary in our valuation lines-in-the-sand framework. The yield
disadvantage of the yen narrowed as first the US and then other countries
cut policy rates. The appreciation reflected the risk aversion role of the
yen, outperforming during periods of heightened volatility. The initial
phase of the appreciation also reflected improvements in the Japanese
basic balance, which we view as the medium-term or structural driver of
the currency, as the current account surplus continued to grow and there
were limited FDI outflows from Japan.

Is the yen done? We take stock of valuation and prospects for the cyclical
and structural drivers of the yen.
(i) The yen is no longer cheap against the dollar but it is not unduly
expensive either, while it is near fair value against the euro and
approaching very expensive levels against sterling.
(ii) The policy rate differential has already narrowed (completely)
against the dollar though it has further to go against the euro, sterling
and commodity currencies.
(iii) Equity volatility has fallen from its peaks, but it remains high and
has further to fall over the next two quarters. We expect FX vol to
follow.
(iv) The Japanese basic balance has deteriorated dramatically on the back
of continued FDI outflows, while the trade surplus has given way to a
deficit. While we expect the basic balance to improve as capital outflows
diminish, with the trade deficit persisting through the global recession,
we expect the basic balance to remain well below recent peaks, arguing for
a weaker yen.

Long the dollar/short EUR?

I think it may be time to short the EUR against the USD again...

-I think Europe will sink into recession more than the US and the authorities there have not officially recommended a Zero interest rate policy... So any moves towards that will "surprise" the markets.

- Also, with news like Ireland, Greece etc. being more likely to default the status of Euro as a single currency may be a bit more under siege....

News Below....

The Irish IMF Rumor: Is A Payment Default Or A EMU Break-Up More Conceivable?

• Ireland was at pains to deny rumours that the IMF is about to walk in. Investors are getting increasingly nervous about the prospect of payment default in the euro area, and this is reflected by an increase in spreads and a weakening euro. The Irish spread has now widened to 184bp, and five-year credit default swaps for Ireland yesterday shot up from 193 to 207bp. Greek CDS are now at 250bp. The notion of a payment default among euro members spooks global investors, and the euro duly fell to $1.31 (Eurointelligence)

Hedge Fund Performance Dec 2008

Index / Sub Strategies		8-Dec	YTD	1 Year
Convertible Arbitrage		-1%	-32%	-3%
Dedicated Short Bias		-2%	15%	15%
Emerging Markets		0%	-30%	-30%
Equity Market Neutral		0%	-40%	-40%
Event Driven		-1%	-18%	-18%
Distressed		-3%	-20%	-20%
Multi-Strategy		0%	-16%	-16%
Risk Arbitrage		2%	-3%	-3%
Fixed Income Arbitrage		-1%	-29%	-29%
Global Macro		1%	-5%	-5%
Long/Short Equity		1%	-20%	-20%
Managed Futures		2%	18%	18%
Multi-Strategy		-2%	-24%	-24%

Risk Aversion still rules money markets funds still getting money!

• It seems hedge funds are not the only industry having money outflow problems... ( $150 billion was withdrawn from hedge funds in December alone). We see money coming out of mutual funds as well.
  
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• The fact that world equity funds are suffering outflows could be bad news for the EM countries- risk aversion means that people continue to withdraw money and are afraid to invest.

• The fresh round of banking troubles can only worsen the situation for small and emerging countries in the short term- lower liquidity means fund withdrawal from their stock and bond markets leaves those emerging markets more subject to shocks and jumps.
  

- The money market funds macro-group (+$127.4 billion) was the only macro-group attracting net flows in December, while stock and mixed-equity funds handed back $27.3 billion and bond fundswitnessed $6.7 billion of net redemptions.

- Large-cap funds (-$5.2 billion) continued to be the flows outcast of the U.S. Diversified Equity (USDE) funds group, while small-cap funds (-$1.0 billion) mitigated outflows better than the other capitalization groups during the month.

- In December the Mixed-Equity Funds macro-group (-$0.4

billion) suffered its fourth consecutive monthly redemption.

The mixed-asset target horizon funds group (+$2.6 billion) just managed to make up for the net redemptions witnessed by the mixed-asset target allocation funds group (-$2.1 billion).

- For the second month in a row the World Equity Funds macro-classification experienced the largest net outflows of Lipper's major equity groups, handing back $15.5 billion.