MBMG Outlook 2011

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Outlook 2011 Gorillas in the mist

Outlook 2011 Gorillas in the mist

Executive Summary “2010 turned out to be a good year for investors with all broad assets classes turning in a positive return, continuing the trend set in the second half of 2009. Stock picking and micro assets selection continued to prove largely irrelevant – the mantra of ‘the greater the risk, the greater the return’ was again the most popular approach. A strong finish to the year for risk assets has left the fund management industry in a confident frame of mind for 2011; always a worrying scenario for the non-consensual investor. At first glance, it seems inexplicable that yields on 10yr German Bunds should have risen by around 75bp since the autumn lows. A large current account surplus with little sign of inflation, should surely be sending the yield lower? The market however, is being driven by concerns over how much Germany will have to stump up to rescue the rest of Europe. There was strong reluctance shown by Angela Merkel during the bail-out of Greece in particular to set any sort of precedent and the ECB has been trying to avoid the drastic QE measures taken by the UK and US. Portugal is likely to need some sort of bail-out in 2011, but the fate of Spain (and perhaps Italy and Belgium) will be the real test.” – Martin Gray, Miton Asset management, in his review of 2010 in the December 2010 fact sheet for MAM Special Situations fund.

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Outlook 2011 Gorillas in the mist

Gorillas in the Mist 2008 was the year when Nassim Taleb popularized the idea of ‘black swans’ (See box overleaf). We expect 2011 to be dominated by different animals - 800 Pound gorillas in the mist. Gorilla number one For 2011 all eyes will be on QE and the collateral damage of these policies on the rest of the world. We have already seen trade and currency wars brewing for the second half of the year and should QE continue, resulting in more capital flows from west to east, then expect this theme to continue into this year, becoming the loudest and maybe ugliest 800 Pound gorilla in the room. Gorilla number two The second 800 Pounder will be how Europe gets itself out of the fix it is in. Austerity by some and bail-out or even bail-in spending by others makes for an interesting saga in which nobody knows the ending. What we do know is that the single currency is the real 800 Pound gorilla that is holding all countries hostage to each other as if in a big bear (gorilla) hug. This prevents individual movement ensuring that all could go down in the same ship called the Euro experiment. Gorilla number three While the Kangaroo and Koala maybe the best known indigenous wildlife perhaps there is yet a third gorilla lurking in the land down under to keep the other two company. You can envisage that this is a very quiet one sneaking up in the middle of the night akin to the Aussie economy that seems to have sailed through the global financial crisis in the back of surging commodity demand from China and sound finances. Or has it? Australia isn’t the only country patting itself on the back for avoiding all the crises while still having an attic full of hidden skeletons. Brazil also terrifies us and so to a lesser extent does Canada. All 3 economies are so dependent on commodity prices and volumes.

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Outlook 2011 Gorillas in the mist

According to Wikipedia “The Black Swan Theory or ‘Theory of Black Swan Events’ was developed by Nassim Nicholas Taleb to explain: 1. The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology 2. The non-computability of the probability of the consequential rare events using scientific methods (owing to their very nature of small probabilities) 3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.” ‘Black Swan’ Events were characterized by Nassim Nicholas Taleb in his 2007 book of the same name. Wikipedia adds “The term black swan was a Latin expression — its oldest known reference comes from the poet Juvenal's characterization of something being "rara avis in terris nigroque simillima cygno". In English, this Latin phrase means "a rare bird in the lands, and very like a black swan." When the phrase was coined, the black swan was presumed not to exist. The importance of the simile lies in its analogy to the fragility of any system of thought. A set of conclusions is potentially undone once any of its fundamental postulates is disproven. In this case, the observation of a single black swan would be the undoing of the phrase's underlying logic, as well as any reasoning that followed from that underlying logic. Juvenal's phrase was a common expression in 16th century London as a statement of impossibility. The London expression derives from the Old World presumption that all swans must be white because all historical records of swans reported that they had white feathers. In that context, a black swan was impossible or at least nonexistent. After a Dutch expedition led by explorer Willem de Vlamingh on the Swan River in 1697, discovered black swans in Western Australia, the term metamorphosed to connote that a perceived impossibility might later be disproven. Taleb notes that in the 19th century John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.” In short a ‘Black Swan’ is an event which: 1. Is a surprise (to the observer). 2. Has a major impact. 3. After the fact, is rationalized by hindsight, as if it could have been expected (e.g., the relevant data were available but not accounted for). It’s important to note that Taleb doesn’t believe that we can predict Black Swan Events, but rather that we should be aware of the possibility of such events and systematically ensure that systems, business or entities ensure that they are able to with stand negative ones that occur and to exploit positive ones. Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan Events and are exposed to losses beyond that predicted by their defective models.

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Outlook 2011 Gorillas in the mist

Introduction to 2011 outlook The idea of forecasting and predicting is always dangerous and can run the risk of being meaningless. However MBMG’s outlook each year since 1997 have managed to capture most of the major themes that have dominated the investment landscape in that period. In one form or another the highlights of these have included: 1997 - 1998 The Asian Financial crisis and subsequent currency rebound 1999 - 2002 The tech wreck and global equity market collapse 2003 - 2005 The liquidity-driven relief rally IXHOOHG by the ‘Greenspan Put’ 2006 - 2008 The onset of the sub-prime problems and the ensuing global financial crisis 2009 - 2010 The liquidity – fuelled relief rally driven by QE and leading to “Expect the unexpected� - the ongoing battle between artificial stimulus and real word economic problems. 2011’s outlook faces the same dilemma as our previous outlooks – something that is extremely well expressed in our good friend Tim Price’s own recently published outlook for 2011 “When I read about the evils of drinking, I gave up reading.� - Henny Youngman. It is customary for asset managers to begin the year with a list of forecasts and predictions for the year ahead. Customary but a bit of a waste of both writer’s and readers time, unless the financiers in question have uniquely stumbled upon some formula for perfect foresight. City and Wall Street folk being what they are (amongst other things: simplistic, backward-looking and herd-following drones), such forecasts are as likely to provide value for contrarian purposes as for offering any kind of amazing insight into the otherwise unfathomable magic of the markets. The US S&P 500 Index currently stands at roughly 1,275. Citigroup (bailed out bank), Goldman Sachs

! # have targets between 1,400 and 1,450 for the S&P 500 this year. So far, so predictable. It may actually be compulsory for Wall Street banks to be bullish about the market. It may have been a condition for getting $ % * +/ <# = > @ X Z[\ ] ^ * $ ! # points out, is that Shiller’s target is for the year 2020. One obvious response to these price targets is to ask: if the financial heavyweights in question were so good that the only thing standing between them and bankruptcy or market failure was the US government, why on earth should anyone take their forecasts about anything seriously ? Did they foresee and predict their own need to be gifted emergency funds from the US taxpayer ?š A more nuanced response is simply to acknowledge that we live in a fallen world, monetarily speaking, and that for as long as we are faced with unbacked paper money and fractional reserve banking, the global financial system will forever be prone to crises of confidence, bank runs, greedy bankers getting away with murder, and an inherent bias toward inflationism.

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Outlook 2011 Gorillas in the mist

So we are where we are, even if the view isn’t especially pretty. Whether Shiller or Wall Street turns out to be closer to the truth in terms of US stock market returns in 2011 is in any case somewhat academic, particularly for non-US investors. In the bigger picture, the game is being rigged, and markets are being juiced with liquidity that it didn’t cost anything to create. In that sense, it’s rational to be bullish: inflation is good for nominal market returns. We are, of course, interested in the business of generating meaningful real returns – so having a government that continually lies about and arbitrarily changes its measure of inflation isn’t extraordinarily helpful. Nevertheless, one of the many attractions of working for an independent wealth management firm is that one is privy to all sorts of intelligent and stimulating commentary from other independently minded managers. Tied and otherwise conflicted asset managers may of course read the same commentary – but they can’t invest into the associated funds. Tony Deden, manager of the Edelweiss Fund, makes the following point with reference to the fund’s performance: “..our results in the short-term should be attributed not to any special ability on our part but rather to three distinct and indisputable factors: a) The ongoing slow, often volatile but nonetheless certain depreciation of paper monies against assets such as precious metals, b) The rise in the prices of certain financial assets fuelled by the credit creation that is at work, and c) The reflection of genuine and honest entrepreneurial activity.” Moving on to the larger macro-economic perspective, Tony writes: “..the state has crossed the Rubicon in its commitment to a policy of inflationism. The unavoidable and certain end result will be an even greater crisis than the world has yet seen. Without a financial catharsis, massive sovereign bankruptcies and a return to free-market principles, all the ridiculous ideas of fomenting growth by inflationism will end up in tears. George Orwell was right. “We have now sunk to a depth,” he wrote, “at which the restatement of the obvious is the first duty of intelligent men.” Actually, this author reserves the right to make one or two predictions for the year ahead. One of them is a slam dunk, and one of them is possibly a high probability outcome. Prediction # 1: Politicians facing the terminal decline of the current and untenable monetary system will continue to make up policy on the hoof in a doomed attempt to deter the inevitable and rescue the unsalvageable. Expect more stupid things out of Europe and the US for a kick-off. Prediction # 2: Central banks – especially the Bank of England – will watch in horror as inflationary pressure builds while they are effectively powerless to do anything about it. This is, of course, the same inflationary pressure that was entirely predictable once policy rates went to circa zero across the world amid an orgy of monetary stimulus. They will be damned if they do and damned if they don’t. If they don’t do anything as bold as raising policy rates, understandable given the fragility of the banking system and the economy and the typical mortgage holder, then holders of things like Gilts may well vote with their feet. Look out below. If they do do anything as bold as raising policy rates, then holders of things like Gilts may well vote with their feet. Look out below. In short, 2011 could be the crunch year for the Great Bond Bull.”

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Outlook 2011 Gorillas in the mist

One reason that MBMG and Tim Price have long-standing 0utual respect and reciprocal agreement to reproduce each other’s writing is that for over a decade now each has harboured similar concern in global markets and successfully adapted similarly successful investment responses; “Longstanding readers may twig that this is exactly how we have been positioned for roughly the last decade. But we don’t feel under any pressure to change tack simply in response to a change in the date. Different year, but same circus.” THE OUTLOOK A New Beginning As it is now January, the month that got its name from Janus the Roman God of time and a new beginning, let’s perhaps reflect on 2010 and the outlook we had for the year that has been as we contemplate our predictions for the year to come. Unemployment We stated quite rightly in reflection that unemployment was to be the dominant theme for 2010 and as it has stubbornly remained near double digits in the US and at lofty levels for Europe. Emerging markets were less severely affected. This proved to be spot on. Trade was to be a pressing issue for 2010. We predicted correctly that both supply and demand side factors were to contribute. Basically no one wanted to borrow and banks were unwilling to lend. However, trade dynamics for emerging markets were to be improving and outperforming those of the west.

Emerging Market Strength We specifically stated that the fundamentals of emerging markets were strong and that it would carry this region through strong headwinds of the global economy coming out relatively stronger than before it went in. Underpinning this is the strength of the EM currencies and relatively moderate debt levels reflected in narrowed debt spreads. Continued Real Estate Troubles Our prediction that the real estate crisis 2010 but in the US would remain a concern albeit a subdued one that would not affect the market to any significant degree that it could continue to haunt the financial sector did prove somewhat prophetic as witnessed by the Yolatility in risk assets throughout the year and the concerns of foreclosure fraud threatening to derail any recovery.

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Outlook 2011 Gorillas in the mist

Quantitative Easing Perhaps the easiest prediction of the lot, although a lot of commentators didn’t see it, was our prediction of the ineffectiveness of quantitative easing and the fact that more would follow. This played out according to our script with US Fed Chairman Bernanke announcing QE2 of 600 Billion USD. Inflation/ Deflation Debate Finally the never ending inflation versus deflation debate did turn out to be a case of subdued inflation with threats of deflation ever present but not quite willing to show its ugly head. This was reflected in recovering commodity prices. QE presumably played its hand at taming, or at least keeping aW bay, the deflation beast as was intended by the authorities. Debt Debt Debt Of course the biggest factor for 2010 and no doubt for the years ahead is the huge debt that is plaguing western nations. The 60/90 rule that normally applies to debt to GDP ratios where at 60% of GDP will be slowing growWK whereas 90% begins to contract growth has raised concerns since most indebted western economies are now approaching those levels. The one exception to this rule is Japan with 200 percent debt to GDP albeit most of it domestic owned and off-set by the huge savings pile of its consumers and corporations. Given this overhang of debt, the markets, for the most part, have responded rather positively. But for 2011 the defining issue will be: 1. the way the authorities set their policy agenda 2. how the markets react to this At this stage it is patently clear that any recovery will be dependent upon stimulus by the central banks but ultimately the question is whether any self sustaining growth can emerge from the unprecedented liquidity that has been injected into western economies. To answer these questions we can look to the past but unfortunately this does not tell of positive outcomes once authorities take this particular track. History shows of constant devaluation to outright default in one form or another by the authorities. This time however, we cannot see that the ultimate end game will ever be reached as the system will well and truly give up before we ever get to the hyperinflationary collapse that many of the die hard gold bugs predict. Confidence in the system by the public will ultimately decide the fate of any monetary system and it is foolish that the authorities in their arrogance can believe otherwise. Just look at the States in the US as a recent example where H[SORGLQJ yields DUH threatening to collapse the fiscal structure of even mighty California. Over in Europe we have a subtle and silent QE where debt sold by peripheral nations are being well bid somewhat suspiciously by unknown buyers. Could this be a silent QE that the markets are factoring in with the Euro weakening proving that markets can not be fooled. 7

Outlook 2011 Gorillas in the mist

As the ever controversial Mark Faber of the Gloom, Boom & Doom report has stated in a recent report quoting the author Kindelberger ‘..the propensity to swindle and to be swindled run parallel to the propensity to speculate during the boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves’ noting that fraud is now running through very structure of society particularly in the US in both public and private sectors and often times interconnected. This story is repeated through history as he goes on to say and never does it end well as someone is always left holding the bag. The moral of this story for us now is that the fraud is still continuing and is being perpetuated. The system has not been purged of its bad debts as authorities have allowed them to fester. Global Economic Rebalancing As far as the world was concerned we highlighted the need for some kind of economic rebalancing that was to be the solution to the financial crisis. This depended upon a few factors: 1. The continued growth of Asia 2. The restoration of the financial sector and balance sheet (debt reduction) 3. Increased domestic demand coming out of emerging markets It seems that we only got one out of the three, being the first one driven by China. However the Chinese and the rest of the world knows that goods produced will have to be sold somewhere and that is the million 'ollar question. Looking forward to 2011 It’s the debt stupid! This is the key for 2011 and beyond and the question that should be asked is really when and how the crisis of debt will hit the markets and how badly that will impact the global economy. With economies ever more interlinked through trade and capital flows as was proven in 2007-8, the thought of a new round of panic sends shivers down the spine. As a solution to the crisis in debt and recession let’s do a quick brush up on theory. It was Keynes that recommended deficit spending in the depression to replace private demand with public. The problem with that as always, was once you let governments do something they like they don’t want to stop and we’ve had continued deficit spending for forty years that has got us where we are. Milton Friedman was of the opinion that if you simply increased the money supply then this can stimulate but he forgot that people are able to hoard money thereby causing a collapse in velocity forcing deflation in a post gold standard era. Roosevelt did apply this policy during the depression but returns were minimal as confidence to spend and invest were lacking. Looking back to Bush’s State of the Union address in 2008, where he states ‘We need a spending discipline’, referring to the fiscal problems facing the US, he only mentioned the word debt once, one can see that the real problem lies within the halls of power itself where the debate is only how much to spend and not looking at the problem which is spending itself.

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Outlook 2011 Gorillas in the mist

Key for Investors for 2011 The problem for investors is to understand what it is that will fix the economic woes plaguing the world economy and whether policy makers will carry this out. So far it looks as though there are only three possible outcome for investors for 2011: 1. A miracle occurs and economies respond favourably 2. The risk on trade falters leading to depressed prices in commodities, property, equities and precious metals (be on the stand by to jump back in once the coast is clear ) 3. Risk assets will continue to prosper at a rate of 5-15% throughout each asset class with problems remaining unresolved, and questions unanswered as monetary authorities are able to continue to extend and pretend and the resolution of issues drags on into 2012 and beyond. Portfolio construction 2010 was, as Martin Gray observed, a year where risk was almost blindly rewarded. This had also been the case in 2009 following on from 2008, a year in which risk was very severely and discriminately punished. There are key differences between 2010 and 2009. The earlier year opened with a quarter that was a continuation of the asset price corrections of the global financial crisis but was than followed by 9 virtually uninterrupted month where risk was indiscriminately rewarded. In 2010, however, the balance between risk on and risk off was finely poised throughout much of the year with almost all of the gains for the year in many equity markets ultimately being realized in the final quarter of the year. A detached analysis of the last 3 years reveals that these have been made up of various periods, which don’t quite fall tidily into neat annual divisions bounded by Janus’ forward and backward glances, but which in turn have consisted of: Risk penalization (Nov 2007 – March 2009) Risk rewarded (March 2009 – 2010) The battle between risk penalization and reward (2010 to date) Going into 2008 our caution and fear may not have been unique but it was certainly a minority voice. In February and March 2009 when both Scott Campbell and Martin Gray forecasted the equity market lows, they were again very much in the minority (although the range of potential outcome was so variable that both managers still adopted strong diversification and risk management policies within their portfolios at the expense of heedless gain). In 2010 we warned to ‘expect that unexpected’ and to be nimble and agile in asset allocation. The market machinations proved this to be the right call, although in many cases we used these concerns to achieve returns in line with market returns albeit at much, much lower levels of risk exposure.

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Outlook 2011 Gorillas in the mist

Our aims for 2011 should be broadly similar; if risk wins out again, we would hope to match the returns that are available from a passive allocation to the major asset classes while using the active management capabilities of our associated portfolio managers to reduce risk exposure. An example is Martin Gray’s MitonOptimal Special Situations Portfolio which, despite volatility of just 3.88% last year (the lowest in the IMA Balance sector), has achieved returns of 10.83 % over the last 13 years, the highest within the sector. The successful portfolio allocators in 2011 will be those who don’t sacrifice return but do manage to control risk. 2011 may be the year when any weaknesses or failings in risk management or liquidity come home to roost. A full and detailed analysis of individual sectors, assets, funds or securities is available upon request but in general terms our advice would be as follows: Avoid

Actively Manage

Open-ended

Equities

Unlisted forestry

Fixed interest

Litigation funds

Property

Open- ended/unlisted

Currencies

Property

Cash

Guaranteed funds

Precious Metals

I liquid assets

Commodities

Hold Liquid Equity Hedge Strategies Managed futures(with high quality managers and comprehensive risk management)

Right now, the situation remains as described in my December 8th CNBC appearance: http://www.cnbc.com/id/15840232/?video=1688284576&play=1 Be active, be very active. In the few weeks after that we issued that warning gold did indeed fall by 5.3% and the Dollar increased in value by over 3%, both very much in line with our short term views expressed at that time. Right now our emphasis has changed already and will no doubt continue to change constantly throughout the year. 2011 is the year of trying to build on shifting sands – luckily we believe that from our range of associated portfolio managers, we have the proven expertise and experience to do exactly that by understanding the risks that face us.

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Outlook 2011 Gorillas in the mist

Equities The Daily Reckoning’s Eric Fry recently wrote “The Dow has advanced for seven consecutive weeks, but has gained only about 100 points per week during that timeframe. So the recent price action does not feel over-the-top exuberant. Instead, it feels steady, reliable...almost predictable. Everyone knows the market will go up next week, just like it went up last week...and the week before that. This seeming predictability is simply a different strain of irrational exuberance. When the market seems as soothing as a Corona Beer commercial, the ‘fear instinct’ goes dormant. Investors forget to worry. But a Corona beer commercial isn't reality. And neither is a tranquil, friendly stock market. Nevertheless, most Wall Street strategists have been falling all over one another to proclaim their bullish forecasts for 2011. Goldman Sachs strategist, David Kostin, is looking for a 17% rally in the S&P 500 Index this year, while most of his Wall Street counterparts are expecting at least low double-digit gains. We hope these hopeful prognostications come to fruition. In general, up is much better than down. But it's a long year ahead and the road to gains may not be as direct and "predictable" as the Dow's recent performance might suggest. The market might encounter a few bumps along the way. In fact, David Rosenberg, economist for Canada's Gluskin Sheff, expects the market to encounter a few bumps very soon. ‘Signs of excessive exuberance abound,’ says Rosenberg. In particular: ~ /€ # X $‚#

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— ] $$$™ X ‹ $š All equity markets are vulnerable to the behaviour of the 3 eight hundred Pound gorillas in 2011. Docile, quiet gorillas will allow the effects of US/UK QE and Eurozone bailing out/in to push indices higher. Well behaved gorillas may well see the range of forecasts derided by Tim Price proven right.

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Outlook 2011 Gorillas in the mist

However as Tim understands far better than most, that is only one potential outcome and we’re very aware that other possible/probable outcomes could see pretty well all equity markets fall by 50% or more. Let’s be clear, that’s not on the horizon as we look out today, but if/when these storm clouds move in, they’ll come so quickly that investors won’t have time to react. Nassim Taleb believes that we can’t predict black swans, we can only prepare ourselves. Even in the year of ‘gorillas in the mist’ that is about the best approach to equity exposure from a risk and reward point of view. Traditional long-only equity exposure offers much less upside than a year ago but far greater risk. At this stage our headline advice would be to Reduce overall equity exposure Increase allocation to risk-adjusted approaches to equity exposure within equity allocation Reduce traditional long only equity exposure within equity portfolios Be far more agnostic about regional diversification; the trend towards long-term Asia and emerging markets remains intact but short term it’s no longer so clear Be extremely active about both allocation and selection. Within the risk-adjusted approaches we’re inclined to favour market neutral, long-short equity–hedge and hedged quantitative approaches; our preferred managers remain Paulson and GAA.

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Outlook 2011 Gorillas in the mist

Fixed Income

Historical Treasury Rates 30 Days

In the short term it’s very difficult to guage the direction of sovereign debt or the credit spreads between sovereign and any other credit instrument.

Our concerns are a long-term devaluation of sovereign debt, due to declining perceived credit quality or over supply. Increasing interest rates is also a long term, but not imminent danger. The very presence of the gorillas in the room is detrimental to US, UK and EU sovereign debt but the threat is very different from the execution and the bad behavior of one gorillas may cause a flight in the perceived quality of another. In particular Source: http://www.treasury.gov a global crisis, most likely emanating from the Eurozone, could see a flight into T-bills making them the asset that is most in demand. Such an event could see a major blow out in both corporate and emerging market debt which, although sound in the long term may behave like a volatile risk asset in the short term. Other triggers could disturb our slumbering gorillas, most notably the risk of deteroration of either GSE or municipal assets in the states. Any blow-out in emerging market or high quality debt could present another ‘chance of a lifetime buying opportunity’ like in 2008 but for now the sidelines may be the safest place to watch the main credit markets and the search for alternative yield assets is very much on. The 2 criteria that should be required are quality and liquidity. The surge in the issuance of pseudo-yielding assets based on obscure rightV derived from highly questionable assets such as traded life insurance policies traded endowment plans, litigation funding, illiquid property assets or unlisted forestry assets should, in general, be avoided like the economic plague

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Outlook 2011 Gorillas in the mist

Property Residential property in western markets stabilized in 2010 as fundamentals were supported in the short term by the various QE and bailing programmes. Looking forward however, property prices globally remain at levels that are very vulnerable to the risk of significant short term disruption in many cases and major longer lasting further deteriorations in the worst areas especially in Ireland, Spain, Portugal, the UK, the USA and Australia. Residential property in these markets in the main looks significantly over-priced and vulnerable to corrections from this point onwards. Such corrections would most likely be triggered in the event of any bad behavior from the gorillas. These are not the only vulnerable markets and residential property, even the booming markets of Asia, looks to be prone to catching a very nasty cold at current levels if any of our gorillas sneeze. One further problem that was swept under the carpet post-GFC remains commercial property – any increase in interest rates or deterioration in economic activity could have extremely negative impacts on pricing for commercial property assets. Commercial property pricing does not, in our view, reflect the ‘new normal’ paradigm let alone the risks of any impending abnormalities. The US, UK and Australia are markets where opportune short investors may well exploit outstanding opportunities in the period ahead. While the trend in many markets is currently still positive any holders of long positions may need to be extremely nimble as even fundamentally attractive assets may suffer from the fallout of overpriced commercial real estate.

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Outlook 2011 Gorillas in the mist

Hedge Funds and alternative assets Anyone whose memory extends back to just 2008 should know that genuine liquidity is an essential investment criterion. Liquidity, according to MBMG’s definition, is the definitive ability to sell an asset immediately at an acceptable price that bears close relation to expectations of current realizable based on continuous, consistent trades. Assets whose demand can simply disappear in an instant or whose pricing cannot be verified should be off everyone’s radars in the post-2008 world. However financial product designers seem once again to be committed to the not so noble art of 'turd polishing’, focusing primarily on what can dressed up as a great marketing story and hoping, despite the painful lessons of just over 2 years ago that no-one looks too closely what's actually under the hood. Even today there are assets that remain suspended in the aftermath of the great alternative asset lock-up of 2008. The less liquid, the less traded the underlying asset the less valid are the expectations of realizing the notional value of an investment – this discrepancy becomes more readily apparent when it is tested in extremis. Assets which, in the formats we most often see them represented as retail investment propositions, make no investment sense to us and which embody the triumph of marketing over substance include: Litigation funding Open-ended property funds (such as student accommodation, ground rent, etc) Life and savings policy contingent rights (such as viaticals, traded life policies, senior settlements, traded endowments etc). In contrast, currencies are the ultimate example of an asset that is constantly traded and re-priced and represents the epitome of liquidity: funds that drive alpha from assets as liquid as currencies or widely traded futures and options have transparent, liquid, tangible, realizable inherent value. The liquidity and security of managed futures funds continues to make them an asset class that we favour although the dangers of the inherent leverage associated with this asset class mean that only managers with strong risk management processes, such as Man, Winton and Eckhardt, receive our seal of approval. Managers with dubious or impaired risk management processes do not.

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