Friday, 30 March 2012

Hedge Fund Radio on the 2nd April

Make sure you listen out for the Monday, April 2nd edition of the three time Sony Awards-nominated N@ked Short Club on Resonance FM [104.4FM within London/online worldwide on the internet here]: 1 hour of loose talk about hedge funds and the state of the world, plus sweet poetry and heady music...No promotional agenda, no commercial intent...just Ponzi Bier and Pure Alpha both on tap.

Host, Dr. Stu will help callers to the Emergency Hedge Fund Helpline (1-800-DISTRESSED) to re-attain their Inner High Water Mark, with expert guests: Matthew Roberts- Head of Multistrategy Hedge Funds, Towers Watson; Simon Kerr- Founder, Enhance Consulting/the Simon Kerr Blog; Stephen Pope- CEO, Spotlight; Andrew Kinsey-Quick- Head of Hedge Fund Research, Kleinwort Benson; Marc Ostwald- Strategist, Monument &amp - Sarah Dudney Writer & CEO, Ignite. Feedback to

The show is broadcast between 9-10pm/ 21.00-22.00 hrs., London time.

Friday, 9 March 2012

Chart of the Day is the Technical Position of the Aussie Dollar

 A recent article here cited a short in the Australian Dollar as a position held by Bridgewater Associates at the turn of the year. Often global macro investors like both a fundamental case and a technical case for their positions - the bias one way or the other is a style point for differentiating between managers. The previous article gave a fundamental case for a position, this article gives a technical case based on a re-test of a (very short term) key level. 

In another article here about macro trading the (at-the-time) CIO of a $9bn global macro shop (he is now CEO and CIO) disclosed how he traded FX in 2010. He explained how observing the technical developments allowed him to change position size as markets unfold through time. A key attribute of a successful (macro) trader is to reflect the probabilities of gain/loss on a position through sizing. When the investment hypothesis on which a position is taken is confirmed by market action macro traders either initiate a position or add to it. In pattern or trend terms these could be the break-point (of a trend), a key reversal, or a successful re-test (see second graphic here). A successful re-test is very powerful because the odds of success shift considerably - the amount that can be lost is much smaller than the amount that can be gained because the spot price is much nearer the stop (just through the key support/resistance level) than the first take-profit level. This set up is illustrated below for the A$ - US$ rate.

Graphic 1. A$ v US$ over the last year

The set up is that an ascending triangle formed from October through early February with  some acceleration in the uptrend (Graphic 2). This took the rate into the significant price band shown on the 1 year chart (Graphic 1). Note there was not a close above 1.0808 - the A$ traded above there versus the US$ intraday once but did not hold above that level. And the low close relative to the high that day (29th February) is a weak reversal signal.

 Graphic 2. A$ v US$ over the last six months

The short horizontal lines at the 1.0668/1.0633 levels bound a narrow band of resistance - reflecting the candle body of the 22nd February and the market action on the 5th and 6th of March (the second and third of the three down days in a row).

The investment hypothesis is that the A$ is going down based on a fundamental case. The consolidation after the ascending triangle - the break of the uptrend on the 10th February, and sideways move since - has been done with lower lows and only one day of a minor new high (which was the weak reversal signal mentioned above).  The rate has broken below 1.0668 this week and markets have tested that level yesterday and today, and bounced off it. A weak close today (on a Friday too) would increase confidence for a trader that the A$ is reversing, and is a good short against the US Dollar now - as Bridgewater Associates have been looking for for some months.

A good macro trader would also use technical inputs other than chartism to support/undermine the assessment of market condition. Flow information, market positioning data, volume and market action all feed into the view.

All the above are used to illustrate when a global macro trader would turn a long-to-medium term fundamental view into an actual position - when the market begins to show that it is acting the same way. That is when the probabilities of upside/downside begin to tilt towards the profit potential. So it is game on for Bridgewater's A$ short position.

Tuesday, 6 March 2012

Oaktree Capital Sets Out To Seize Control in Europe

Howard Marks of Oaktree Capital Management

There are a number of managers of distressed assets who are able to take a medium-to-long-term macro view about the viability of the opportunity set in front of them. Successful distressed investing is a cyclical phenomenon, such that there are better times than others to apply fresh capital to the investment strategy.And there are times to back away from it - when there are too few securities trading at distressed prices to give managers a proper choice, and too much capital committed to the strategy. For example, Steve Persky of Dalton Investments LLC of Los Angeles managed a low volatility Distressed Credit strategy for the first seven years of the firm, but in 2006 he decided to return approximately $350 million of capital to investors, leaving the strategy completely. He started taking in fresh investor capital for distressed investing in 2009, after the Credit Crunch had created gross opportunities.

It is interesting in this context that Persky's neighbour in Los Angeles, Howard Marks of Oaktree Capital Management, the world's largest manager of distressed assets with $75bn in AUM, has just raised €3bn for a new fund to take control of distressed companies in Europe. Oaktree too has closed funds - it closed three in the second half of last year, a high-yield-plus fund, a European credit opportunities fund, and a Japan fund. Unlike Dalton Investments LLC, Oaktree has a global reach, with offices in New York, Stamford, Conn., Amsterdam, Frankfurt, London, Luxembourg, Paris, Beijing, Hong Kong, Seoul, Singapore and Tokyo, as well as the headquarters in L.A. That is, of all the opportunities available globally and through the 16 investment strategies utilised by Oaktree, the new fund is focused on European companies using control investing strategies.

Oaktree Capital Management Assets Under Management, as at December 31st 2011
Source: Oaktree Capital Management

Oaktree's control investing strategies combine traditional private equity and distress-for-control activities, investing at any level of the capital structure, and seeking equity positions that result in substantial influence, control or total ownership. Oaktree's approach is to use strategic partners and intermediary relationships, which enables the sharing of essential industry knowledge and global investment experience. According to Caleb Kramer, the European Principal Group's portfolio manager, "we focus on business sectors where Oaktree has prior experience and expertise, or we partner with individuals or groups that have industry expertise but lack capital or other resources." The Oaktree investment professionals dedicated to European Principal investing also tap into the specific knowledge of their colleagues in the high yield debt, real estate and distressed debt teams in Europe.

For the new fund, European Principal Fund III, Oaktree Capital particularly favours cross-border opportunities that benefit from European integration or provide opportunity for global distribution. They are seeking potential in the divestiture of assets of large companies, and from enhancing the strategic and operational expertise of family-owned businesses to drive profits. Recent, unprecedented debt issuance in Europe suggests a coming increase in distress-for-control opportunities, and that is the trigger for the asset raising. 

Oaktree believes companies in Europe, where several countries have been forced to restructure their debt, are likely to come under pressure to sell assets to raise capital. In addition, the Oaktree view is that distressed investing in Europe has been less competitive than in the U.S. However, the principals of Oaktree Capital don't look to have fine timing in their investment strategies: “We don’t expect to be able to hit the bottom,” Howard Marks says. “All we care about is that we’re buying cheap. If it gets cheaper, we buy more. Eventually, it’ll work out - so long as we are right.” 

Oaktree Capital Management has done a fine job in marketing the new fund. Against a target of €2.5bn the firm have actually raised €3bn. This is evidence that the end institutional investors share the view on the richness of the opportunity, and share the Oaktree expectations of outsize returns from being proved right.