GaveKal - the Hong Kong-based research and money management firm set up by Times commentator Anatole Kaletsky and investors Charles and Louis-Vincent Gave in 1998 - must be feeling pretty pleased after sealing a joint venture deal with UK hedge fund Marshall Wace to jointly run some Asian funds, including a plan to establish a new Japanese long/short hedge fund in the autumn.
If you believe it’s a good time to invest in Asian funds, then you might be interested in GaveKal’s memorably-worded observations in its latest client newsletter on how money managers can make money in the current conditions. According to GaveKal, there are four main ways:
1. Run some kind of momentum trade: the problem today is that, bar energy and maybe soft commodities, very few markets are showing signs of positive momentum. Most equity markets are sickly, currency markets are all over the place and bond markets are going from one knee-jerk reaction to another. So right now, unless one is willing to take the plunge into the crowded energy and commodity trades, being a “momentum-based” investor is not much fun.
2. Run some kind of return to the mean trade: This typically means buying assets that are “undervalued” and selling those that are “overvalued”. But to do this with comfort, one needs a modicum of visibility on earnings growth and on where the cost of capital will settle. Unfortunately, today, most investors feel they have neither. Meanwhile, except for a few exceptions equity markets around the world, while not being expensive by any stretch are usually not cheap enough to compensate for the reduction in this lack of visibility. Being a “return to the mean” investor has thus also been a challenge lately.
3. Run some kind of carry trade: Another way to make money in the financial markets is to borrow at low rates and lend at higher rates. Needless to say, being a “carry trade” investor has been a rough experience in the past year as the ability to borrow at low rates has simply disappeared. With the recent credit squeeze, many carry-trade investors have been carried out…
4. Run some kind of negative carry-trade: Our old friend Hunt Taylor would always tell us that carry-trade strategies “eat like birds and shit like cows” and that, when they do, the rest of your strategies (whether “momentum” or “return to the mean”) usually take a kicking in sympathy. Thus, he argued, it made a lot more sense to build a portfolio around “momentum” and “return to the mean” trades, and protecting it through “negative carry-trades”, whereby you pay a premium over time and one day (when you need it the most!) you get a massive pay-out. Examples of negative carry trades include CDS, puts, long yen calls etc.
In the past year, concludes GaveKal, there is little doubt that the most profitable strategy has been to buy insurance against the possibility of an implosion in the US mortgage market and US financials. But, it asks, is this still the best “negative carry trade” going forward? Over to you, readers….
