First Quarter 2016
This past quarter was one we would rather forget as our funds were whipsawed by central bank support. In the first 40 days of the year, the S&P fell more than 10% as fundamentals deteriorated and fears of slower global growth and significant worldwide debt raised risk premiums in equity and credit markets. February’s release of the January Fed minutes drastically eased the Federal Reserve’s tone and lowered Federal Funds rate hike expectations for the year. This caused the market to quickly price in lower rates, leading to a surge in equities that actually made up the losses faster than the previous sell off. In addition, the European Central Bank pledged to buy corporate bonds in huge amounts and other central banks eased monetary policy in reaction to market volatility. This pattern of markets dropping followed by central bank jawboning makes extracting value from the public markets difficult as the cost of hedging becomes more and more expensive versus its short term value.
We know that hedge fund of funds will do well and have a place in investor portfolios once the Federal Reserve returns to normal interest rates and the Government stops attacking businesses through draconian regulation, antitrust abuse and middle of the night tax law changes. The problem is that we do not know when these issues will stop escalating, start to subside and eventually normalize. Our managers are very cognizant of the risk posed by tight credit spreads, blunt regulation by decree, increased global debt levels and slower growth. However, betting these factors will self-correct proves to be increasingly frustrating as low global rates, central bank intervention and mixed inflation measurements push out the ultimate reckoning for these imbalances into the unknowable future.