Paolo Pellegrini's PSQR Capital Annual Letter

Today we present you the annual letter from Paolo Pellegrini and his global macro hedge fund PSQR Capital. They ended up 2009 up 61.6%, largely due to a short treasuries trade they put on very early in the year. (You can see how PSQR fared against other hedge fund performance numbers here). Pellegrini of course left John Paulson's hedge fund Paulson & Co to start his own firm after enjoying large success shorting subprime.

In the past, we've gotten a glimpse at Pellegrini's portfolio and have posted up a previous investor letter. His annual letter, however, is chalk full of much more in-depth macro insight. PSQR's outlook for 2010 is entitled 'The Rubber Meets the Road' and they have expressed the following investment views:

- Short US fixed income
- Short US equities
- Short US dollar
- Long commodities

These are by no means new revolutionary investment theses. After all, we've covered how many hedge funds have had similar trades on. PSQR though believes that 2010 will present structural problems and expect cyclical indicators to peak in the first quarter of this year and then decelerate after that. Pellegrini notably ends his letter with a gloomy outlook as he writes, "Both the US and the global economy continue to suffer distortions from a refusal to come to grips with this reality, whether through lack of understanding or because of political calculation, or some combination of the two. Eventually, there must be a reckoning. In our judgment, that day may be much sooner than the markets suggest."

Embedded below is PSQR's 2009 annual letter and RSS & email readers will need to come to the site to view the document:




Simply put, Pellegrini notes that structural changes around the world still persist and there are many problems left unsolved. Many won't argue that point. On the equities side of things, it mainly becomes a question of whether or not a rally can persist after the liquidity-driven portion of the run-up has ceased. We'll just have to wait and see how things play out, but Pellegrini certainly lands in the "still bearish" camp.

For more great hedge fund letters full of investment insight, head to our coverage of:

- David Stemerman's Conatus Capital Q409 letter
- Perry Partners' annual letter
- Lee Ainslie's Maverick Capital annual letter
- David Einhorn's Greenlight Capital commentary
- Global macro hedge fund Woodbine Capital's thoughts
- Prologue Capital's macro takeaways
- Annual letter from Whitney Tilson's hedge fund T2 Partners
- Cheyne Capital's investor letter
- Corsair Capital Management's fourth quarter letter

Paolo Pellegrini's PSQR Capital: Investor Letter & Performance Update

Big hat tip to Zerohedge for posting this one up recently. Paolo Pellegrini, John Paulson's former colleague who helped him craft his large bet against subprime, is now out on his own. PSQR Capital is his discretionary global macro fund that invests all over the world and across the full spectrum of asset classes. When we last checked in on Pellegrini, we saw he had been shorting treasuries and longing oil. Below we get an update as to what he's been up to via his quarterly investor letter and hedge fund performance report. Given Pellegrini's essential role in hedge fund Paulson & Co's big bet that netted them billions, we found it prudent to track him and we started covering him right as he started his own hedge fund.

To get an update as to what he's been up to, embedded below is PSQR Capital's investor letter (RSS & Email readers come to the blog):




Also, below is PSQR's performance report:




You can download the letter .pdf here and the report .pdf here. For more insight from the hedge fund manager, head to our most recent post on Pellegrini's positions & thoughts.

Paolo Pellegrini: Short Treasuries, Long Oil & Sees 'Anemic Real Returns' In Equities

While you may not be familiar with Paolo Pellegrini, you should be. The 52-year old used to work for John Paulson's hedge fund Paulson & Co and played an integral part in the research and investment ideas that led to Paulson's astonishing 570%+ return in 2007. As we covered on the blog before, Pellegrini has since left Paulson and started his own fund PSQR Management LLC with $100 million of his own money and will open to outsiders in 2010. PSQR's name has meaning for two reasons. Firstly, it is Paolo's initials squared (Paolo Pellegrini: P Squared). Secondly, it is an anagram for SPQR, or Senatus Populusque Romanus (Senate and the People of Rome). Pellegrini is a Rome native and this highlights the initials of the ancient Roman Republic as a tribute to his background.

In 2006 Pellegrini, a Harvard MBA, decided that the housing bubble was about to burst after he sifted through tons of housing data. In Spring of 2008, Pellegrini saw the severity of the situation and knew that massive government assistance would be needed which would send both stocks and the U.S. dollar down. Needless to say, he's been spot on both with his economic calls and his execution of a trading strategy that would profit from the crisis.

Strategy, Portfolio & Performance

Upon starting his fund, he shorted exchange traded funds (ETFs) that were loaded with financial stocks (most likely ticker XLF or some similar ETF), as well as S&P500 index ETFs (SPY, etc). In late 2008 he shifted his bets to the Treasuries market by shorting long-term treasuries. This is a trade we saw many hedge funds put on in the past and we recently detailed Julian Robertson's curve cap play that bets on rising long-term Treasury yields. And, Pellegrini expects the fall in Treasury prices (and rise in yield) to continue. He is taking a global macro approach by trading anything and everything he pleases, as long as it will help him make money off his theses. He has an uncanny ability to take an economic situation and turn it not only into a trade, but a profitable one.

Pellegrini is also bullish on commodities, especially those that are scarce or of daily necessity. In particular, he likes oil and has been buying oil futures. He likes commodities since he sees global competition for them elevating. Given this commodity thesis, he also likes the Australian Dollar as the country benefits from their natural resources. Pellegrini also has owned the Norwegian kroner which is interesting, as we saw Julian Robertson also recommended this currency. In a way, Pellegrini's theses here are also similar to that of legendary Quantum fund manager Jim Rogers. Rogers likes commodities and various currencies of commodity producing countries as we noted when we detailed Rogers' portfolio & positions.

Performance wise, Pellegrini has kept up the great numbers he helped generated at Paulson & Co. From April 2008 until December 2008, PSQR was up over 52%. Year-to-date through July for 2009, PSQR was up 80% largely on the heels of success in the Treasury market.

Thoughts on the Market

Given the sour economic situation he uncovered while at Paulson, Pellegrini still has a gloomy outlook for the economy. He sees the market essentially trading sideways and could even generate negative returns once you adjust it for inflation as he calls for "anemic real returns." The point is, he doesn't really see things going up by much as he cites budget deficits, household debt, and increased regulation amongst other things. As mentioned earlier, Pellegrini has been shorting long-term Treasuries and going long crude oil in a wager that was formulated on the basis of dollar devaluation. He cites massive stimulus programs, huge corresponding deficits, and the fact that the US is now a debtor nation as reasons for the currency's value dropping. While Pellegrini takes a long-term view in formulating his theses and putting on his trades, he does note that due to policy shifts and the market volatility, that his positions can (and will) change with the ebbs and flows of all the intertwined parts.

Pellegrini recently sat down for an interview on Bloomberg TV and we've embedded the video below. He discusses his strategies and his view on the economic trends we're seeing these days:




Obviously, Pellegrini paints a rosy picture... /sarcasm. He thinks fiscal stimulus and quantitative easing are not the solution and has been critical of the move the Federal Reserve has made. Pellegrini has been vocal in the past as he looks to solve the mortgage and housing crisis since it is at the root of much of America's problems. You can read some of Pellegrini's mortgage solutions here. He also sees a real decline in economic activity and some asset inflation as well.

John Paulson has called his former colleague "extremely smart and capable" as they previously met at Bear Stearns before moving on to Paulson & Co. Paulson has made a wager of his own when we saw that Paulson was buying financials. While this could have just been a trade, it is still interesting to see the difference of opinion. As you undoubtedly already know, hedge fund Paulson & Co also has a large gold position as they look to hedge their fund share class denominated in gold. But interestingly enough, they also have stakes in numerous gold miners. We'll continue to track the differences in thought and strategy between Paulson and PSQR as the economy meanders along.

Pellegrini parted ways with his former colleague because he always desired to run his own show and to run a true macro fund. Currently, PSQR is a smaller firm that recently hired Alex Patelis away from his position as Chief International Economist at Merrill Lynch in London. While he may run a smaller firm for now, you better believe that he has the credentials and the track record to succeed. The one question mark surrounding him is his ability to operate in futures markets, as he is relatively inexperienced there. We're sure he'd be quick to point to his winning Treasuries trades to refute that point though. But in the end, the majority of his experience lies in mortgage related markets and it will be interesting to see if he can continue to translate his economic theses into profitable macro trades. For more on Pellegrini, check out this in-depth profile of him from Bloomberg.