Hedge Fund Woodbine Says Global Rebalancing Is Most Important Macro Issue

Today we wanted to present you with the January investment letter from Josh Berkowitz's global macro hedge fund Woodbine Capital. Berkowitz of course previously plied his trade at Soros Fund Management before founding his new firm. When we covered Woodbine's prior commentary, we saw they were focused on the dispersion between industrialized & emerging worlds. This theme still prevails and we'll detail their current outlook below. Other current themes include: exit strategies from accomodative monetary policies, fiscal consolidation, emerging market demand, and capital goods divergence. In the past, we've also posted up an in-depth look at the above which are Woodbine's five current investment themes.

Overall, Woodbine says that global re-balancing is the most important macro issue currently. Going forward, the focus will be on fiscal tightening and they highlight that the US and the UK are very unlikely to drive incremental growth in this rebalancing act. They also note that, "Through this period of higher uncertainty we are navigating our pro-cyclical risk through tactical shorts in global equities."

In terms of their current portfolio positioning, they have been adding to bullish fixed income exposure, bullish foreign exchange positions in Asia, positions in emerging market banks, long positions in commodity intermediaries, and short US companies focused domestically. To play the dispersion theme we've posted up about before, Woodbine is net long vega and they've purchased tail risk options with the proceeds they've received from selling volatility.

Woodbine doesn't feel that sovereign risk is the next crisis. Instead, they believe it is merely an extension of the current one. In order for the global re-balancing to take place, fiscal tightening will definitely need to be more proactive they argue. Woodbine concludes that,

"The natural adjustment for countries on the wrong side of global imbalances is to live below their means for an extended period of time, reversing the process from the pre-crisis period. Fiscal policy plays a far more important role than monetary policy in that process. Countries on the right side of those imbalances can help in the adjustment with the pursuit of policies that encourage domestic growth. Exchange rate policies are the most relevant symbol. We remain optimistic that this need not end badly for the world economy. There will be winners and losers in every cycle, but government policy has a lot more control on the outcome than in the past."

Embedded below is Woodbine Capital's January letter to investors. RSS & Email readers you will need to come to the site in order to view it:



So in large they stick with their current investment themes from last time around. You can't argue with the notion that the UK and US can't be relied upon for growth going forward. Given all that these countries have to digest, a tepid response is the most likely. What will be interesting to watch is the response from emerging markets. As we begin a cycle of fiscal tightening, you enter a global situation with a ton of moving parts. Throw one wrench in the system and everything goes haywire. This just goes to show how difficult of a job the policymakers have in their attempts to perfectly time everything. After all, we know that market timing can be a b*tch.

For more great investment insight from hedge fund Woodbine, check out their in-depth look at everyone's favorite precious metal in their piece, Gold: The Anti-Goldilocks. We'll leave you with this gem from their letter: "There is no free-lunch in a deleveraging cycle."

Woodbine Focused On Dispersion Between Emerging & Industrialized Worlds

Earlier this morning, we posted up five investment themes in Woodbine Capital's portfolio. Next, we're taking a look at this global macro hedge fund's outlook. As the title notes, their portfolio has been focused on the dispersion between the emerging and industrialized worlds.

Macro Takeaways

We wanted to quickly compile some of Woodbine's prudent macro takeaways from their December 2009 investor letter. Woodbine notes that current market sentiment is targeting a US-driven global expansion and they see this as unlikely. They highlight the fact that the discrepancy between developed markets and emerging markets is rising and should not go unnoticed. Woodbine does not think that sovereign credit issues in the developed world will deter further global expansion.

Josh Berkowitz's hedge fund goes on to note that, "The follow-through of an inventory-led upturn to broader activity is far more dependent on healthy balance sheets, which allow accommodative monetary and fiscal policies to influence private activity."

In order to see growth, they shift their focus specifically to the countries of Brazil, China, India, Indonesia, Korea, and Turkey and mention that these countries need to, "embrace their leadership position with a virtuous cycle of stronger exchange rates, lower import prices, lower domestic interest rates, and stronger domestic demand."

In terms of future investment themes, they've identified a candidate in the form of emerging market policy decisions that will be focused on higher exchange rates, trade surpluses of smaller size, and strong domestic demand. In terms of potential risks, they think that deflationary pressure in the US could be more persistent than most fear. In order to guard against this risk, you can look at downside strikes in long duration swap yields. They feel that inflationary fears are overblown as these pressures "will be restrained by the long workout in the major economies, with large relative price shifts in favor of capital goods utilized by the emerging world." Additionally, they admit that sovereign fiscal issues pose a potential risk. In order to help protect from this, they suggest going short the euro against the Swiss franc.

Overall, hedge fund Woodbine Capital's 2010 outlook is focused on the continued global expansion driven by emerging markets as they believe developed countries will lag. Woodbine now has $2.5 billion in assets under management and finished 2009 up 13.15%. Make sure to check out our other piece from this morning detailing their five current investment themes. We've previously covered some past resources from the global macro hedge fund as well, including their thoughts on a possible early cycle slowdown and their piece on Gold: The Anti-Goldilocks.

Hedge Fund Woodbine Capital's Five Current Investment Themes

Josh Berkowitz and Marcel Kasumovich founded Woodbine Capital, a global macro hedge fund in January of last year after leaving George Soros' hedge fund firm Soros Fund Management. Previously, we'd seen Woodbine's thoughts on the often talked about precious metal in their commentary, Gold: The Anti-Goldilocks. In their recent December 2009 letter to investors, we got a glimpse at five current investment themes that Woodbine is playing in its portfolio that are detailed below. Additionally, we covered some of their macro takeaways in a separate post.

1. Exit strategies from monetary policies: In order to play this, they are long fixed income and long exchange rates in regions that have seen aggressive exit strategies. In this aspect, they are fond of Israel, Norway, and Australia. They write, "Emerging markets and countries benefiting from their demand recovery will be exiting from accommodative policies faster than others." What's also interesting here is that the market believes an interest rate increase will occur by July and that a return to historically normal short rates is expected over the next three years. They disagree with both of those notions.

2. Fiscal consolidation: To play this theme, they have bullish risk positions in countries like Hungary and bearish risk positions in countries like the UK (with the bulk of their focus on reactive countries). They note that tightening is moving away from developing countries to industrialized countries and they are "implementing spread trades to capture relative mispricing of sovereign credit risks."

3. Capital goods divergence: This is a newer theme that they've added and they are playing it by trying to capture the mid-cycle capital goods expansion and are focused on emerging markets. Berkowitz's hedge fund is "long capital goods providers tied to the emerging world and short companies providing capital to sectors in industrialized countries with excess supply." In emerging markets specifically, they like energy and agriculture as a long and they would like to be short "overstocked capital goods in the industrialized world." They specifically cite apartment REIT companies that are reporting price declines yet are priced for growth as short candidates.

4. Emerging market demand: They have bullish Asian forex positions here and think stronger currencies will be found in countries that will be forced to raise rates. They take their thoughts one step further by saying that, "financial intermediation will remain at the core of the next global expansion. Boring banking is back ... and we see the bulk of these opportunities residing in emerging markets. It is not the banks themselves that present the most efficient investment opportunity, but rather the areas where the banks are lending that will provide beta in the cycle." They are likely to increase their exposure to equity markets if exchange rate policies in Asia adjust and they also outline an example of shorting the US dollar against the Chinese yuan in short dated tenors.

5. Dispersion: Lastly, we see that Woodbine has also added this other new theme to its portfolio and they are shorting volatility in areas where there is excessive premium and in turn are buying tail risk options. They write that, "Structures to capitalize on elevated USD-JPY volatility are one component of the dispersion theme."

Overall, they sum things up by saying, "After last year's correlated upturn, our focus is on the implied dispersion between the emerging and industrialized worlds. That's the common thread across the themes in our portfolio." They also mentioned that future themes will include emerging market policy decisions that will be focused on higher exchange rates, trade surpluses of smaller size, and strong domestic demand.

In his three years at Soros before starting Woodbine, Berkowitz returned an annual average of 34% net of fees. Woodbine is already closed to new investors as they started with $185 million and now have $2.5 billion in assets under management. They ended 2009 up 13.15% and we are tracking them for solid perspective on the global macro arena. For more insight from Woodbine, head to their earlier thoughts on a possible early cycle slowdown and their piece on Gold: The Anti-Goldilocks.

Before everyone gets their knickers in a twist asking for the letter: we apologize, but we are not allowed to post it and figured a summary was better than nothing. Stay tuned for a second post this morning for some of Woodbine's global macro takeaways.

Gold - The Anti-Goldilocks: Thoughts From Hedge Fund Woodbine Capital

Previously this morning we laid out some macro thoughts and portfolio adjustments from hedge fund Woodbine Capital. Next we're examining their in-depth thoughts on gold from their October investor letter in an excerpt entitled, "Gold - The Anti-Goldilocks." Woodbine Capital is a global macro hedge fund firm founded in January by Josh Berkowitz and Marcel Kasumovich, two former executives at George Soros' hedge fund firm, Soros Fund Management. In his three years at Soros, Berkowitz returned an annual average of 34% net of fees. They are already closed to new investors as they started with $185 million and now have $2.5 billion in assets under management.

We wanted to present their thoughts on gold today because they offer an intricate and unique perspective on everyone's favorite precious metal. They have owned gold as well as deep out of the money puts on gold. However, they view this position not as a hedge against inflation or deflation, but rather as a part of their theme of stronger emerging market demand.

They argue that, "the fundamental source of strong prices is more likely to be tied to stronger demand from emerging markets, through higher income growth and stronger local exchange rates. We argue there are probably more powerful and much cheaper ways of representing that theme. Of course, another source of higher prices is that all investors wake up with the idea that a small part of their portfolios should be allocated to gold. That's true of any and all assets at any given time - it's called a bubble."

Woodbine then proceeds to examine the three ingredients to a bubble:

1. There is an initial reason for the rise in price. For gold: Weak US dollar, rising investment demand, and ncreased emerging market demand.

2. One-sided exuberance: when both good and bad news is 'good' for the asset and investors don't think the asset will decline. A great example is gold being supported by inflation and deflation cycles.

3. Market prices ignore downside risk. "Perception can be a reality."


So, by all means gold could be argued as a bubble. The hedge fund then goes on to examine gold in-depth by looking at supply and demand, the argument for hedging tail risk, and negative return skews. Instead of summarizing these points, we'll instead present you with the words direct from Woodbine. Embedded below is Woodbine's October investor letter with their commentary, "Gold - The Anti-Goldilocks." RSS & Email readers must come to the Market Folly site in order to read the full letter.




An intricate and well presented look at gold from the folks over at Woodbine Capital. This all comes in the midst of a media frenzy over the precious metal. After all, hedge fund icon John Paulson launched a gold fund and Eric Sprott is launching a physical gold trust. Not to mention, gold hit new highs and then drastically pulled back, causing even more of a frenzy.

All in all though, we've seen a great exchange as various hedge funds present cases both for and against the precious metal as they examine the rationale behind gold's value and its role in a portfolio. For more insight on this commodity, check out hedge fund Sprott's special report on gold, David Einhorn's rationale behind storing physical gold (hedge fund Greenlight Capital), as well as John Paulson's gold thesis. Ah gold... without you, what would we talk about?

Woodbine Capital Sees Possible Early Cycle Slowdown

Yesterday we got word that Paul Tudor Jones' main hedge fund BVI Global had stopped accepting new investments. From the market lows of this year to July, Tudor Investment Corp saw $1.3 billion in inflows and they've decided that they've reached an ideal capacity for now. While Tudor is a well known hedge fund with a storied past, we also want today to focus on another hedge fund that recently stopped accepting money as well.

Woodbine Capital is a hedge fund firm founded by two ex-Soros Fund Management players Josh Berkowitz and Marcel Kasumovich, as well as three other partners. George Soros' former executives launched their new fund in January with only $185 million and they already have $2.5 billion in assets under management. They have reached their initial target AUM and as such have stopped accepting new investments as of November 3rd. As of the end of October they were up 13.07% for the year. They employ a global macro strategy ala Soros Fund Management as they seek to play various trends by trading in all kinds of markets.

We recently got a glimpse as to what themes they will be watching going forward in their October letter to investors. Woodbine has made three main adjustments to their portfolio:

1. "The global housing theme is removed."
2. "Deeper emerging market demand/credit and fiscal consolidation are reduced to marker positions."
3. "Bullish fixed income exposure is raised in our themes of policy cooperation and exit strategies."

They then expand upon their #3 adjustment by saying that, "Regions that were early to exit from very accomodative monetary stimulus are priced for the gradual return to normal interest rates; the long workout in the US will encourage lower global real yields for a longer period and the risk premium in those markets is an opportunity."

Woodbine actually highlights a prudent point that while the global recession has just ended, we are possibly facing an early-cycle slowdown. They attribute this to the fact that the initial surge/recovery was driven largely by fiscal and monetary stimulus. But now that the supporting cast is slowly exiting stage right, inventories are starting to build again and everyone is focusing on demand. Woodbine anticipates that such an early cycle slowdown would put a damper on the potential rise in risk assets. In order to resolve the uncertainty they outline two scenarios:

1. "Global policy response encourages a rebalancing of demand away from the US"

or

2. "The world remains stubbornly tied to US demand, which grows at a very slow pace."

Their portfolio is reflective of such growth uncertainty given that their VaR (Value at Risk) is near the lowest levels since their inception. Overall, interesting thoughts from Berkowitz and Kasumovich's fund. Woodbine also laid out an in-depth look at the most talked about precious metal in a section entitled, Gold : The Anti-Goldilocks, which we've covered this morning in a separate post. For more updates from prominent hedge fund managers, head over to our hedge fund tracking series.