JF Capital est. 2011

In a year where the average hedge fund squandered 3% of assets to unforgiving markets, it has been a pleasure, for some, not to have lost money.

John Paulson, astute and savvy enough to have profited from the CLO saga, has seen nearly half of client capital wiped out and a number of difficult questions asked.

Why should a hedge fund lose in falling markets?
Why is volatility bad for a hedge fund?
Why are we down by far more than an almost any market or index for the year?

The truth behind the appalling industry performance isn't to be found in any of these concerns. Indeed, particularly agile managers have managed to negotiate the year in the black, and others less agile have profited from the flight to cash - buying US Treasuries on 01/01/11 would've netted 1.4%. A handsome return for the laziest possible investment strategy.

For a fund in its infancy, positive returns month on month for 3 months is certainly a good place to start. We intend to build on this early success, remembering the lessons from 2011: without a credible macroeconomic picture and a light footed approach to positions, it is incredibly easy to be entrenched into one view, and be caught out.

Whether it be long and wrong, or more likely in our case, short and sorry, the split second evidence mounts against a position, the only thing to do is close, as per the adage:
"The markets can stay irrational far longer than you can stay solvent."

Mr.Paulson, Mr. Corzine and others fell foul of this simple truism in 2011 and there will be many more lining the financial obituaries in 2012.

JF Capital Fund I returned 9.8% to investors in 2011. Happy New Year.

Filled on WBC short - 20.62

Refer to this post for the the big idea on Aus bank shorts.

Why WestPac (WBC)? They have the most leveraged exposure to the EZ of all Aus & S Korean banks, whilst also having the furthest to fall in share price - based on 2007/8 levels.

We were entered on Wednesday's overnight session based on a limit entry of 20.62. The current (closed) market price is 20.26.

Flat: Positions and P&L

We traded very little this week, merely closing out Gold at 1660 and letting the S&P short run down to 1200 before covering and netting the position into positive P&L.

Opportunities into year-end remain slim. Occasionally we have dabbled into the intraday FX market only to find that the lack of volume and volatility make for weak moves and increased noise. There's no need to waste time and money on this game, we'd rather stay flat and mould a strategy for the New Year, which promises to be at best "eventful".

In the Melting Pot: WBC (WestPac) short, CADTRY long, VXX (Volatility) short until Xmas.

And I can't rule out revisiting the Long Gold / Short S&P trade, now that the basis has widened to near historical highs and technical funding stresses have been eased/unwound.

We Like The Turkey Trade

No, not the the ultimate bull trap that was the "Xmas rally".

I'm talking about shorting the Lira: long USDTRY. Loose fundamentals, nice tail risk exposure. Read on.

Monday Comment

Good Morning. At 07:58 we executed Trade 3 from our trade shortlist. Prices were Gold (XAU/USD) 1690.74 and S&P500 (ES) 1250.73.

See below for our roundup of the weekend's news, focusing on the regions and products we think are the most tradeable this week.

Dull Markets into Volatile Weekend

The market is very quiet today. We're seeing range trading, light volumes and virtually no entry opportunities. With a range of summits and speeches chalked in for the weekend, agents are reluctant to take a view. This is encouraging - the political guessing game has bored the market into submission. Perhaps from now on we'll see less volatility as ministers struggle their way through highly scrutinized sentances.

I'll most likely wait 'til Monday before executing anything from our hot trade list.

While We Wait: 4 New Trades

At JF we continue to re-fund and restructure our back end.

Whilst we finish this process (and stay flat over both ECB and BoE rate decisions this afternoon) here are 4 possible trades over a number of timeframes that we have been mulling over. Do not trade these, they are simply discussion points.

Rally on Rumour, Sell on Summit

Doing the rounds over City Bloomberg's today:

"DAX PERFORMANCE BEFORE AND AFTER ALL 2011 EU RESCUE SUMMITS

• SAVING PLAN FOR GREECE 3 FEB 2010  +2.4% 4 DAYS PRE THE SUMMIT.... -3.1% 4 DAYS POST THE SUMMIT
• GREECE'S FIRST BAILOUT 3 MAY 2010 +0.1% 4 DAYS PRE THE SUMMIT.... -7.3% 4 DAYS POST THE SUMMIT
• PACT FOR THE EURO 11 MARCH 2011 -2.5%% 4 DAYS PRE THE SUMMIT.... -4.6% 4 DAYS POST THE SUMMIT
• PLAN FOR THE TRUE EUROPEAN ECONOMIC GOVT 16 AUG 2011 ... +6.8% 4 DAYS PRE THE SUMMIT.... -8.7% 4 DAYS POST THE SUMMIT
• EU SUMMIT 26 OCT 2011 .. +4.3% 4 DAYS PRE THE SUMMIT.... -3.0% 4 DAYS POST THE SUMMIT"

Interesting. But as with most "dead certs" in the market, it will inveitably fail, just as the penny drops with retail investors.

Gold vs Index Basis Widens Up

The chart above should really speak volumes to even the most unobservant investor.

We expect the FTSE-Gold basis (difference) to narrow - i.e. mean reversion. Limited downside, healthy upside, this would be a no brainer if we could trade. Expect real money back on the table by Wednesday.

P.S. Plenty of other reasons to be long Gold (funds opting for physical delivery, exposure to a number of QEs etc), covered over and over again on this blog, make this trade a runner even in the medium term.

***EDIT*** To those that took this trade: congratulations. The basis has closed up nicely.

Housekeeping, the Week Ahead and Kyle Bass

Behind the light flow of blog posts last week, JF Capital has been restructuring ahead of 2012.

Read on for more details, our take on what is likely to be a defining week for the EZ and an alarmingly insightful feature-length discussion involving Hayman Capital's Kyle Bass.