One of our key discoveries from speaking with prospective investors is that there is no one-size-fits all product. Indeed, there tended to be two distinct schools of thought - investors that desired capital preservation and investors that desired capital appreciation. We intend to cater to both camps but without sacrificing the key strategies that make JF Capital successful on an absolute return basis.
Put simply, whilst we could comfortably create a diverse portfolio of assets for the risk averse investor that would safely return ~4% per year, we feel this model drastically reduces any added value that a money manager can impart. We, alone, should be responsible for the success or failure of a trade.
This philosophy justifies hedging versus a benchmark or currency so that every idea is crysallised down into its purest form - a refined strategy that succeeds exactly under a forecast set of conditions and under nothing else. In this way, successful trading is not dependent on a "bull market" nor does it require "risk-on sentiment".
Having said that, clearly technically motivated trades require the exposure to one market alone and therefore shouldn't be hedged. In other words, if you are speculating on the actions of other traders in a particular market then it is only the price action of that one market alone that should be traded.
For example, in this period of high volatility, surrounding political risk in Europe, we have been all but on the sidelines as typical trends and correlations have fallen apart. One key exception however, which we have managed to trade profitably, is Silver (XAGUSD).
Our view, voiced in this blog previously, is that Silver has a practical lower bound (around $26) justified by industrial uses, finite supply, aesthetic value and lastly as a safe-heaven (a function of the previous three).
It has been a very profitable strategy to trade this support, buying in size as the price approaches $26 and averaging out up to $30. Volatility has been sufficient that this cycle has repeated several times, however, each repetition brings lower-lows and higher-highs typical of any up-trending security that is exposed to this kind of convexity (confidence in a "floor level" price causes incremental buying pressure).
We continue to hold a large position in Silver as a base, high conviction trade. A key aspect alongside the skewed Risk/Reward is also the protection from inflation and high payoff in a cross-border QE3 scenario.
More on our Macro views later in the week - tomorrow I take stock of the Greek Election and position the JF portfolio as one more piece of the puzzle is revealed.
