Fund Objective

To achieve steady capital growth.

View on Past Performance

Hedge funds initially suffered on counterparty concerns as a result of the Lehman Bros failure but funds had moved swiftly to limit their exposure and consequently damage was very limited. Concerns over regulatory changes followed, in particular those designed to curb short selling. Again the impact on the asset values was slight. However this is only half the story.The uncertainty over the future for the industry and the damage further deleveraging may have on asset values has seen discount to asset values, which had averaged 3 to 4% a couple of months ago, widen to around 25%. This area now offers significant upside, both short and longer term. The current crisis has thrown up many opportunities, particularly in credit based funds and all trades are likely to be less 'crowded' as many funds wind themselves up.Much of our structured product exposure is through defensive autocalls with good long term downside protection. However, the widening of credit spreads due to concerns over the financial stability of the banks has impacted prices, as has the increase in volatility which reached levels higher even than the Great Depression. Again, we see outstanding value.A reduction in volatility, combined with a narrowing of credit spreads in banks that now have stronger balance sheets, should see prices begin to rise. Some recovery in equity markets will boost these returns. On a longer term view, much of our exposure will pay out the accumulated coupons, even at well below current levels, but it is a matter of sitting it out. ZDPs have behaved as expected given widening credit spreads and reduced asset cover.Most investments have held up well and are trading at, or around, the levels of a few weeks ago. Gross redemption yields have risen and cover has fallen but in most cases zeros remain covered. The falls in interest rates, which we view as inevitable, combined with a narrowing of credit spreads would produce useful returns from our investments. The pull to redemption means in most cases these returns are not dependent on any equity market recovery.

Future Expectations

The recurring theme is uncertainty. Worries over further banking collapses, widening credit spreads, hedge fund exposure and leverage are all worsened by the prevailing clouds, as these clear we expect to make good money and unlike equity investors, this expectation is not built on an equity market recovery, merely some stability. This would allow pulls to redemption, defensive autocall kick outs, falling interest rates, and hopefully narrowing credit spreads to do the trick.

Fund Details