Tuesday, May 01, 2007

April Post Mortem

It was the best of times, it was the worst of times. It was the age of wisdom, it was the age of foolishness. It was the epoch of belief, it was the epoch of incredulity.

Are these the opening lines to A Tale of Two Cities.... or A Tale of Two Investment Styles?

April was all about buy and hold and adding risk on dips. The beta plus portfolio, particularly the equity position, had an absolute stonker in April. The alpha portfolio, which took the view that risky assets were overextended and likely to pull back...well, that was a different story. April was the best of times for beta and the worst of times for alpha.

All told, the month was generally a success. While Macro Man's alpha returns were execrable, at least he had the sense not to allocate so much risk to poor trades that it overwhelemed the stellar beta performance. All told, he made a shade less that $1.37 million, his best month of the year.
As noted, April was all about beta. All in, and including yesterday's payment of the dividend on the beta portion of the SPY position, beta strategies generated 2.77% of return: 2.89% for the equity beta position and -0.12% for the FX carry basket.

The alpha portfolio was a different story, however. Macro Man's index puts all expired worthless, and his short index calls went from low delta to in the money. The lone bright spot was his homebuilder short; his short XHB/long SPY position added 0.33% to the P/L. The losing index options, however, took overall equity alpha to -0.78%.

Commodities were another source of pain. Equities and gold were both sharply higher on the month, yet Goldcorp barely moved. Clearly the micro is swamping the macro here, and Macro Man must seriously consider whether it's worth holding on. Similarly, the WTI/Brent spread trade went horribly, horribly wrong, descending from a modest premium to a modest discount over the course of the month. It traded as if he had plenty of company in the trade, and that at least some holders were capitulating. That the inventory situation at Cushing has not improved over the last six months is clearly a source of concern, and it behooves Macro Man to begin thinking of an exit strategy for a position where neither the price nor the fundamentals have performed in line with expectation. All in, commodities subtracted a painful -0 .62% from the portfolio.

Fixed income was a mixed bag. The portfolio continued to clip coupons via the long TIPS position, while the Treasury puts petered out to close at strike to the very tick. Ugh. Fortunately the delta hedge ended up in the money. The JGB position gave back its early gains and then some, while the various plays on the short end of Europe combined to end the month with a modest loss. All in, the fixed income alpha bets registered a tiny loss 0f 10 bps on the month.

Finally, FX proved to be more interesting than in previous months. The portfolio made good money being long EUR/USD, but the nature of slow motion crashes is that they produce slow motion cash. Meanwhile, the GBP/USD one touch continued to erode in value, and the bid side of the price is so low now that it is hardly worth selling out. Sadly, today's rally in sterling has come a bit too late, as spot is unlikely to blow through the 2.02 call strike expiring today. All in, FX added 10 bps to alpha portfolio performance, the only alpha asset class to make money in April.

All told, alpha trades dropped 1.39% on the month- exceedingly painful, but bearable given the success of the alpha portfolio. Traditionally, May has been the worst of time for risky assets....which could mean a return to the best of times for alpha strategies.



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