From a spectacular, mutli-billion Hedge fund manager

Commentary for January 2012

Global stock markets rallied sharply during the month of January. The S&P 500 was up over 4%, its best January performance in more than a decade. However, this headline number only tells part of the story. There was significant dispersion both at an intra- and inter-sector level in most markets. This dynamic was perhaps best observed in Europe. Within the MSCI Europe Index, the most cyclically-geared sectors (materials, consumer discretionary and financials) were up approximately 10% in January. By comparison, the safe havens of consumer staples, health care, telecommunications and utilities all posted negative returns. A similar pattern could be seen across most equity indices as 1) the risk premia associated with the European peripheral crisis contracted sharply, 2) the US
economic data was again stronger than anticipated and 3) concerns about a Chinese hard landing subsided.

Given the better conditions mentioned above, the rally was more broad-based than soley equities with commodities, credit, bonds and currencies also participating. The performance of credit is particularly noteworthy, as the High Yield CDS Indecontinued the rally it started in mid-December. The index rallied in January almost 120bps to close at levels not seen since early August 2011. It is clear that investors are searching for yield given the negative ‘real rates’ priced into US, UK and German government bond markets.

With the generally positive performance in almost all markets, it is important to highlight that the European peripheral crisis still remains precariously balanced. The ECB’s longterm repo operation (“LTRO”) is now expected to have provided the European financial sector close to €1 trillion of financing, once the second and final operation is completed on February 28. This is equivalent to approximately 80% of 2012-13 European bank bond maturities. The LTRO, therefore, has significantly reduced the financing concerns of the financial sector. However, it does not address the solvency issue of many banks in the event of multiple peripheral defaults.

Greece has again moved back onto centre stage with the troika of the European
Commission, the International Monetary Fund and the European Central Bank still negotiating “prior actions” that need to be implemented in advance of the long anticipated voluntary debt exchange and second financing program. It should be noted that although Eurozone officials would still prefer the debt exchange not to trigger a credit event, their stance appears to be softening.

For the month of January, the total gross trading return for Caxton International Limited was +0.57%.
Equity trading added 1.03% to January’s gross return, with gains attributable to both directional positioning and stock selection in the US, with housing-related stocks being the largest contributor. Short positions in companies exposed to growth in Europe partially offset some of these gains. CI’s net equity exposure varied between long 4% and long 28% over the month, and ended the month long 9%.

Fixed income “rates” trading was positive, adding 0.73% to CI’s gross return for the month. Gains were mainly in European government bond and emerging markets positions.

Commodities trading contributed 0.21% to January’s gross return, with gains primarily in base metal positions.

Trading in credit products was slightly positive, adding 0.04% to CI’s gross return for the month. Gains in developed and emerging markets bond positions were partially offset by losses in developed country CDS positions.

Foreign exchange trading reduced CI’s gross return for the month by 1.44%. Losses were driven primarily by trades that would have benefited from US dollar strength. It was anticipated that these positions would have protected the Fund in the event of a sudden deterioration of the European crisis.