The $4.1 billion investment advisor Morgan Creek doesn’t like volatility or high correlation to global equity markets. The firm’s Opportunity fund, which prefers a long / short strategy to manage such issues, delivered 1.42 percent returns in October, capping what was a volatility filled month. The fund is up 7.77 percent on the year.
Morgan Creek Opportunity Fund on the stock market sell-off
In a letter to investors reviewed by ValueWalk, the fund noted the selloff really started in September and only increased in intensity during the first two weeks of October. This volatility could be seen in the MSCI World Index’s peak-to-trough decline between September 3rd and October 16th, which was nearly 10 percent. At its low point, the Index had fallen 6.2 percent in October alone, the letter noted, but then “remarkably” the MSCI World index found massive buying, as did other indexes, and staged an almost equally intense two-week rally and ended the month slightly up.
Given this sharp stock market reversal, the fund said it seemed only fitting when the Bank of Japan surprised markets with its decision to expand quantitative easing on the last day of the month, in essence, feeding even more fuel to an already hot equity market.
In terms of stock sectors, the fund is most exposed to technology, media and telecommunications stock sectors, accounting for 35.9 percent exposure, followed by consumer, at 20.4 percent exposure, and healthcare, at 13.2 percent exposure.
Morgan Creek Opportunity Fund significantly exposed to strategies in Japanese markets
The Opportunity fund is significantly exposed to strategies in Japanese markets to the tune of 26.5 percent. During October, Asia and Technology strategies each gained +3.9 percent, contributing +99 basis points and +47 basis points, respectively to the fund’s performance. Global long / short strategies were the largest detractor, showing generally mixed performance with the losers ahead of resulting in an aggregate loss of -0.7%, costing the fund 22 basis points of positive performance.
It was the BOJ decision at month-end that sent Japanese equities higher and the yen lower, a trend many hedge fund managers have been watching. The BOJ’s specific announcement was that it would increase purchases of Japanese Government Bonds from ¥50 to ¥80 trillion/year and an increase in equity ETF and REIT purchases to ¥3 trillion and ¥30 billion per year, respectively, a strong move in quantitative easing across asset classes.
Such publically stated intentions to influence not just the bond market but also the stock and real estate markets is a slight difference from U.S. quantitative easing, where such moves in equities were assumed by insiders by not widely publicized by official sources.
As the BOJ was increasing its exposures to equities, Japan’s $1.2 trillion Government Pension Investment Fund announced its intention to increase domestic equity exposure from 17.3 percent to 25 percent and dramatically reduce its Japanese bond exposure to 35 percent from 60 percent.
“We think these announcements will prove to be strong and durable positive catalysts for Japanese equities,” the fund said, as it has an overweight 11.1 percent allocation to Japan currently.
