Woodbine Capital Short French Government Bonds


Woodbine Capital is a hedge fund firm founded by two ex-Soros Fund. Below is their letter for October, which contains some interesting positions.

Monthly Investor Letter

October 2011

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Woodbine Capital returned –2.31% net of fees in October. Within the CIO account, which is the majority of Firm risk, negative contribution was primarily from fixed income and to a lesser degree currencies. The main negative driver in fixed income was long positioning in European rates. Negative drivers in currencies were long Chinese yuan and short euro against the Danish kroner.

Entering October, the CIO’s largest risks were long euro against the Swiss franc, long Euribor, and short euro against the Danish kroner. Exiting the month, major contributors to portfolio risk were the same. Month-end VaR was 37.4% below the intra-month high.

At the end of October the book was broadly similar in nature to that at the beginning of the month. Key positions were long European rates and euro positioning against Denmark and Switzerland. We introduced a new position during the month, selling call options on developed market equities to fund long call positions in emerging market equities. In an equity “risk-on” environment, we believe that emerging market (EM) equities will significantly outperform developed market (DM) equities. This structure provides optionality on such an outcome with limited downside risk. If global markets decline, both options are worthless.

The portfolio continues to reflect a flexible and open-minded approach to markets. We have downside protection against a bad outcome for Europe, but also upside optionality for more relaxed market conditions. With an expectation that markets will continue to focus on the European situation in the near term, we believe tactical trading around our core positioning is appropriate.

The month was characterized by continued volatility in our two largest positions, Euribor and EUR-CHF. We continue to believe that the European Central Bank (ECB) will cut rates again in December given the rapid tightening in credit conditions and clear signs of Europe being in recession. Up to this point, our Euribor contracts have not moved, even after  the November rate cut. Upon the realization of another interest rate cut or the introduction of guarantees on unsecured  bank funding on a pan-EMU basis by the ECB or another credible EU/EMU entity, we should begin to be rewarded for this trade.

EUR-CHF continues to dominate the risk in the book. As the exchange rate rises above the Swiss National Bank’s (SNB) floor of 1.20, we have more P&L volatility. This is exactly what should be expected. We expect the SNB will move monetary policy again in the next few months. The exchange rate floor is the one policy tool left to respond to the downside risks in Europe and additional deflationary pressure. We expect the floor to be raised in December. In our view, his is one of the best risk/reward opportunities in the market in quite a long while.

We still believe that we are in the midst of a correlation shift. The ECB will have to become more aggressive either directly through debt purchases or indirectly through the European Financial Stability Fund (EFSF), such as turning it into a bank. In this context and with the background of the long-awaited China easing and the improvement in US economic data, we can easily see a situation where the risk markets trade very well as the ECB moves towards a larger balance sheet and cuts rates. In this new potential construct, the euro trades very weak. Thus we may be adding to risk going forward and becoming more willing to sell the euro against those risk positions.

Prospectively, the core positions in the CIO book should be as follows: long EUR-CHF, long gold, long Euribor, long equities with an emphasis on EM and policy easing, and short the euro against the US dollar and other major currencies.

Full letter embedded below:

Woodbine Capital Investor Letter Oct. 2011

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