“Least Objectionable” Investments Found in EU: TT International

“Least Objectionable” Investments Found in EU: TT International

DB Platinum TT International, a global macro, multi-asset class hedge fund, saw a slight decline of -.02% in January, according to an investor letter reviewed by ValueWalk. 

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TT International, counted among Europe’s largest hedge funds, credits its European equity portfolio as a stabilizer of returns despite the January fall in markets broadly offset losses on the macro book.  The fund notes that “positive contributions from its long option positions in Peugeot SA (EPA:UG) (OTCMKTS:PEUGY) and ThyssenKrupp AG (ETR:TKA) (FRA:TKA) (OTCMKTS:TYEKF), which recovered strongly from December’s losses, were augmented by gains on our long positions in banks such as UBS AG (NYSE:UBS), Commerzbank AG (ADR) (OTCMKTS:CRZBY) (ETR:CBK), UniCredit SpA (BIT:UCG).  Hellenic Telecommunications Organization S.A. (FRA:OTE) (OTCMKTS:HLTOF) helped the fund on the long side, and it was a good month for the fund’s shorts in materials and consumer stables. Our short index futures hedges also contributed positively, yet it remains to be seen how this impacted performance in February as the market rebounded.”

Although TT International had reduced macro positions coming into the New Year, cutting further in January, the portfolio in aggregate made a loss primarily due to long positions in Chinese and Japanese equities, though the fund’s short FTSE China A50 Index (INDEXFTSE:XIN9) and short Topix hedges were profitable as those markets tumbled, the letter noted.  In foreign exchange markets the most positive contributor was the fund’s short JPY / USD pair, “although significantly reduced in size, this lost money as the JPY strengthened in response to the bout of risk aversion,” the letter said. “We had also cut our long CNY vs. USD position by around 2/3rds, and more subsequently, but the residual position made a modest loss. Our small remaining short AUD position also made a small loss and was cut completely.” Within fixed income the fund’s long positions in 5 year Italian and Portuguese government bonds were profitable, the letter noted, as yields in Europe continued to compress. A long position in Short Sterling also made money, yet position size was modest.

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TT International: Two broad themes behind weakness

TT International notes that two broad themes have been offered as fundamental explanations for recent market weakness. Turmoil in Emerging Markets, and signs of slowdown in Developed Markets, most notably in the US.

“The stress in EM is confined to problem countries notably those where there is a large current account deficit, large-near term foreign debt to be rolled over, large government deficits, and domestic political instability,” the letter notes. “This recipe is best realised in Turkey. By contrast in much of Asia the situation is not that bad and getting better; e.g. Thailand and Indonesia, where early currency depreciation has seen improvement in trade accounts. (Emerging markets) are not one homogenous block; there is enormous disparity in fundamentals, even within the problem countries, as seen e.g. in current account balances.”

TT International: China is not a ponzi scheme

In regards to China, the letter notes this as a standout.  The economy is stable, the letter optimistically states, and “reform is in the air, the FX reserves are vast. The Hong Kong external trade numbers show that exports to HK from the mainland exceed imports into HK from the mainland, i.e. money is being brought back onshore. This is also visible in the rise in FX reserves, which rose $500bn in H2 2013. If China is a ponzi scheme as many seem to believe, local traders would be trying to get their money out rather than bringing it back in.”

TT International portfolio positioning going forward: Europe “least objectionable” investment destination

TT International notes that the pullback in European markets “has been relatively modest so far and as such we remain cautious near term. (Emerging market) sentiment is likely to remain negative,” the letter said. “However, Europe is probably the least objectionable investment destination,” with the European Central Bank maintaining its “ultra-accommodative” monetary stance and growth having the potential to surprise on the upside, particularly in the periphery.  As such the fund’s positioning is generally unchanged: long Financials to play European domestic recovery, long Healthcare, quality engineers and selective miners; short Consumer Staples and capital goods stocks with EM exposure. Our exposure to European equities is currently 203% gross, with net low: +11%.

The letter goes on to say, “We cut back our long Japanese equity position substantially in January and have similarly reduced our long Chinese equity basket, hedged with FTSE A50 futures. Overall equity exposure is currently 211% gross and +13% net.  In FX we continued to reduce our long USD/JPY in January, all but exiting by the end of the month. We have since cautiously rebuilt as we approached lows around 101. We exited the remainder of our short AUD/USD position.”

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com
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