The Ivory Flagship Master Fund earned a return of 3.64% in the first quarter of 2014, according to the quarterly investor newsletter seen by ValueWalk. The hedge fund launched by Curtis Macnguyen in late 1998 discusses the market environment (and euphoria) in its quarterly letter to shareholders.
The hedge fund gained from its long positions in companies such as American Airlines Group Inc (OTCMKTS:AAMRQ) (NASDAQ:AAL), Actavis plc (NYSE:ACT), Osram Licht AG (ETR:OSR) (FRA:OSR) and Electronic Arts Inc. (NASDAQ:EA), though its short positions made losses on the whole.
According to the letter on April 14, Ivory launched a UCITS fund with Deutsche Bank. Ivory will be the submanager of a sub-fund of DB Platinum, Deutsche Bank’s Asset & Wealth Management According to the hedge fund “The objective of the Ivory UCITS fund will be to replicate the investment strategy of Ivory Optimal Fund as much as possible. As such, Ivory’s UCITS fund will require no additional burden on Ivory’s investment team or process. The UCITS fund will be called DB Platinum Ivory Optimal.”
Ivory Investment methodology
Ivory’s market approach is as follows:
Ivory approaches public market investing by assessing companies on a private market, or fundamental value, basis through a research-intensive, bottom-up approach… Ivory’s investment team develops its own set of expectations based on proprietary research and analysis and contrasts these with consensus expectations to identify investment opportunities created by material misperceptions in the markets. For Ivory, an investment thesis must be quantifiable and data driven, while the pricing dislocation must be expected to correct (or converge to its fundamental value) within a reasonable time frame. Ivory believes this security selection process must be augmented and balanced at the portfolio level by managing exposure to macro and systematic risks. (Emphasis added)
What is Ivory’s view on risk in the markets today?
It is interesting that Ivory views emerging markets as a source of risk. Ivory’s view is based primarily on the likelihood of emerging economies such as Thailand, Turkey, Russia and Brazil entering recessions during 2014 – a contrarian opinion as far as the markets are concerned, which “appear to be pricing in a cyclical recovery.”
According to Ivory, these market expectations may be shattered because some of the emerging economies could face a radical shift in their macro situation because of excessive growth in money supply, over-utilization and inflationary expectations.
Such a transformation would quickly escalate to a full crisis, says Ivory, and “we would expect contagion risk spreading to nearly all risky asset classes globally, with spikes in asset cross correlations including downside risk to highly crowded hedge fund positions.”
Geopolitical flare-up ex. Russia/Ukraine
According to Ivory, equity markets are rather complacent about the potential geopolitical risk from an escalating situation in Ukraine following Russia’s aggressive posture. It is quite possible, warns Ivory, that these geopolitical tensions could trigger a correction in global equities, and potentially US stocks too. Energy prices spike upwards, credit spreads would reach higher and investors could rush for defensive stocks.
Inflation risk – expect the unexpected
A warning bell that is not often heard these days – but Ivory is apprehensive of inflationary pressures rearing their head in the US by 2015.
However, in a break from the past, the Consumer Price Index will attract inflationary pressure from ballooning credit and growth in money supply, instead of a traditional source such as supply constraints in respect of food, commodities or energy, warns Ivory.
Inflation, in this new avatar, may confound the predictive models of investors and analysts. “We think it will be negative for broad equity risk premiums, overall interest rate levels, and certain fixed income proxies such as MLPs, utilities and perhaps REITs,” according to Ivory.
Fed tightening – closer than you think
According to Ivory, the market is pricing in a rate hike by the Fed in mid-2015, but that event may be upon us several months earlier than most people anticipate.
The basis for Ivory’s apprehension is a better macroeconomic performance by the US economy as well as new upward momentum in wage rates.
If this combines with higher inflation, the twin event could catch the market totally unaware, says Ivory’s letter: “if this view is correct, the market often overshoots on its readjustment, which can create quite a bit of downside volatility to the stock market.”