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He who rides a tiger is afraid to dismount

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This is November letter from a hedge fund that has returned well above 1500% in the past 11 years. From now on, I will in general not be posting names.

Despite the recovery from the 2008/2009 recession and bear market, the global economic scene is, in plain terms, a mess.  It is difficult to keep track of the various geo-political players in this game.  The Euro Zone for example involves the European Monetary Union, the Northern European countries versus their southern and eastern neighbors, the European Central Bank, a variety of rescue agencies and programs, etc.  Europe is currently on the front burner.  Getting anything substantive accomplished in a reasonable time frame appears to be out of the question.  Yet, as its problems worsen with no resolution in sight, Europe could drag the rest of the world down with it into renewed global recession.  China’s economy has been slowing; we believe by significantly more than Chinese policymakers are willing to admit.  The U.S. has recently shown improving economic indicators, although still at extremely poor levels.  However, given the severe ongoing problems in housing, employment, debt levels, governance, etc. we have a hard time believing that the U.S. is on the road to a typical post-war recovery and renewed growth.  The overriding problem remains that the large developed economies, are drowning in debt, much of which cannot be repaid, and they have been incurring even more debt to stave off imminent disaster – basically for want of an acceptable alternative.  These governments continue to postpone making the difficult decisions needed to deal with the current crisis.  Unfortunately, debt levels continue to rise as these delays are extended, setting the stage for an even worse outcome.  While negative on the economic fundamentals, we are sensitive to the possibility that stock and commodities markets would rise, if governments continue monetary stimulus policies.  There is significant risk in positioning for such a rally during a time of economic turmoil – as highlighted by the ancient Chinese proverb:  He who rides a tiger is afraid to dismount.  The past year has been marked for its volatility, with many investors reluctant to ride or dismount.  We continue to implement our strategy with caution, searching for risk/return asymmetry and relying heavily on derivatives.


The portfolio gained 2.28% in November.  Profits came in roughly equal amounts from gold, equity indices and options, currencies, and interest rate swaps.  While we generally avoid short-term trading, the high rate of volatility has presented us with tactical opportunities such as selling some of our gold on price spikes and buying it back on declines.  Also, because of the dangers inherent in these highly volatile markets and because we can generally execute our strategy using limited-risk derivatives, we continue to hold substantial cash reserves.  The portfolio is currently heavily hedged, although still with enough asymmetry to provide a favorable potential gain-to-loss ratio.

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