The H Fund (USD) gained 1.76% in December bringing the YTD return to 16.97%.
Four of our seven themes were profitable in December. Two were neutral in their impact and one was negative. The first three of these themes generated the bulk of the 2009 return. The remaining three themes had a negligible net impact during 2009.
After a sickening decline in 2008, Credit markets staged a spectacular recovery in 2009. The Merrill Lynch US High Yield index had a spread of 1812 bps in January and ended December at 639 bps, a move of 65% while the Barclays Investment Grade Index tightened 69%. Spreads moved down 126 bps in High Yield in December and 34 bps in Investment Grade. Our Credit Spreads in Transition theme topped the results for the month and for the year, producing half of the Funds 2009 return from a 30% average weighting. The prospects for Credit remain strong in 2010. We have developed a new vehicle, the Long Term Alpha Fund, which will focus initially on this sphere and have swapped holdings accounting for 4.6% of the H portfolio into it. This will give H a broader exposure to managers who can capture opportunities arising from stressed and distressed credit as the default cycle peaks.
All four managers in the Asian Consumer Power theme made money in December. In the year, the theme contributed a third of the overall return. All our managers latched on to improving fundamentals as 2009 unfolded. All are well placed to capitalise on the prospect of the region continuing to grow at a faster pace than the rest of the world, even if this growth path demonstrates some volatility.
Relative Sovereign Opportunities contributed a fifth of the annual return of the fund. In December, it made money despite divergent manager returns. The best of them read the background trends and their short term impact with great dexterity. Shorts in Sovereign European credit, as did longs in Asian currencies and a short in the US$, which he lifted prior to the yearend $ rally. In common with his peers, his 2010 agenda is to track differences in the timing and impact of the withdrawal of stimulus and in the emergence of growth. Mature Industrial economies are following a different trajectory from EM, but there are big differences within regions as well. The theme looks to us like a very exciting prospect.
Japan Corporate Event Opportunities was the fourth contributor to December’s positive return. The theme has been radically simplified. It now contains a manager whose approach is to position his fund so as to take advantage of short term anomalies in Japanese equities. This worked well in the month. We also have a residual exposure to a warrant Fund, a useful barometer of equity sentiment.
The Financial Sector Dislocation theme lost money in the month. Since the spring, the sector has seen an impressive bounce in valuation terms. Yet, in the US especially, the fundamental credit picture remain dire for a large number of midsized Banks. If broad economic recovery takes longer than markets anticipate, a cautious view on the financial sector offers some defence.