A new wind is blowing

In our November newsletter we talked about Louis Moore Bacon’s sea-change in trading opportunities (see item). Since then, we have seen major renewed investor interest in the Global Macro strategy. A clear indication of this was that ex-Brevan Howard trader Chris Rokos raised $2 billion in a one-off re-opening in January, turning down even more investor demand. We subscribe to the improved outlook for Global Macro, but we think it applies to a much wider group of strategies.

Having visited six of the Legends in New York in January it has become clear to us that the more upbeat sentiment since Trump’s election is shared across strategies. We briefly discuss the viewpoints of the managers we met.

Glenview

With a portfolio of mostly U.S. domestic, defensive names at cheap valuations (13x 2017 PE, 11x 2018 PE) Larry Robbins believes the new pro-business administration will prove to be a real boon to his book. He has increased the net long position of the portfolio and added to stocks that were unjustly punished after the election like US hospital names. The changes helped to gain 5% in January. Including the first week of February Glenview has gained 13.5% since the election in November.

Paulson

After Trump’s election there was a brief relief rally in Paulson’s pharma holdings, but it ended abruptly with Trump’s aggressive tone vis-à-vis drug prices. Still, John Paulson strongly believes that pharmaceutical stocks will stage a rebound this year. He compares the sector to financials in 2011 which were considered uninvestable at the time, but whose share prices have quadrupled since, while being under constant political pressure. Paulson is extremely bullish on the preferred shares of Freddie Mac and Fannie Mae. He expects Treasury Secretary Steve Mnuchin, a close relationship of Paulson’s, to restructure the companies and turn of the dividend sweep, thereby boosting the preferred shares.

VR

Richard Deitz expects that his major current positions (Ukraine, Argentina and Greece) have further room to contribute significantly in 2017, even after driving a strong 2016 (+17%). The one frustration to him is that for now there are no other meaningful opportunities to allocate capital. Distressed debt is indeed the strategy where opportunities seem to be lacking for the moment. Areas Deitz and his team are watching closely are Venezuela, Turkey and certain sectors and countries impacted by Trump’s policies.

Discovery

Rob Citrone has a very clear roadmap which has already paid off post-election. Citrone is an investor that is well versed at the interplay between politics and markets. His level of conviction as to how events will develop across Europe, the US, Japan and emerging markets is currently very high and we expect to see that reflected in the numbers delivered by Discovery in 2017.

Moore

We did a full item on Bacon’s letter in our November newsletter. Visiting Moore in January, it is clear Louis Bacon is especially excited about the trading opportunities in fixed income markets. Opportunities in equity markets will be abound, but more tactically as the policy specifics of the new administration unfold.

Pershing Square

While Ackman had been a vocal Bloomberg supporter, he thinks the fact that the U.S. now has a CEO as President will be good for his holdings. Trump should be good for Pershing’s US domestic businesses, for the likelihood of a Mondelez takeover, and, probably most immediate, for Pershing Square’s equity positions in Freddie Mac and Fannie Mae.

We visited a wide range of other hedge funds outside the ones mentioned here and while the mood on a personal (political) level was generally subdued, we encountered a broad based enthusiasm with regards to the opportunities for active management. The one exception perhaps being US distressed debt managers where opportunities are lacking for the time being.

We finish by mentioning one manager specifically. Dan Loeb’s ThirdPoint is a strong contender for a future spot in Legends Fund. Around the time of our meeting, Mr. Loeb sent a letter to investors with an unambiguous message that he believes Trump makes hedge fund investing great again. The regime shift to fiscal spending according to Loeb will create a very different investing backdrop. Cross-asset class correlations should fall and, even within equities, there will be much greater dispersion of results. Higher rates will create opportunities reversing the one-way trade in yields that dampened the past few years. We agree with his analysis that the move from deflation to inflation is good for their style of investing as it creates favorable conditions for value- and event-driven investing, risk arbitrage and activism. Per Loeb’s words: “This environment is undoubtedly better for active investing – just as active investing was considered to be on its deathbed.”