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Published by: zerohedge on Mar 25, 2010
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This document is being issued by Eclectica Asset Management LLP (“EAM”), which is authorised and regulated by the Financial S
ervices Authority. The information contained in this document relates to the promotion
of shares in one or more collective investment schemes managed by EAM (the “Funds”). The promotion of the Funds and the distr
ibution of this document in the United Kingdom are restricted by law. This document isbeing issued by EAM to and/or is directed at persons of a kind to whom the Funds may lawfully be promoted. No recipient of this document may distribute it to any other person. No representation, warranty orundertaking, express or implied, is given as to the accuracy or completeness of, and no liability is accepted for, the information or opinions contained in this document by any of EAM, any of the funds managed byEAM or their respective directors. This does not exclude or restrict any duty or liability that EAM has to its customers under the UK regulatory system. This document does not constitute or form part of any offer toissue or sell, or any solicitation of any offer to subscribe or purchase, any securities mentioned herein nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contracttherefore. Recipients of this document who intend to apply for securities are reminded that any such application may be made solely on the basis of the information and opinions contained in the relevant prospectuswhich may be different from the information and opinions contained in this document. The value of all investments and the income derived therefrom can decrease as well as increase. This may be partly due toexchange rate fluctuations in investments that have an exposure to currencies other than the base currency of the relevant fund. Past performance is not a guide to future performance. All charts are sourced fromEclectica Asset Management LLP. Registration no. OC312442; registered office 6 Salem Road, London W2 4BU © 2010 Eclectica Asset Management LLP
CFEclectica Absolute Macro Fund
February flittered with risk aversion as equity markets fell and concernsgrew over the prospects for European economic recovery. This provedto be short lived and the Fund returned a profit of 0.4% in Sterling, toput it up 1.6% year to date.
The equity book contributed 67 bps to overall performance with strongreturns made from the high yielding tobacco names. British AmericanTobacco and Philip Morris International both saw their share priceappreciate over 7% for the month. A new 5% of NAV holding in AnnalyCapital Management (see stock insight below) proved timely as thestock rallied into the month end, contributing a further 19 bps toperformance.The Fund made a profit of 18 bps from its currency positions in Februaryas the US dollar held on to gains made early in the month and Sterlingweakened. We closed out the long Euro/short Sterling position, lockingin 6 bps of profit, and the long US dollar/short Sterling position yielded12 bps. The Fund added to its long US dollar exposure over the monthwith a 2% position taken against the Australian dollar and a 2.5%position against the Korean won. In addition, a 20% of NAV longEuro/short Estonian kroon has been initiated; this is currently a peggedexchange rate.Elsewhere in the portfolio the Fund lost 16 bps in fixed income andmade 9 bps from its holding in corn.Going into March the Fund is 19.5% net long equity, 10% of NAV longthe 30yr German bund, 9% long corporate bonds and 1.5% long a cornETF. The Fund has 40% of NAV in currency exposure, three quarters of which is in pegged exchange rates which have imperceptible dailymoves.
Stock Insight: Annaly Capital Management
Annaly is a mortgage REIT. It buys government guaranteed agencymortgages and it does so with leverage. Its borrowing costs are largelydependant on where the Fed sets interest rates. At year end it earned4.8% on its assets and paid 2.8% on its liabilities. With the benefit of leverage it managed to achieve a 22% return on equity last year andcurrently has a dividend yield of 17%. The present environment withrates on the floor is as near as perfect can get for Annaly; we expect thisrate environment to continue for the foreseeable future.
A 17% yield sounds too good to be true. What’s the catch?
There aretwo main risks. By borrowing short and lending long (at year end theaverage duration of their assets was 1 year) there is a risk that the Fedaggressively raises interest rates and as a result the yield curve flattens.This would quickly raise the financing costs for Annaly and narrow theprofit spread between what they pay on their borrowing versus whatthey receive from their book of agency mortgages.The second risk would be a surge in mortgage refinancing, which againcould narrow interest margins and hit earnings. However, with houseprices having fallen in recent years, it is harder for many households toget financing by remortgaging their homes as the equity in the typicalhouse has shrunk. This has helped to keep pre-payment speeds at asteady pace and allowed earnings to remain elevated.
1 month 3 months since launch0.4 n/a 1.6
31 Dec 0914 Jan 1028 Jan 1011 Feb 1025 Feb 10
 NAV £p
¢A shares 137.91 90.63 101.51C shares 137.93 91.31 101.51AUM £6.2m
Long EUR / short EEK Currency 21.8Long EUR / short LVL Currency 14.5German 30-yea
r gov’t bond
Fixed income 10.3Annaly Capital Management Equity 5.1Long USD / short KRW Currency 2.7Long USD / short ZAR Currency 2.4Long USD / short AUD Currency 2.1Long USD / short GBP Currency 2.1MetroPCS Wireless 9.25% 2014 Fixed income 2.1British American Tobacco Equity 1.6
currenciesfixed incomenet equitycashcommodities
Launched 31 December 2009Fund managers Hugh Hendry & Espen BaardsenIMA sector absolute returnTarget return annualised 10% on arolling 3-year basis
Portfolio data as at 26 February 2010. Source: Eclectica Asset Management.

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