Australian Government Bond Yields – Pretty Quiet…and other thoughts

I haven’t posted too often this year and the above chart pretty much shows why. This year, there hasn’t been too much change a not a great deal of interesting things to write about. Despite natural disasters, minority government, middle east issues, record food prices and climbing oil prices, our bond yields have been relatively stable and ‘normal’ looking.

Even the short part of the curve has been relatively stable this year as the market has pretty much agreed that the Reserve Bank is more likley to keep rates steady until at least the latter half of this year. This ‘normal’ looking chart suggests the continued strength in the Australian economy and despite very high food and energy prices, inflation is not of major concern at this point in time.

Risks to our economy continue to revolve around our reliance on strength of China’s economic growth and our property prices holding up. The Euro-sovereign crisis appears to have been forgotten by the newspapers but Portugal is looking like following in Greece and Ireland’s footsteps and will probably require a bailout some time this year as their yields continue at record highs with 10 year bond yields around 7.5% (many economists believe 7% yields are unsustainable borrowig costs for the Portuguese). Markets continue to be complacent about the Euro-Sovereign issue as its banking system is far from strong and is incredibly weak.

Anyway, aside from going long the Renmimbi, I believe the best trade for the year will be going long the VIX when it gets towards mid-teens as there is little doubt that, just like the last couple of weeks, as soon as it gets there some market shock will result in the VIX moving up 30% or more for a nice little gain. Volatility strategies are a must for any multi-strategy fund or portfolio.

My Least Favourite Hedge Funds

I’m always being approached by fund managers pitching their latest or greatest fund and many of them appear quite good with impressive people, performance, and/or process. Every now and then I see a fund that to me makes little sense and the latest to annoy me is the generic Asian Fund of Hedge Fund…I haven’t named the actual manager as there is quite a few managers doing them.

My reason behind my dislike goes like this…these funds are selling two attributes…1) they are focused on Asia and it’s expected strong economic growth which is expected to generate strong returns, and 2) the absolute return focus of the underlying funds and therefore their combination. I view the combination of these attributes as a little contradictory.

If I want an absolute return focused fund of hedge fund, I do not want to restrict my selection to one region. If there is a skillful manager based or investing in Ireland or Greece or US with a successful absolute return focus why should my fund ignore that potential?

Having a geographic focus is a beta (market) play whilst hedge funds are an alpha (skill) play…they shouldn’t be used to confuse or for marketing purposes just because naive investors will fall for it. If you are a fund of hedge fund keep it local for tax reasons or go global to increase your opportunity set. If you want to invest in a region, you are typically wanting to do so because you believe markets are going to go up… so do yourself a favour and buy a cheap index fund or long only managed fund that is region focused and save yourself some fees and increased risk.

Combining the two actually increases your risks of not achieving your desired outcome which can be achieved more efficiently with a global fund of hedge fund and a long only Asian fund combined to provide an acceptable level of risk.