Today's Return & Mutual Fund Update

If you remember me bemoaning our performance a week ago Monday when the S&P was down 8.8%.... after holding large short exposure and cash for months on end (i.e. cautious), I went pretty much "all in" (70%ish long, 5%ish short) that Monday the House voted (expecting a knee jerk rally). I was wondering then how my normal exposure of the previous 8-9 months would of fared in such a market, since we had changed our position so starkly the previous Friday to the long side and were not able to see the results - we had a terrible day that Monday of course, but judging by today we would of had a heck of a good day versus the markets if we had our normal exposures on.

On another front: I've received many questions about the fund launch of late. #1 Obviously we are in historical (bad) times, so we are holding off the fund launch for myriad reasons, most obvious I assume every investor has taken huge hits like I have. #2 It would be like doing an initial public offering for a stock right now - who would want to invest? No one wants to put money in the stock market. So I need $7Mish one way or the other and even with the original $4M pledged I assume at best that would be $2M nowadays - if people even wanted to bother with the market at all.

So my gameplan for now is to take it quarter by quarter and assess as we go. I'll probably start a new pledge sheet from scratch because (a) I assume many people who used to be around quit this market at some point in utter disgust and (b) my performance of late has not been as outstanding as the first 9-10 months and I realize many people "performance chase" - not that there is much to chase into in this type of market. I do believe the readership continues to grow, so we'll see if the pledges are there at some point at the future. I've literally received 2 pledges in 6 weeks after generally getting 30 a month. So it is just the situation and asking for pledges in this environment is just plain silly. So we'll start from scratch I suppose. I went into this thinking I'd need a 3 year track record to attract pledges, and it looks like, due to market conditions, that's going to be the situation. But the (battered) dream is still alive. Obviously this is the sternest of tests anyone will ever face :)

On the positive side for those who have been around you know I've forecasting economically much of what has happened here - feel free to read it here [Jul 14: Reviewing December 2007's Roadmap & Views], although greed kept us in the game trying to make a buck. So in a span of 6 weeks we've really made a very good record turn into a "still beating peers but not so pretty record anymore". Now if I could only buy futures on my economic calls we'd be swimming in dough ;)

While I think the economy will continue to struggle for quite a while as we have many excesses to ring out in the "real economy" - the market has reached levels I did not anticipate happening for well over a year from now. But in this internet age where everything is computerized - things happen at the speed of light (time is compressed), and the hedge fund liquidations were something I had no idea about - not working in the industry I did not realize the risks and leverage they were employing. But... as we look ahead - this will leave a barren landscape with far less institutional (hedge) and retail investors and less "crazy trading" strategies and hopefully more "investing" - the old fashioned type. What has been lost in the past few months is the market has not been normal in a while - everything has been a huge sector trade, and individual stocks were either "all good" or "all bad" for a long time - going on a year and a half now. That is not normal - individual stock fundamentals will matter again and people will discern between stock A and D in the sector again. Not every stock in the banking sector should go up 15% on a Tuesday and down 15% on a Friday - that's what we've been doing for 15-16 months now. Abnormal. The quicker the market broke down, the quicker that day would come as models that had little to do with fundamental approaches finally turned on each other and effectively is killing their owners. After every excess is a shortage - we've had a excess of "brainiacs" making 2%/20% using leverage up the wazoo. They are being obliterated and we'll probably have a shortage of hedge funds in a year - the best will remain and they should. That will leave a lot of boring mutual funds who cannot use leverage by rule. So at least from that minor silver lining, a more calm and rational market will probably await us much sooner than I thought even 6 months ago - as much more of the damage came in a very short amount of time. So this "Great Cleansing" should set us up for a calm, rational market similar to 2003-2005. And then a new generation of hedge funds, and traders with time frames of 2 days will be back, but hopefully without 75% of the leverage of the "golden era" we just exited.

Obviously something like "this" market won't happen again for 50+ years - so whatever the market brings us in the next few decades, should be a relative "cake walk". So in the long run there is always something positive. Just need to survive the here and now and get to "there".