May Review

Performance Review
Despite, or more accurately I should say because of, the turmoil in markets the portfolio performed quite adequately during May.  While the final performance of +0.36% for the month (putting the YTD at 2.9%) is decent, it understates how well the portfolio coped during May.

Unsurprisingly, the weakest parts of the book were those that were long equities.  The Value Equity bucket (-134bps) was the most disappointing of these; THRX remains volatile (giving up all of April’s gains, and more) and the decision to take Earnings-related risk on the initial DRWI proving costly, though the stock’s sharp reaction to the uncertainty provided a good opportunity to add to the name.   The Other Equity bucket (-38bps) and Absolute Value/NCAV bucket (-23bps) both fell with the market, which in the latter’s surprise was ahead of relative expectations.

Given the strength of the sell off and market fears, there  was a continued bid for instruments perceived to be safe resulting in the Treasury Bucket (+188bps) being, by some distance, the largest contributor.  Exposure to Treasuries also benefited the tortoise-like Bond Fund Bucket (+14bps).

While the hedge/put option bucket (+43bps) was a contributor, it did not benefit as fully as one might have expected in part as rumors of a Goldman-SEC settlement helped investors reconsider GS’ “franchise value”.  The short China-related thesis (-18bps), which has been discussed almost the entire year but hadn’t yet been added to the book, finally entered the book near the end of the month.  As such, around 1/3 of its loss stemmed from costs related to its implementation (commissions, bid-ask spread, etc) – it is a bucket that I’ll be looking to add to, if there’s sufficient market strength.

Portfolio
42.8% - Long Treasury Bonds (20.5% TLT and 22.3% in the Aug-29 Bond)
14.3% - Long Bond Funds (6.7% HSTRX, and 7.7% VBIIX)
4.7% - Value Idea Equities (2.9% THRX, and 1.8% DRWI)
3.4% - Absolute Value/NCAV Equities
3.1% - Other Equities (1.6% NWS, 1.5% CMTL, and 0.0% SOAP)

-0.9% (delta-adjusted) - China-Related Thesis (15bps premium in FCX put, 6bips premium in EWA put)
-7.1% (delta-adjusted) - Hedges/Put Options (61bps premium in S&P put, and 100bps premium in a GS put)

30.0% - Cash