October Review

Performance Review
October proved another strong month for equities as the economic data continued to point towards lackluster (but positive) growth and there were further signs that the FED will launch a second quantitative easing program (QE2) in early November.  Unlike September, the portfolio was unable to perform positively spending the majority of the month fighting to stay around flat before succumbing in the final week, ending the month down 1.65% (putting the YTD at +6.9%).

The Treasury Bonds bucket drove the negative performance during the month (-156bps) as the long-end of the curve suffered throughout the month as a result of the various discussions on both the size of QE2 (ranging from $100bn/month for a number of months, to a shock-and-awe $1trn+ in the short-term) and where it would be focused (with consensus being that it would likely not be heavily in long-end Treasuries).  Furthermore bonds all suffered from proclamations of an end to “bull market in bonds” but various market participants, most notably by Bill Gross (though it should be noted that he also proclaimed a bear market in bonds in mid-2007).  Unlike the Treasury bucket, the Bond Funds (+8bps) managed a small positive gain, in part due to their exposure to shorter duration instruments.

In contrast the fund’s equity positions again benefited from the rise in the markets.  The Value Equity bucket (+37bps) was the primary contributor, on the basis of a strong performance from DRWI following decent guidance from management.  The Other Equities bucket (+28bps) and the NCAV bucket (+1bp) also helped performance during the month.  Against these profitable Long positions, the Hedges/Put options (-75bps) and the China-Related thesis (-<1bp) were negative contributors.  The newly-started Currency bucket also posted a small loss during the month (-7bps) 

Portfolio
43.0% - Long Treasury Bonds (20.5% TLT and 22.5% in the Aug-29 Bond)
14.7% - Long Bond Funds (6.8% HSTRX, and 7.9% VBIIX)
6.8% - Value Idea Equities (4.5% THRX, and 2.4% DRWI)
4.4% - NCAV Equities
3.1% - Other Equities (1.6% NWS, 1.6% CMTL, and 0.0% SOAP)

-0.0% (delta-adjusted) - China-Related Thesis (<1bp premium in FCX put)
-3.9% (delta-adjusted) - Hedges/Put Options (6bps premium in S&P 2010 puts, 68bps premium in S&P 2011 puts and 5bps premium in a GS put)

5.5% (leverage-adjusted) – Currencies (EUO, Ultrashort Euro, 2.76%)

24.4% - Cash