October 2012 Review

*Post updated 12/1, to reflect some inaccuracies in the performance figures of the individual books (the overall performance, exposure information, etc was unchanged).

Portfolio Update
- There were no changes to the portfolio during the month.

Performance Review
The portfolio fell, together with the market, during October losing 1.12%, which leaves the book -1.51% YTD.

The moves in the Treasury book (-1bps) and the Bond/Absolute Return book (+2bps) largely cancelled each other out, as Treasuries widened during the month while other bonds (especially mortgage-related) tightened in October.  The Energy Efficiency (-4bps) and NCAV (-4bps) books posted incremental losses, as they fell with the markets.  The Precious Metals (-23bps) position was a negative contributor.  The Currencies book (-11bps) hurt the portfolio, after the Euro strengthened following continued signs that the politicians and bankers are prepared to support the currency and the member nations that run into fiscal problems.

The Puts/Hedges (-2bps) and China Thesis (-10bps) strategies both suffered in spite of the falling market due to the cost of the time decay outweighing the benefit of the various options being closer to profitability.  While the falling market brought both books closing to being in the money, they remain some way out of the money (20%+) and thus suffer from a rapidly declining probability of being profitable. 

The primary detractor was again the Value Equities (-58bps) book, with the losses from the position in THRX offsetting the much smaller gains in DRWI.  Despite the difficult markets, Dragonwave (DRWI) rose over 10% after announcing its Q2 number during the month and guidance that suggested the integration of the division it recently purchased from Nokia was going well and that the firm was likely to be break-even by its fiscal year-end.   In contrast, Theravance (THRX) fell over 15% during the October, which means that the position has given up the majority of the gains it made since it announced Glaxo taking a larger stake and the positive progress of their key drugs back in June/July.  There has been limited news since then meaning that market fears over the success of these drugs has returned, and this has been compounded by Glaxo’s weak results which means people feel it’s less likely to bid for THRX (in which it owns a 20%+ stake) in the short-medium term.

Portfolio (as at 10/31 - all delta and leverage adjusted, as appropriate) 
19.6% - Bond/Absolute Return Funds (DLTNX and HSTRX)
7.5% - Precious Metals (GLD)
6.0% - Value Idea Equities (THRX, and DRWI)
5.1% - Treasury Bonds (TLT)
2.5% - Energy Efficiency (AXPW, and XIDE)
0.6% - NCAV Equities
0.0% - Other Equities (none)

-0.7% - China-Related Thesis (6bps premium in EWZ Jan-13 puts)
-0.1% - Hedges/Put Options (2bps in IWM Jan-13 puts, 2bps in SPY Jan-13 puts and <1bps jan-13="jan-13" puts="puts" span="span" xly="xly">

-12.1% - Currencies (EUO – Short Euro)

52.7% - Cash

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned (TLT, DLTNX, HSTRX, GLD, THRX, DRWI, AXPW, XIDE, , EWZ puts, IWM puts, SPY puts, XLY puts, and EUO).  He also holds some cash.  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you.