Porcupine aims for transparent returns

Angus Murray, managing principal of Castlestone Management, talks to Judith Evans.

Angus Murray founded Castlestone Management in 1996. He was previously the president of Macquarie Bank (USA) and co-head of the international equity department at NatWest Markets USA. He manages the Porcupine Global Macro Plus hedge fund.

Q: Why is this the right moment to bring the Porcupine Global Macro Plus hedge fund to the British retail market, in the form of Porcupine Absolute Return?
A: Retail investors have been horrified at the returns they’ve received in the last 18 months, starting from October 2007. Meanwhile there are two major problems with hedge funds.

One is that people feel that the return they’d expect to get from a hedge fund would be substantially better than the 18-20% loss they’ve received. They’re looking for equity-type returns but they feel much more comfortable where the manager is absolute return focused. In addition, they want to know that the instruments the managers are buying are liquid and clearly valued at market rates and that’s the second problem. A number of hedge funds last year had liquidity problems, causing a lot of anxiety with investors.

With us, all of the instruments that we trade are liquid and market-valued: there is a methodology behind them.

Q: How would you describe the fund?
A: This is a G10 fund: it doesn’t have emerging markets and we avoid high degrees of leverage. Most of the portfolio is in fixed income, equities, currencies and commodities. It’s mostly held in the UK, continental Europe, the United States and Japan, and our major instruments in those markets are all exchange-traded. We don’t have what you might call exotics or instruments that may jeopardise liquidity.

The Global Macro Plus fund has about £67m under management. The new retail fund wraps itself around Global Macro Plus, but it gives a higher degree of disclosure to the
regulators. A lot of asset managers will be doing this: converting unregulated investments into regulated. This is not a Ucits III fund. It’s structured as a mutual fund.

Q: How have you achieved positive returns during the bear market?

A: There is an indifference as to whether we are long or short: it is purely about being able to capture excess returns with a focus on not losing money. In the calendar year 2008, we were able to return in excess of 14% with two losing months. In the previous year, over 8% with three losing months and the year before that, just over 17%.

In the year to date, we’re only up 1%. I could say I’m a disappointed man but we’re not losing money and unless there were pricing differentials or something where I could make an excess profit, I’m happy to be only up 1%.

Q: What have been your main positions over the past year?
A: We were long on the US dollar last year and ended up being long on the US bond market. We had small short positions in equities. We shorted the Nikkei, the Japanese market, because of the strengthening yen. We saw this repatriation of money into the US and Japan, which affected the perceived level of exports into Japan and to a lesser degree, the US. Still, we never expected the US dollar to strengthen quite as much or as quickly. Now, it’s definitely overvalued.

Today, some of those positions are reversed. We aim to be short in the US bond market, while we’re maintaining long equity and commodity positions. The underlying theme for us is long real assets rather than financial assets.

Our maximum is 200% towards equities, 50% towards commodities, 200% towards currencies and 300% in fixed income. But our current positioning is very conservative. We’re long about 10% in commodities and looking to go to a 100% short position in the bond market.

There will certainly be deflation of currencies. We are slightly short the US dollar, about 20%. The major currency position that we have is long sterling, short yen.

Q: What is your outlook for the future?
A: Central banks have been able to stop the destruction that could have happened in October 2008. We could have tipped over into the abyss but you cannot have these massive fiscal stimulus packages without some effect.
Still, humans need time to adjust. People will realise that the yield on cash is not attractive and they will shift towards equities. We’ll know this is starting to come through when people feel comfortable investing in Citigroup, RBS and so on – when they accept that banks themselves have got rid of the unknowns.

The enormous amount of money we’re printing is going to cause a whole lot of inflation. Therefore, real assets such as gold, other commodities and art will outperform financial assets and stocks over the next five to eight years.

Q: Hedge funds have been held partially responsible for the crisis. Is that fair?
A: Absolute return and hedge funds have pretty big negatives attached to them at the moment: [Bernard] Madoff, [Sir Allen] Stanford and Weavering Capital caused big losses of faith. As for hedge funds and the crisis, it’s a complex question, but I feel an increased amount of disclosure and regulation is a good thing.

It’s important to make a fair distinction between hedge funds and banks. Banks had significant amounts of leverage on their proprietary trading books and balance sheets – more than any of us really understood. The amount of leverage that banks allowed hedge funds to have did cause problems: Long-Term Capital Management is a blatant example.

Do I think the hedge funds are to blame for the bankruptcy of Northern Rock? I think that they added to the pressure on the share price but if the managers of Northern Rock had
managed the business correctly, it wouldn’t have mattered whether the hedge funds had shorted it. Hedge funds played a role in overleveraging and deleveraging but I’m not sure
that they were the root cause of the problem.

Q: What financial instruments do you use?
A: We only use futures and forwards. We have a futures contract over the S&P 500 and the Nikkei 225 and over five and 10-year bonds in the US. We’ve bought futures in corn, wheat, nickel, gold, copper, heating oil, natural gas and also futures contracts on currencies: a long sterling, short yen position and we’re short the dollar versus the euro. Those instruments are exchange-traded and valued at every moment of every day, guaranteeing they are not an over-the-counter instrument or derivative, with some sort of model-based pricing.

Q: How much will your fund disclose?
A: Anything. All our positions: anything. Whatever we do is only the expression of our views.