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From The Man Behind The Paulson ABX Trade, Paolo Pellegrini, Comes The First Investor Letter And A 81% Return YTD

Tyler Durden's picture




 

Unlike other funds, Pellegrini seems to enjoy blockbuster months: making 24% in December 2008 and 67% in January 2009, thanks to a "highly profitable strategy" of shorting "either Treasuries or the S&P but not both." Going short the S&P and long Treasuries at the beginning of 2009 explains the performance. For more on the Galleon neighbor (both have office space at 590 Madison), and Goldman PB client, read the letter below.

 

 

h/t LK

 

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Fri, 11/27/2009 - 17:04 | 144333 Cheeky Bastard
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there was an interesting "portrait" of Pellegrini couple of months ago on Bloomberg.

In short (no pun intended); the man knows his shit ....

Fri, 11/27/2009 - 17:23 | 144355 Daedal
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 has proven his ability to generate alpha through a period of extreme market dislocation

 

Impressive, but wouldn't you call March - Present extreme market dislocation? Dude flat lined after January.

Fri, 11/27/2009 - 17:34 | 144368 Cheeky Bastard
Cheeky Bastard's picture

well no

think about it; whats more "dislocated" the market that is shooting up on a daily basis (nov-mar) or a market that shoots up daily because of all the liquidity (mar-present) ....

Fri, 11/27/2009 - 17:41 | 144380 Daedal
Daedal's picture

I'm not sure I follow, dislocated from what exactly? Liquidity driven rally is dislocated from fundamentals, like the stuff no one cares about anymore.. you know like revenue and earnings.

Fri, 11/27/2009 - 17:46 | 144391 Cheeky Bastard
Cheeky Bastard's picture

yes, all very true, however i wasn't talking about that; yes SPX PE is what; 140-ish and yes overall picture is very bad BUT what you are seeing in equities and commodities (well some of them; gold i.e.) is a prime example of sectoral inflation mixed with currency devaluation on a massive scale, and hence it makes perfect sense for the market to behave as it does; sure if you disregard that little thing this has never made sense (and by that i mean since the 80s(at least)) since the whole thing is built upon massive credit and deteriorating industrial economy. but as i said; to me; this market makes perfect sense; it would be dislocated (IMHO) if there was a case of sectoral inflation, currency devaluation AND market going down 50%+ of the trading session. This, this makes perfect sense.

Fri, 11/27/2009 - 17:50 | 144396 Cheeky Bastard
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4

and nice to see you man

 

Fri, 11/27/2009 - 18:10 | 144413 anynonmous
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-

Fri, 11/27/2009 - 17:57 | 144406 Daedal
Daedal's picture

+1 Gotcha.

Sat, 11/28/2009 - 20:33 | 145062 Anonymous
Anonymous's picture

Yeah, I would be extremely disappointed with the fund's performance between March and June. Absolutely no participation in the rally. I can see not participating after that, on alpha concerns.

Fri, 11/27/2009 - 17:28 | 144362 deadhead
deadhead's picture

TD or anybody: wtf is with the indexes?  i thought spx has closed @ 1091 now i'm getting readings of 1086 on cnbc and 1087 on google...was it the last 3 minutes kaboom?

Fri, 11/27/2009 - 17:30 | 144364 Daedal
Daedal's picture

1086 on CNBC? Never expected them to have a downward bias... 1087 says Bloomberg.

Fri, 11/27/2009 - 17:31 | 144365 lizzy36
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1086.34 is the close.

Fri, 11/27/2009 - 17:34 | 144369 deadhead
deadhead's picture

Thanks Lizzy, I appreciate it!

You will be spared when Bernanke lead forces invade Canada for maple leafs and oil shale reserves.

 

Fri, 11/27/2009 - 17:37 | 144375 lizzy36
lizzy36's picture

thomson/reuters.

good.  how are you?

Fri, 11/27/2009 - 17:41 | 144381 lizzy36
lizzy36's picture

sounds promising. 

u can always re-ZHify o/s of business. marla/mary would be upset if you left her permanently.

Fri, 11/27/2009 - 18:02 | 144411 lizzy36
lizzy36's picture

Yes.

And the person that leaves is never the same one who started down the road. 

Fri, 11/27/2009 - 17:43 | 144382 Daedal
Daedal's picture

? Bloomberg: 1087.27

Fri, 11/27/2009 - 17:46 | 144390 lizzy36
lizzy36's picture

Thomson/reuters now now 1087.27

Mon, 11/30/2009 - 04:05 | 145993 gatopeich
gatopeich's picture

Gosh! it's Monday morning, Euro markets open, and still Google, Yahoo, and every other free site is are sporting S&P at 1091.

So hating the blue-pillers!

Fri, 11/27/2009 - 17:50 | 144395 Anonymous
Anonymous's picture

Thank you for this

-Comfortably Smug

Fri, 11/27/2009 - 18:02 | 144408 Leo Kolivakis
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Pellegrini delivered outstanding results but let's see how he does in the next five years. I have invested with the world's best hedge fund managers and know better than to get excited based on impressive results. Last couple of years was all about beta. He called the directional moves right and made a pile of money. Don't forget, he took a lot of risk to deliver those results.

Despite his setback, I am more impressed with Ken Griffin at Citadel, who lost $8 billion in clients' money last year, but is turning things around as markets recover and has made $5 billion in profits so far this year. I am willing to bet you anything that in the markets we're heading into, Griffin will trounce most of his elite competitors, including Pellegrini and Paulson.

Fri, 11/27/2009 - 18:41 | 144446 Leo Kolivakis
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Yeah, except this violent trading range will make Japan's look like a walk in the park. Going forward, only real alpha generators will survive. The easy money (beta) is over. The wheat will get separated from the chaff in the hedge fund industry and multi-strategy pros like Griffin are better placed to profit from this environment.

Having said this, if you've invested in PSQR, don't redeem all your money, but don't be shy to take some profits and invest it in a market neutral fund. Don't expect him to keep returning these results. That's simply foolish.

Fri, 11/27/2009 - 18:51 | 144454 Leo Kolivakis
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I hope so because it's all about relative value trading in the next 12-24 months. Still, they have to prove they have what it takes to deliver results in this environment. That remains to be seen.

Sat, 11/28/2009 - 10:50 | 144767 pivot
pivot's picture

to be fair, leo, different hedge funds have different ways of implementing opinions.  Sure there may be money to be made in relative value trades, but that is often best done with leverage, which isnt as cheap as it has been in the past.  Plus you get weird market action where no-brainer trades (the citi preferred arb trade) take too long to happen and you get killed on the borrow.  I can't tell you how many funds came through our office touting that trade, only to have it be a loser.  I actually think PSQR performance is outstanding and not at all "beta" driven.  had it been beta driven they would have had a great Q1 09 and then gotten crushed, yet they were flat. 

Sat, 11/28/2009 - 13:54 | 144859 Leo Kolivakis
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pivot,

Good point on leverage not being cheap, but on the beta, let me explain something. Just because he reversed course and then went long in Q2 2009, it doesn't make him a genius. It makes him a good (or lucky) market timer.

When I say the big beta moves are done, I mean corporate bonds, emerging market bonds, stocks, commodities, commodity currencies, the weak USD have all had significant trends. Going forward, it will be hard for Pellegrini or any other elite hedge fund manager to repeat the performance of 2009.

One thing I do like about Pellegrini is that he isn't afraid to play the stock market (S&P futures). I used to allocate to global macro funds and they were primarily focused on bonds or currencies, but very few of them were willing to trade stock futures on indices, sectors or individual stocks. And even fewer were trading commodities in their portfolio.

I never understood why this is was the case, it was enigma to me. I guess most global macro guys come from fixed income or currency backgrounds.

Sat, 11/28/2009 - 03:28 | 144676 Unscarred
Unscarred's picture

For my knowledge, all that Griffin did was re-leverage his positions that he LOST 55% ON the year before, rode them as far as he could, then finally lifted the gates to his investors.

Sure he recalibrated his portfolio to remove a number of illiquid positions that he would typically hold, but after going down 50+, you gotta more than double to get back to even.  Even then, you're still only flat.

Personally, I don't find it attractive to hold money at a hedge fund firm whose primary focus is on becoming a full-service investment bank.  Given various personnel acquisitions/partnerships that Citadel pursued to develop their merchant banking group, it's no wonder that Ken fell asleep at the wheel instead of performing due diligence on a potentially cataclysmic liquidity crunch scenario.

Similar strategy employed by Bill Miller over at Legg Mason (minus the i-bank group and investors' gates).

http://www.fool.com/investing/general/2009/10/28/bill-miller-thinks-outs...

Interesting to see that Bill's unloaded the financials that dragged him down huge in '08.

Sat, 11/28/2009 - 17:24 | 144966 _Biggs_
_Biggs_'s picture

How can you be impressed with Ken Griffin?  After all the stuff that has been said here, I find it hard to believe that stealing from people using HFT is impressive.  His gross manipulation of etrade, which by the way has contributed greatly to his "performance, is arguably criminal.  He is no better or no worse than the traders at GS.  Yup...impressive.

Fri, 11/27/2009 - 19:05 | 144459 Assetman
Assetman's picture

The impressive thing may not be the 80 percent return (since he did it on extreme volatility), but the ability to maintain it after March.

Pelligrini appears to me more than one hit wonder material... pretty savvy about finding and capturing imbalances.

Fri, 11/27/2009 - 19:16 | 144467 Leo Kolivakis
Leo Kolivakis's picture

"The impressive thing may not be the 80 percent return (since he did it on extreme volatility), but the ability to maintain it after March."

What's so impressive about that? I know many pension fund managers that were long investment grade corporate bonds at the beginning of the year and coasted through the year. After they made the big money, none of them took big risks going into year-end. The same goes for hedge funds that were leveraged and were able to add juice to their results. Nothing particularly impressive about that. Most of the top hedge funds made a killing last year.

 

Fri, 11/27/2009 - 19:53 | 144489 Assetman
Assetman's picture

Here Leo... I'll make this simple for you.

The guy made-- and kept-- an 80 percent ABSOLUTE return on a global macro strategy.  Then, after January, he beat a "risk free" absolute return after deciding to remain beta neutral before jumping on the next major imbalance.

He could have gotten a bit greedy, I guess, and went all in for a liquidity driven risk trade.  Jumping on that liquidity driven junk rally was the easy thing to do-- even I was dumb enough to go beta heavy in March.

I guess "top" hedge funds become "top" after the fact in your eyes, because there were many hedge funds that had really bad years-- especially the fundamentally driven ones.

But go ahead and don't be impressed with someone that hasn't only had a good 2009, but has hit the nail on the head pretty consistently before that.  I'm sure John Paulson wishes he was still hanging around...

Fri, 11/27/2009 - 21:16 | 144535 Leo Kolivakis
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Assetman,

There is no doubt in my mind that Pellegrini played the spread trades and timed them well. I am not taking anything away from Pellegrini who not only returned 80% but killed his global macro competitors, who according to Barclay's hedge fund indexes, are up 6% YTD as of October.

But you have to be very careful in interpreting his results and extrapolating them into the future. He may be the next Soros or even better, but that remains to be seen in the next five years, not based on his performance of the last two years. That is all I am saying. Same goes for Paulson.

People think hedge fund managers are gods. They aren't. In fact, the majority are a closet indexers who charge 2 & 20 for leveraged beta. Very few managers can consistently deliver alpha in up, down and sideway markets. That type of alpha is worth paying for and you will typically find it in the top multi-strategy funds who can deliver the highest risk-adjusted returns under all market conditions.

Finally, I think this monthly letter was very well written and should be read by all. Even though I do not agree with everything in his investment outlook, this is an excellent commentary.

Fri, 11/27/2009 - 22:29 | 144562 Anonymous
Anonymous's picture

The real question is how bad does he get hit when his trade goes against him. Clearly he nailed a couple of trades and then essentially got out of the market for the remainder of the year. If you can put together an 80% return in two months you are going all in. How many times in a row do you go all in before you hit a bust. If you are taking that much risk one bad trade could easily wipe out the entire fund. With that much leverage he is playing with fire. Smart guy no doubt.

Fri, 11/27/2009 - 22:54 | 144569 Assetman
Assetman's picture

Agree or disagree... Pelligrini has been very, very good at finding the larest macro imbalances out there and exploiting the ever loving hell out of them. When he doesn't see them he doesn't get involved, playing it appears small arb opportunities. Pretty smart stuff.

You are certainly on the mark about relying on long term performance and the dangers of extrapolation. There will come a time when these macro imbalances won't be as great and the returns to be extracted will pale in comparison to other strategies. And there's always the possiblity of just plain goofing up (as I've been on that humbling side myself). Given the imbalances I see in the macro world these days, Pelligrini still can have his day in the sun for a while longer.

This current newsletter is about as good as it gets... and I for one think he is in the right neighborhood on identifying the one or two major imbalances out there. It will certainly be something if he's on the mark again.

Sat, 11/28/2009 - 03:57 | 144684 Unscarred
Unscarred's picture

Book review:  "The Greatest Trade Ever"

http://online.wsj.com/article/SB1000142405274870357460457449974084917944...

By early 2006 the 49-year-old Mr. Paulson had reached his twilight years in accelerated Wall Street-career time. He had been eclipsed by a group of investors who had amassed huge fortunes in a few years. It was the fourth year of a spectacular surge in housing prices, the likes of which the nation never had seen. Everyone seemed to be making money hand over fist. Everyone but John Paulson.

 

"This is crazy," Mr. Paulson said to Paolo Pellegrini, one of his analysts.

 

Mr. Pellegrini felt his own pressures. A year earlier, the stylish native of Italy had called Mr. Paulson looking for a job after a career of disappointments. Paulson & Co. likely was his last stop on Wall Street.

Excerpt:

http://online.wsj.com/article/SB1000142405274870357460457449974084917944...

People credit Paulson for identifying the housing bubble, and Pelligrini expertly identifying how to play it.  I'll be interested in your thoughts after you read the book.

...And I agree with you, it IS pretty smart to exploit the hell out of the macro imbalances, then stay on the sidelines while playing small arb ops (as opposed to needlessly giving away his winnings) while he waits for his next big trade!

Sat, 11/28/2009 - 23:17 | 145170 Assetman
Assetman's picture

Thanks, Unscarred... I'm looking very forward to reading this book.

People don't realize the extent to which Paulson employed hedges on some of these bets...  these were far from being all in plays-- they just had "all-in" type payouts.  Big difference.  From what I've read, it appears that Pelligrini is employing a similar approach.  These are clearly not market neutral-type hedges (sort of defeats the global macro HF mandate) but there are some clever "if then else" bets deployed.  You sort of pick up this type of thinking from Pelligrini in this article.

Or perhaps it's something I'm smoking...

Sat, 11/28/2009 - 00:39 | 144624 pooplagrande
pooplagrande's picture

What is the best route to short MBS?

Sat, 11/28/2009 - 01:58 | 144656 slore
slore's picture

hop in your time machine and set it to 2006

Sat, 11/28/2009 - 03:05 | 144672 Grand Supercycle
Grand Supercycle's picture

 

More people should study trends.

I started to warn people in early 2007 and called the (temp) bottom this year.

http://www.zerohedge.com/forum/market-outlook-0

 

Sat, 11/28/2009 - 18:59 | 145005 gatopeich
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Sure, but are you human?

-- It's your birthday. Someone gives you a calfskin wallet...

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