Paolo Pellegrini, John Paulson’s famous sidekick who helped figure out the great housing bet, has released his first shareholder letter since striking out on his own. Not surprisingly, he’s doing awesome, with a 175% gain since inception. (via Zero Hedge)
And like many managers these days, he hates the dollar, and likes commodities.
All of the above recommends shorting US MBS and the US dollar – we can’t predict which will
go down, or which will go down more, but in combination we believe they will go down a lot.
Buying commodities and commodity-related currency is one way of shorting the US dollar. It is
highly probable that commodities outperform other asset classes in the medium term, as demand
from emerging markets bumps against still-constrained supply.
With China a lead actor in this play, investors like us must either divine Chinese policy or find a
strategy that is relatively invariant to it, at least over time. We attempt the latter. If China uses
dollars to buy US goods, US inflation goes up and MBS go down. If China uses dollars to buy
other currencies, MBS – in dollars – may not do as badly, but the US dollar will collapse.
The critical implementation issues, aside from the choice of instruments and trade execution, are
(1) the respective weights of the two legs of this strategy (short MBS, long commodities) and (2)
leverage/financing – we don’t want to be “stopped-out” of a winning trade on a temporary
reversal. Robust structuring of counterparty trading relationships and individual transactions
contributed significantly to our investment results in the past. High returns imply the possibility
of large temporary reversals, which dealers may exploit to curtail losing positions against poorly
prepared counterparties. We intend to be as diligent and creative as ever in ensuring that we
capture the full benefit of our investment insights through skillful implementation.
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