This post was included in the Best of Money Carnival #72 and the Carnival of Wealth #7
Our fascination with global capital markets has a lot to do with the myriad ways involved participants can make money in them. We recently discussed event driven, catalyst focused, special situation investing where we learnt that it is possible to make money without having to guess which direction the economy or the equity markets in general are headed. On the flip side of that coin, there are money managers who focus the greater part of their day analyzing global macro economic and political themes, to profit from their ‘big’ picture view of the world. ‘Global Macro’ is the term assigned to this style of money management. While you don’t necessarily hear the global macro term being used too often in the media, you’ve certainly heard of a few global macro traders, the likes of which include George Soros, Paul Tudor Jones, Jim Rogers. Our next interviewee is one such global macro trader and in the interview below, you’ll hear his views on the U.S. dollar and the Canadian dollar, gold and silver and the macro economic situation in the Eurozone.
Michael Yhip is the President and Chief Investment Officer of Garrison Hill Capital Management
Biography: Michael Yhip is the President and Chief Investment Officer of Garrison Hill Capital Management Inc. He was a former debt and derivative banker employed with Canada’s largest investment banks. He is considered an expert in his field and has worked with Canadian governments, corporations and high net worth investors to provide a range of financial solutions over his career. Michael is a CFA charter holder.
Q: Mr. Yhip, can you talk a little bit about your background and how you got into global macro trading?
A: I was a former debt and derivative banker at a major Canadian investment banks and I had a prominent Canadian family that wanted me to act as their in house CIO and partner in an asset management business. I have always had a deep interest in global markets and the transition made sense and the opportunity was fantastic.
Q: How would you describe your investment approach? Do you trade across multiple sectors, using multiple financial instruments or do you focus on a few sectors, using particular instruments?
A: We are at heart a macro based firm. Our job is to analyze the political, economic and market conditions globally and turn them into investment products and advice. We invest in four main markets: equities, fixed income currencies and commodities on the long and short side. We utilize a variety of instruments such as cash products, futures and OTC derivatives.
Q: How do you approach and control risk and volatility?
A: The key is capital preservation. Otherwise you are essentially gambling. We try to make sensible investments based on risk versus reward. Every product we manage has a different investment profile and expected volatility. You need to manage investments within those parameters. Risk in itself is not a bad thing - active investment is not a riskless endeavor.
Q: Do you use leverage? If yes, how much?
A: People always ask this question but its rather misleading. As an example, we could run a un-leveraged portfolio containing small cap natural gas and energy stocks. The volatility and potential risk of this portfolio could be very extreme (greater than 20% annualized volatility which is a good guide for the major stock averages). We currently manage funds that are considered levered if you simply looked at the asset/equity ratio, however, some of the underlying instruments, such as short duration bonds, require this leverage in order to produce a reasonable return. As an example, our fundamental macro fund has historically had a 6% annualized volatility, despite using leverage.
Q: How do you (and global macro managers in general) identify trends that are worthy of taking positions?
A: We have an overarching theoretical view of the world and various markets. This governs the general investment stance in all our products. We are not ‘trend followers’. We are constantly evaluating economic, political and market events and challenge our views all the time. It might mean we are long one day, and short the next. This applies to every market we invest in. Extensive research and a healthy dose of constant self doubt are essential as a macro manager. Our job is to peer around the corner to see whats coming in the major asset markets.
Q: Why do you believe that retail investors should not be ‘playing’ this market?
A: Prior to the crisis, the ‘rising tide’ in investment returns meant that mistakes where often corrected by the market itself and damage was limited. We are now in an investing environment that is fundamentally different from that of the last 25 years. Even professional money managers are having difficulty understanding the complexity of events. Retail investors are handicapped by the speed at which markets react and other informational asymmetries that exist. You can’t come home and click ‘update’ on your portfolio at 5:30 p.m and hope the arrows are green.
Q: Given that a minimum of 40-50% of the Garrison Hill Multi Strategy LP I is allocated to the Canadian Dollar and interest rates, what is your economic forecast for the loonie and interest rates going forward?
A: Our forecast for 2010 has been pretty much bang on. We predicted the Bank of Canada would raise rates by 100 to 125 bps this year and the Canadian dollar would trade around 5% of parity with the USD for the majority of the year. The Bank of Canada has raised rates 75bps so far with perhaps another 25 bps to come and the Canadian dollar prediction has played out. The next 3 months will determine our view of interest rates in 2011 and we continue to think the Canadian dollar trades in a 5% band of USD parity.
Q: What are your thoughts the US Dollar? Unemployment remains high, the housing situation doesn’t seem to be getting better, M2 rose to a fresh all time record in the week ended September 13/10 and there is political uncertainty heading into the mid term elections in November. How have you positioned your fund to capitalize on this?
A: The US dollar is currently weak but it will remain the safe haven currency during times of crisis. The other advanced nations are not much better (Canada is the exception). Gold will continue to perform well and risk assets such as equities will likely be range bound for a few years. Europe is really not much better. The Fund is positioned for a low growth, volatile market environment through a variety of instruments.
Q: Most recently German manufacturing PMI came at a far wear weaker than expected 55.3 (on expectations of 57.6) and Irish bond spreads have risen recently on the back of news that Ireland is the first country in Europe to officially double dip back into negative growth. Since you also run the European Crisis Fund, what is your outlook on the Euro and the Euro-zone in general?
A: Germany should fare well as exporters seem to be benefit from a weakened Euro and they are extremely competitive. We look for German manufacturers that derive a large portion of revenues from outside the Eurozone to do well. Any consumer discretionary companies that derive a large portion of revenue from Europe will not fare as well. Generally, the ‘core’ countries such as Germany and France will fare much better than the ‘periphery’ countries like Ireland and Greece. This will be the case for many years to come. The strong nations will continue to support the weaker nations until the cost of the social experiment is too high to bear. This will be a long process.
Q: Mr. Yhip, commodities like Gold and Silver have recently been hitting new highs, what do you attribute their strength too – is it simply a seasonal trade or are there fundamental macro reasons for Gold and silver to move higher on a consistent long term basis?
A: The fundamentals for gold and silver have not been better. Japan, the United States, Europe and the UK are all experimenting with quantitative easing and currency manipulation of some sort. In addition, there is a currency war brewing to improve countries terms of trade with each other. Central banks are actively intervening the currency markets and this doesn’t bode well for market stability or confidence in ‘fiat’ money. The trend for precious metals to once again be viewed as a currency (or store of value) will be with us for many years to come.
Q: What is your highest conviction investment/trading idea right now? Why do you like it, what are the risks to your investing thesis and do you have any entry/exit points?
A: Gold producing companies are cheap relative to the commodity itself. Silver will likely hit new highs along with Gold. Emerging markets continue to see the benefit away from low growth, troubled advanced economies.
Thank You, Mr. Yhip!
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