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Polygon Investment Management: Market Commentary
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October 2017

As we head towards the end of the year, Polygon’s portfolios are up 10-15% year to date—depending on the client’s risk aversion—despite a conservative orientation. Our current asset allocation model is approximately 65% equities, of which half is in the U.S.; the remainder (35%) is roughly 50% short-term bonds and 50% alternatives. We believe that continued caution is warranted, given high stock market valuations (particularly in the U.S.), coupled with heightened geopolitical risk.

Having recently spent several days in Washington I thought it might be of interest to report on a flurry of meetings which we participated in. These included the annual International Monetary Fund gatherings, as well as a series of roundtable discussions sponsored by the Bretton Woods Committee. Speakers included Central Bank Governors from France and Sweden, Mohamed El-Erian, Chief Economic Advisor for Allianz, as well as senior officials from the World Bank and the IMF.

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March 2017

Now that the dust is beginning to settle from the results of the U.S. election, I thought it would be a propitious time to take a step back and review the recent past, as well as to take a look ahead. 2016 marked the fourth consecutive year during which U.S. equities out performed the rest of the world. With the dollar appreciating to near record levels against other currencies, and Europe continuing to struggle, these trends were a headwind for internationally diversified investors such as ourselves. Of course, the corollary is that U.S. assets have become increasingly expensive compared to the rest of the world, which suggests that, going forward, there will be ample opportunities for globally oriented investors.

In our core strategy, Global Growth, results for the year were in the 5%-7% range, comfortably outstripping the return of our benchmark (70% global Stocks 30% U.S. bonds), though we lagged the U.S. equity market. As noted above, this was primarily due to our global diversification, which itself is risk averse, but also partly due to our conservatism across asset classes. While I make no apologies for the latter, with hindsight we could perhaps have been more U.S.-centric as regards the former.

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July 2016

I participated in the annual meeting of the Bretton Woods Committee last week in Washington (for those not familiar with it, the group defines itself as: "a non partisan network of prominent global citizens which works to establish the value of international economic cooperation"). In other words, the antithesis of the views which Mr Trump, Marine Le Pen, etc, are espousing. Among the attendees were Secretary of the Treasury Jacob Lew, US Trade Representative Michael Froman, and senior officials from the World Bank and the International Monetary Fund. As the discussion took place in the immediate aftermath of the Brexit vote I thought it might be worth sharing some of my thoughts and observations.

I came away impressed by Froman, less so by Lew. Lew's most interesting comments focused on China which he believes understands the needs and the challenges required to restructure their economy, but is concerned that they may not have the political will to overcome them. He characterized their economy as having lots of private sector borrowings, but little public debt. Like others, he emphasized the importance and benefits of global cooperation, especially in the context of the headwinds created by Brexit, but was short on specific policy recommendations.

Froman, was more political, clearly trying to sell the Trans-Pacific Partnership (TPP). He cited the potential benefits of the pact to the American consumer, saying it would provide a savings of approximately $700 per family, and noted that current US tariffs average only 1.5%. He also touted the benefits of international trade to the US economy, making the point that export related jobs pay 18% more, and cited automation as being more of a threat to job growth than free trade. Not surprisingly, he warned against the evils of protectionism, blaming it for having been one of the causes of the Great Depression. Finally, he feels that if the US fails to take the lead in tariff reduction and trade agreements, the Chinese will fill the void.

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June 2015

Like many others, I am trying to absorb and process yesterday's decision by British voters to leave the EU. While the story will continue to unfold over the next several years, it is not too early to be thinking about the current implications. While it certainly came as a surprise, for anyone who has lived in England, as I did for 15 years, it was not a complete shock. While they may have benefited from economic integration, at the end of the day the country remains an island and therefore is insular by definition-- when Brits talk about Europe they are talking about a foreign country not themselves.

To briefly summarize our views, I think it is useful to categorize the effects of the British withdrawal both chronologically and by area of impact.

In the short term, it is clear that financial markets are going to be volatile and likely marked by falling equity prices. We have already seen multi percentage point declines in stock prices around the world, with Europe and the UK being particularly hard hit, though for the time being, the US has not suffered as much, which makes good sense as we are not as directly impacted. Overall, these declines are not a huge surprise, as markets had been expecting the measure to fail, and had actually gone up several percentage points last week in anticipation of a remain vote. As we all know, markets hate uncertainty and this is certainly terra incognito. However, these kind of knee jerk declines are often short term in nature and can quickly reverse themselves. As I write this, Japan, which at one point was down the most of any major market, is showing a 3% bounce in its futures.

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February 2016

2015 was a roller coaster year for investors, with most markets and asset classes around the world ending the year in negative territory. The primary exception was U.S. growth stocks, where a handful of businesses, the so-called FANG companies (Facebook, Amazon, Netflix, and Google) accounted for 55% of the stock market's meager return (the S&P 500 increased 1.2%, the Dow lost 2.2%). Partly because of this phenomenon, in the U.S. value stocks were down over 9% during the course of the year against their growth oriented brethren, while in Europe the gap was an unprecedented 13%.

For dollar-based investors, international equity returns were also uninspired, as the Morgan Stanley all country Index (MSCI ACWI) was down 4.3%, European stocks fell by 6%, and emerging markets declined by a whopping 17%. Japan was the one bright spot among major stock markets, increasing 7.8% in dollar terms. The strength of the dollar contributed substantially to some of these falls, as it gained an average of 12% against its main trading partners. As a result, dollar based investors lost money even while some non-U.S. markets were rising. Diversification across asset classes was also of limited usefulness, as commodities (down 25%, led by oil), MLPs (down 16%), and global bonds (down 3.2%) all fell. In the alternative space, hedge fund strategies slumped, with both long short and multi-strategy managers showing declines.

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