Wrong Only

The liquidity crisis is over while the credit crisis is still ongoing.
How to make money and to protect capital in this environment remains
to be the question. Dominant forces (partly working against each other)
are de-leveraging, saving and high demand for cash, re-deployment of cash
into equities and risk markets, artificial economic stimulus effects,
inventory liquidation, decreasing earnings due to economic weakness and
and lower leverage.

Long only managers have in particular been challenged, given that most
of them went fully exposed into the downturn. And ironically they had
such large exposure even without the direct application of leverage to
their portfolios. However, since equity is a leveraged asset class per se
(especially when it comes to finanicals) their losses were very competitive
compared to other strategies. Changing risk appetite helped some of them to
partly miss out the upside of the quick bounce. Now a lot have re-deployed
cash which was sitting on the sidelines to chase performance even when
there is very weak fundamental support to the harsh up-move.

How much sense does the long only approach make going forward and how much
faith will investors have? In my view it makes more sense to apply a more
flexible approach. Historical perceptions based on historical data should
give way to a more opportunistic and selective approach. Shortened time
horizons with a focus on price discrepancies and taking money off the table,
when asset getting close to being rich. The use of shorting, hedging, leverage,
and using derivatives all seem to make perfect sense to me.