Absolute Invest AG : Letter to Shareholders

Dear Shareholders
Over the last five years the strategy of ABSI was to position the investments correctly in 3 major investment/market events: emerging markets prior to 2007/8, the subprime debacle in 2008 and subsequently the reflation trades in 2009. Our performance was further helped by the consequent share buy back strategy so that all together, we were able to achieve a very attractive investment result in absolute numbers as well as when compared against the hedge fund of funds index (HFRI).
Looking ahead over the next three years, our main challenge is as always: how are we going to continue to make money for our shareholders? We are deeply troubled by the way the 2008/09 crisis has been dealt with. The unlimited help to the financial sector without addressing the moral hazard question correctly (or at all) has already led to the next crisis - this time in the form of forced deleveraging and a sovereign debt crisis. Unfortunately, we believe the structure of financial system which has operated since the Second World War will have to be fundamentally rethought and adjusted to a new reality. This will be a process lasting many years, forcing a very painful adjustment in many areas but especially in the financial sector. The straight line of globalization, Anglo Saxon capitalism, deregulation / self regulation and new ways to create more and more leverage has come to end. In addition, the developed world will have to deal with too much debt and too little growth and the emerging countries each facing separate internal issues. However, in the case of the latter, the size of the population and their huge economic upward potential is an extremely positive development which should not be underestimated. One major aspect resulting from the policy responses which concerns us is the notion of preserving value in a world of 'debasing' of fiat currencies where more and more pressure is falling on central banks to pursue non-conventional approaches to support or rescue the financial system.
This leads us to the key questions: Where are the opportunities going forward; how do we keep our portfolio balanced; how to find the appropriate hedges at a time where many things are not quite the way they used to be; how do we counter the volatility of returns?
We believe that there are three areas where we should focus our investments: 1) Invest in regions where there is still a potential for above average growth 2) Capture opportunities arising from structural adjustments in markets/regions 3) Being early when new investment themes arise exhibiting likely lower volatility and steady returns.
Our increasing exposure to especially Asian investment managers has been the pre-dominant way of reflecting part of these investment themes. We will continue to add funds being exposed to the Asian consumer story and relative value managers based in Asia. We have already added Tahan, Raintree and Dymon in the second half of this year. We believe they are the new generation of hedge fund managers in Asia.
For years we have had very little exposure to equity long/short. We see few reasons to change our stance. The volatility and the regulatory 'interference' in the equity markets are likely to make it very difficult for short term equity investors to maintain a profitable long/short book. As such, we see better chances for investment managers in the fixed income space where understanding the central bankers and correctly analysing the capital structures of the different situations should be very profitable going forward, creating less volatile but stable returns. Our exposure to CQS, Ravenscourt and Tahan are based on this belief and we will continue to look out for these types of managers.
Maybe our largest challenge is to find smart global macro hedge strategies. We believe precious metals equity should help us in a financial system break down or a massive quantitative easing scenario; this is reflected in our large exposure to Tocqueville and Paulson Gold Fund. The only negative being that this is a consensus view consequently the benefits are painfully slow to come and the short term corrections down are viciously abrupt. Our illiquid positions in Yorkville, Valens and Cheyne New Europe Fund are all benefiting from a stable and ideally growing world economy. Up until recently, we offset this long beta exposure with allocations to some CTA managers. The incredible volatile short term movements in the financial markets the last few months and the continuous interference of the regulators in the markets have led us to redeem our investments from the CTA's who have found it difficult to cope. We are looking to find long volatility managers away from the managed futures strategies such as Lava Vulpes in Singapore.
As challenging as the financial environment may be, we feel confident that our portfolio is correctly positioned and more importantly, well balanced. We continue to look out for solid relative value managers and as always the 'smart' hedge against the unexpected. Further, we expect to have sufficient liquidity to keep on buying back shares over the next three years.
A word on the liquidity profile of our portfolio and possible regulatory scenario going forward: Firstly, it is important to know that whereas the first tranche of the CDO is expiring this December, the second tranche of the CDO will do so in 2014. Most of the other illiquid positions should be settled by that date as well with only the Cheyne New Europe Fund having a pay back schedule longer than this. Secondly, there is the very important development on the regulatory side regarding investment companies in Switzerland. Investment companies may just become too burdensome to operate in which case we will plan to give our money back end 2014. There is, however, a possibility that existing investment companies may benefit from a grandfathering clause and may become a very nice niche to be operating in. We expect to get an answer to this question in the next 9 months. Once the situation is clarified, we will be in a position to better reflect on our position beyond 2013/14.
Thomas Amstutz
Chairman