Taconic Capital 2014 Q2 Investor Letter: Summary of Macro Views

Taconic Capital‘s 2014 Q2 investor letter is out. Frank Brosens’ hedge funds Taconic Capital Partners 1.5. L.P. and Taconic Offshore Fund 1.5 Ltd. returned 2.85% and 2.83% respectively during the second quarter. Taconic Capital had more than $9 billion in AUM at the end of the second quarter. The fund invests in equities, credit, capital structure arbitrage/hedged credit, and macro strategies. According to its latest 13F filing, it initiated brand new positions in Ally Financial (ALLY) and DirecTV (DTV) which, the fund mentions, are among its best and worst performing stocks. Taconic Capital has also been investing in JC Penney’s bonds which can’t be deducted from 13F filings. Here is what Taconic said about JCP:

“In May, the Company announced quarterly earnings and same store sales that were above expectations. Additionally, the company reported that sales improved every month of the quarterwith shopper traffic turning positive in April for the first time in 30 months. JC Penney also disclosed it entered into a commitment letter with several banks for $2.35 billion senior secured revolving credit and term loan facility that will replace its existing $1.85 billion line”

We will save Taconic’s views regarding the equity markets for another time. In this article we will share a summary of their macro views. In a nutshell here is how Frank Brosens and his team see the macro:

“We remain focused on identifying catalyst-driven situations from a bottom-up perspective. However, our investment decision making and risk management processes are informed by our macro views of economic and political situations globally. We anticipate significant levels of monetary stimulus from Central Banks, low interest rates and a high level of liquidity will continue to provide tailwinds to equity and credit markets. The U.S. economy remains relatively strong and its recovery continues, retracing weakness in the first quarter. Europe remains challenged in our view, but the risk of a significant crisis has largely been eliminated as the ECB seems committed to protecting the Euro by providing any necessary stimulus. The Chinese economy has continued to gradually slow, but we do not expect a severe impact from any continued weakness and have confidence in the Chinese government to successfully manage their economy. We believe the Japanese economy is likely to remain sluggish despite its loose monetary policy as structural reform is unlikely. We continue to be concerned about emerging markets where there has been indiscriminate issuance of sovereign and corporate debt due to the high level of liquidity throughout the world and the continued search for yield.

Although we implement hedges at the position level where possible, we also have portfolio hedges that are designed to limit losses in the event of a significant market dislocation. At quarter-end our portfolio hedges included the following: 1) long positions in German government bonds and 2) various long senior/short subordinated debt trades.”