Babson’s Brilliance and #WelcomeToHooverville
Q4 2016 Market Review & Outlook
Mark W. Yusko, CEO & CIO
The first time I heard the name Babson was in 1980 when I was a senior in high school in Weston, Connecticut (serendipitous given some of the themes of this letter and coinciding with Reagan’s election). I was on a bus with my soccer team headed to Massachusetts to play weekend scrimmages against Babson College and Brandeis University. Our coach had convinced our parents that this was a college tour and showcase event where the college coaches would be evaluating us as potential recruits. We learned (the hard way) the real reason for the trip was to help break the complacent attitude the team developed after going undefeated the previous season. Coach felt we were overconfident as we entered the new season, and he intended to show us that we didn't even know what we didn't know about the game of soccer. The bus trip was awesome, the first night in the dorm at Babson was amazing and we were pretty ebullient as we sauntered onto the field on Saturday morning. Most of us had never even heard of Babson College. How good could they be?
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Save FairUS
Q3 2016 Market Review & Outlook
Mark W. Yusko, CEO & CIO
In 1985, legendary film director John Hughes sat down for a week and wrote his “love letter to Chicago” – a story of a slacker teen boy (Ferris Bueller) who decides to take a day off school to show his friend (Cameron Frye) some of the good things in life, and the result was the iconic movie Ferris Bueller’s Day Off. In an interview with the AMC Blog, Hughes said, “I really wanted to capture as much of Chicago as I could. Not just in the architecture and landscape, but the spirit.” That spirit is everywhere in the movie from scenes set on Lakeshore Drive on Lake Michigan to the spectacular vistas from the top of the Sears Tower (now called the Willis Tower for the younger generation who don't know that Sears was once the dominant retailer in the U.S. instead of a stock to be perpetually short).
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The value of value
Q2 2015 Market Review & Outlook
Mark W. Yusko, CEO & CIO
In April, nearly 400 years to the day after Shakespeare died, we lost another truly remarkable artist, Prince. In his career, Prince sold more than 100 million records, won seven Grammy Awards, a Golden Globe and an Academy Award. Prince was recognized by Rolling Stone magazine as the 27th most influential artist of the Rock Era and he was inducted into the Rock & Roll Hall of Fame in 2004. Prince Rogers Nelson was born in 1958 in Minnesota and grew up in a musical household where both parents were jazz performers. He was named after his father who performed under the stage name, Prince Rogers. His early life was not easy and his parents’ separation when he was ten forced him to bounce around homes of family and friends.
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Two Thousand Zero Zero, Party Over,
Oops, Out of Time…
Q1 2016 Market Review & Outlook
Mark W. Yusko, CEO & CIO
In April, nearly 400 years to the day after Shakespeare died, we lost another truly remarkable artist, Prince. In his career, Prince sold more than 100 million records, won seven Grammy Awards, a Golden Globe and an Academy Award. Prince was recognized by Rolling Stone magazine as the 27th most influential artist of the Rock Era and he was inducted into the Rock & Roll Hall of Fame in 2004. Prince Rogers Nelson was born in 1958 in Minnesota and grew up in a musical household where both parents were jazz performers. He was named after his father who performed under the stage name, Prince Rogers. His early life was not easy and his parents’ separation when he was ten forced him to bounce around homes of family and friends.
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Experts Only
Q4 2015 Market Review & Outlook
Mark W. Yusko, CEO & CIO
My daughter and her beau are really good skiers and as we pulled up to the entrance to the run I couldn't help but notice the long warning sign detailing all the hazards that existed on this particular trail and the extra yellow and red sign saying that "Hazards Exist That Are Not Marked" (the unknown unknowns). My favorite part of the warning sign was the last sentence that said "itis suggested that some device be attached to your skis to help you find them if they are lost in the powder snow" (funny there was no kiosk selling such devices at 12,000 feet). I was also introduced for the first time to a fifth rating category for ski trails (I always thought there were only four), Double Black Diamond EX, where the EX stands for Extreme Terrain.
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A.W. Jones was Right: Time to Get Hedged
Q3 2015 Market Review & Outlook
Mark W. Yusko, CEO & CIO
There is a construct called Six Degrees of Separation that says that any two individuals in the world are connected by six or less associations. The thesis is essentially that the term "friend of a friend" can connect any two people in less than six steps. The theory was developed by Hungarian author Frigyes Karinthy in 1929 (perhaps an ironic date given the theme of this letter) from his observations in Chains that the modern world was shrinking (hence the term Small World) due to technological advances in communications and travel and many of the concepts of his abstract work have grown over years into what we refer today as Network Theory. The existential idea was popularized by the 1990 play of the same name written by John Guare and the name was "borrowed" in 1994 to create a trivia game called Six Degrees of Kevin Bacon. Three Albright University students invented the game, partly in response to a comment made by Bacon in a Premiere Magazine interview that he "had worked with everyone in Hollywood, or someone who's worked with them." The basic idea is that anything can be ultimately linked back to Kevin Bacon in no more than six steps.
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Greece Is The Word And Unloosing The New Gordian Knot
Q2 2015 Market Review & Outlook
Mark W. Yusko, CEO & CIO
It seems a little funny that a country with a population equal to Ohio (11 million) and a GDP equivalent to Oregon ($240 billion) was all anyone wanted to talk about in Q2. The news media was saturated with stories about the Greek Crisis and it seemed that just about every other weekend there was another emergency EU Summit to determine whether to force Greece out of the Euro and/or the Eurozone (the proverbial #Grexit) or give them a third bail out. We even dedicated the May Around the World Webinar to the topic, titled Hotel California Encore: Why Europe Won’t Allow a #Grexit and quoted the iconic Eagles song in saying that Euro participants in the PIIGS (Portugal, Ireland, Italy, Greece and Spain) could “check out any time they like, but they could never leave” because any exit from the Euro would disrupt the German master plan of global domination through cheap exports, which requires a weak currency (the Deutschemark would be 40%+ higher than the Euro today).


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Not Lyin’, The Big Tiger’s A Bear, Oh My!
Q1 2015 Market Review & Outlook
Mark W. Yusko, CEO & CIO
The father of the hedge fund was Alfred Winslow (A.W.) Jones. Jones was born in Australia, graduated from Harvard, was a U.S. diplomat and earned a PhD in Sociology from Columbia, before becoming a member of the editorial staff at Fortune magazine where he was inspired to try his hand at asset management while writing an article about current investment trends in 1948. He raised $100,000 (including $40,000 of his own money) and created a partnership that employed a long/short equity investment model where he combined leverage and short selling of securities, as a means to control risk and produce more stable returns. In 1952, Jones converted the fund to a limited partnership and added a 20% incentive fee as compensation for the general partner. The hedge fund concept did not catch on until 1966 when Fortune ran an article entitled The Jones Nobody Keeps Up With. That article showed that Jones’ track record was superior to all listed mutual funds, had beaten them by double digits in the past year, and by high double digits over the past five years.
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Reflexivity: The Virtuous & The Vicious
Q4 2014 Market Review & Outlook
Mark W. Yusko, CEO & CIO
Due to a coincidence of the calendar, I write my Q4 letter each year during Super Bowl week and the hype surrounding the event has provided inspiration in prior years for the theme of the letter from the 2013 HarBowl (Brothers Jim and John faced off as opposing coaches) where we talked about how Defense Wins Championships (defense ruled again on the last play of this year’s game, unfortunately for us Seahawks fans) to the improbable run of Kurt Warner with the Cardinals in 2009 where he was nearly run out of town for a run of poor performance early in the season before confounding his skeptics and leading them to the Super Bowl (which they should have won, but for one of the most amazing passes in Super Bowl history by Ben Roethlisberger). Warner’s heroic performance was another reminder that recent performance is not a good predictor of future returns despite the predilection for investors to pick managers that way.


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Highway to the Danger Zone
Q3 2014 Market Review & Outlook
Had the movie Top Gun been released in 1983 (instead of 1986), this letter probably would not have been written. It is highly possible that I would have been so taken by the “Maverick Lifestyle” that I would have been more open to the Navy’s advances when they came recruiting during my sophomore year at Notre Dame and I may have ended up as a Naval Aviator. I was an electrical engineering major that year (switched to Biology/Chemistry the following year) and the Navy routinely trolled the Engineering School to find recruits for their Nuclear Power Program (Submarine Officer). They invited me to the presentation, I thought it was pretty cool, and I subsequently agreed to go to the South Bend recruiting office to take some evaluation tests. One of the instruments was the Spatial Apperception Test that measured potential aptitude for becoming a pilot and I did so well that they offered to fly me out to San Diego for some additional recruiting. Why not, a free trip to CA sounded pretty good during a SB winter. The trip was fun, hanging out in the BOQ (Bachelor Officers Quarters), touring the parking lot full of all the “Nuke Mobiles” (the super sports cars that all the Nuclear Power Officers had, which we found out later they never got to drive since they were always on the Sub…), but we never quite saw the life that was depicted in Top Gun, and they didn’t actually take us up in an F-14 (which is probably a good thing as it might have sealed the deal).
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#NotDifferentThisTime
Q2 2014 Market Review & Outlook
Mark W. Yusko
Chief Executive Officer and Chief Investment Officer
Morgan Creek Capital Management
In last quarter’s letter, titled The Year of the Alligator: Why 2014 will be the Inverse of 2013, we hypothesized that returns in global investment markets in 2014 would look quite different than the returns in 2013 and that assets that had been shunned (long bonds, commodities, gold equities) during the Year of the Coyote (so named for the gravity defying move in global equities) market might find favor with investors. We dubbed 2014 #YearoftheAlligator because the extreme return divergence between risky assets and safe haven assets was quite remarkable and had created the widest Alligator Jaws (the divergence between two total return lines on a cumulative wealth chart) we had seen in many years. In reviewing the Chinese Zodiac and how our newly added animals might fit within the twelve year cycle, we wrote that “2014 is technically the Year of the Wood Horse, which predicts that the year would be full of energy, financial volatility and impulsiveness, a year for taking on new projects and a year focused on borrowing and spending money (think debt issuance and M&A activity)” and, so far, those themes seem to be playing out as predicted. There has indeed been a high level of market volatility, punctuated by some truly wild...
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The Year of the Alligator:
Why 2014 Will be the Inverse of 2013
Q1 2014 Market Review & Outlook
Mark W. Yusko
Chief Executive Officer and Chief Investment Officer
Morgan Creek Capital Management
Q1 2014 LETTER TO INVESTORS Letter to Fellow Investors The theme of last quarter’s letter, titled 10 Things I Hate About Spoos, revisited a construct we have discussed in prior letters (including Defense Wins Championships ) and we analyzed a series of ten charts (actually there was a bonus eleventh too) that showed that perhaps it was time to be a little more cautious in the U.S. equity markets after such an incredible year in 2013 (to cap an incredible five year run off the bottom in 2009). To summarize, we wrote that “revisiting the reasons to be defensive in the equity markets again this year, it appears from the above charts that the strategies that produced such amazing results in 2013 may not produce a repeat performance in 2014.” It is from the second line of this quote that we draw our inspiration fo r the title of the letter this quarter as we will hypothesize why 2014 is likely to be the inverse of 2013, and we will also review some good evidence that the construct has already taken effect during the first four mo nths. The Alligator is an animal that engenders some trepidation in most people and that fear is warranted...
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10 Things I Hate About Spoos
Q4 2013 Market Review & Outlook
Mark W. Yusko
Chief Executive Officer and Chief Investment Officer
Morgan Creek Capital Management
This Sonnet (a 14 line poem with six pairs of rhyming couple ts a-b-a-b, c-d-c-d, e-f-e-f, and a final rhyming couplet g-g) comes from a scene in the movie 10 Things I Hate About You , a modern remake of the Shakespearean play The Taming of the Shrew. The movie follows the basic plot of the origin al play in that the father of two daughters, the elder Katherine and younger Bianca (Kat and Bianca Stratford in the movie, in a nod to Shakespeare’s hometown), forbids his younger daughter to marry (date) un til the eldest (the “Shrew”) is married (dates). The suitor of Bianca, Lucentio (Cameron in the movie) enlists the help of the “tamer,” Petruccio (Patrick Verona, another nod to Bill) to woo Katherine (Kat) so he may win the hand of fair Bianca (so Cameron can take Bianca to the Prom). The movie follows the comedic story of the fit s and starts of Kat’s resistance to Patrick’s advances (chronicled in the Sonnet above) and results in her finally realizing her affection for Sir Verona and, importantly, that methinks she doth protest too much and doesn’t hate him at all. I have always liked this movie (not just because it was set in my hometown of Seattle), and enjoye d the modern twist of adding high school angst to the classic Shakespearean comedic themes, but it is the title of the movie has been haunting me...
 
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The Not So Great Pumpkin
Q3 2013 Market Review & Outlook
Mark W. Yusko
Chief Executive Officer and Chief Investment Officer
Morgan Creek Capital Management
In 1950, Charles M. Schultz penned thefirst installment of the Peanuts carboon strip that chronided the adventures of a group of lovable characters led by the hapless Charlie Brown, his little sister Sally, his nemesis Lucyvan Pelt and her little brother Linus, Peppermint Patty, Pig Pen, Franklin, Charlie Brown's iconic dog Snoopy and his sidekidc a bird named Woodstock. The strip ran for an amazing 50 years, ending on Valentine's Dayin2000,causirgittobecalled"arguablythelongeststoryevertold l:r/onehuman being“ bya biographerof Schultz.‘l11e oomic strip wasfilled with social and poftical oommentary over the decades and the dmaracters became a massive global phenomenon leadingto print and merdmandisingsuooess that delighted readers in 75 oountries and 21 languages, who religiously followed the exploits of the Peanuts garg, The popularity of the oomic also spawned a series oftelevision specials and stage productionsthat furthered the reach ofthe Peanuts gargs message and societal impact Schultz was adroit at using satirical barbs to provide oornmentary on topic: rangingfrom the Viet- nam Wartothe problems of'organized play’ like Little League, to religious oonstructs like Linus quoting Bflaleversesto explain the meaningof Christmasto Charlie Brown in the television special. A Charlie Brown Christmas...
 
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Around the World In Significantly less than Eighty Days
Q2 2013 Market Review & Outlook
Mark W. Yusko
Chief Executive Officer and Chief Investment Officer
Morgan Creek Capital Management
A period of rapid tech nological innovation during the middle of the nineteenth century sparked a fascination with the concept of speedy global circumnavigation. Three innovations in particular, the completion of the Transcontinental Railroad in America and the opening of the Suez Canal in 1869 and the linkage of the Indian Railways across the sub- continent in 1870, allowed for the prospect of an around the world journey for tourists as opposed to intrepid explorers. Jules Verne, a French writer known for the creation of scrupulously researched adventure novels, was inspired to write a book entitled Around the World in Eighty Days when he read an advertisement for a Thomas Cook tour around the world in 1872. Verne published his Le Tour du Monde en Quatre-Vingts Jours in 1873 as a chronicle of protagonist Phileas Fogg, a wealthy bachelor living in London, and his French valet, Jean Passepartout, who must complete the journey in 80 days in order to win a 20,000 Pound wager (about $2.25 million today) that Phileas makes with his socialite friends at the London Reform Club. Given Phileas’ last name and the route of the journey (the blue line highlighted in the picture above), it is apparent that Vern e used a number of resources to research his novel, most notably a series of letters written by an American, William Perry Fogg, to The Cleveland Leader entitled...
 
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Ganbaru! Kuroda-san or May The Force Be With You
Q1 2013 Market Review & Outlook
Mark W. Yusko
Chief Executive Officer and Chief Investment Officer
Morgan Creek Capital Management
Some of my first memories of television are of a series called The Rocky and Bullwinkle Show, which was a witty combination of animated cartoons about the exploits of the title characters, Rocket “Rocky” J. Squirrel and Bullwinkle J. Moose and their nemeses, two Pottsylvanian nogoodniks spies, Boris Badenov and Natasha Fatale. The show was filled with current event commentary, political and social satire, and featured an embedded variety show including a number of repeating shows-within-a -show that “reinterpreted” fairy tales and history lessons. The show originally aired in Prime Time from 1959-1964, but ran for many years in syndication (remember, no internet and no on-demand) in the coveted after-school timeslot (to capture all the sugary cereal buying power of grade-schoolers like me). The intro for the show was often Rocky flying (yes, he was a flying squirrel, think 1960s jet propulsion here) around the stage while Bullwinkle implored, “Would you like to see me pull a rabbit out of my hat?” The top picture above shows that Bullwinkle’s prowess as a magician was suspect and he pulled just about every- thing out of his hat, except the proverbial rabbit. The show was conceived during the height of the Cold War and had a recurring theme of the spies, Boris and Natasha, following dastardly plans created by their boss, Mr. Big (or Fearless Leader), to defeat our...
 
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