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15 October 2009: Gold Update and Purchase of Agriculture ETF

It is becoming increasing clear that commodities are re-establishing their leadership over and above equities; an established trend that has been in place since the year 2000. However since March, equities have enjoyed a strong counter rally from a deeply distressed position. We take the view that the commodity relative strength seen over recent weeks will continue, as the longer term trend re-establishes itself. The fundamental case for commodities centres around the strong secular growth in the emerging markets and the supply constraints. Our Absolute Return strategy currently has a 10 per cent position in gold and a five per cent position in agricultural commodities spread across grains and softs which is a recent addition to the portfolio.

We see the precious metals as the leading commodities, closely followed by agriculture. Energy and industrial metals are still likely to be strong but lag behind. Gold is of particular interest and remains our highest conviction position. In short, it has emerged from this crisis in rude health as it held up well in 2008 and has moved on to new all time highs; the only mainstream asset in the world to do so. Every great stimulus package and abundance of liquidity in history has resulted in a super strong move in a particular asset class, ranging from Japan in the late 1980's, technology in the late 1990's or more recently, emerging markets and oil. We see gold as the most probable candidate for a strong secular move, and if it were compared with similar cases in history, we believe there is a credible case for the gold price to reach USD3000 within five years. There is widespread scepticism by the intelligentsia, and it is only when it becomes "accepted" and cheered on that we should turn bearish on the world's best performing asset that is structurally under owned. The gold rally will be fuelled by a stampede for diversification.

The fundamental outlook for agriculture has improved following the sharp falls in all commodities late last year. Sugar trades near multi year highs as supply is forecast to trail demand for the second year running by a staggering 8.3 million tonnes. The cause was poor harvests in India and Brazil due to adverse weather conditions. Until recently and with the exception of sugar, the other softs and grains have barely moved in 2009, but this is not unusual as they are typically late in the cycle to do so. One reason is that during a recession, meat consumption falls which materially reduces the demand for animal feed. As the recovery gathers steam, feed consumption recovers and grain prices rise. Corn is particularly interesting as despite the largest ever global harvest, supply fails to keep up with demand and as a result, stocks remain at 30 year lows. US ethanol production and global protein industries have grown so significantly that the world will need a continued record corn harvests in order to meet demand. Add the El Nino effect which comes about every five years or so which will be of particular interest to soybeans. The late cycle nature of this sector, combined with the low correlation to equities makes it a useful source of portfolio diversification and return.

16 July 2009: Purchase of Findlay Park US Smaller Companies Fund

Findlay Park is a US equity fund that has an impressive track record over the past 12 years investing in mid-sized companies. The focus is on high quality companies that are currently out of favour with investors, often in the less glamorous areas of the market, and as a result, tend to be priced below fair value. The team tend to look out for companies with pricing power that generate strong cash flow and have robust balance sheets. These types of companies have so far lagged the market recovery since March but we believe they are best positioned to take the lead once the market normalises. This trade represents a modest increase in our allocation in equities to reflect the improved macro economic environment.

11 June 2009: Purchase of Long Dated US Treasuries

Government bond prices, on both sides of the Atlantic, have dropped significantly since their highs in the New Year. HSBC Absolute Return's current exposure to conventionals is relatively modest at 20 per cent of the portfolio but this has still proved to be a drag so far this year. That said, the case against bonds has become increasingly vocal with many commentators criticising the high level of issuance, and even the rating agencies have publicly stated that the British and American Governments may lose their AAA ratings. Whilst we believe the concerns have some justification, the free market will ultimately prevent debt issuance from reaching extremes as the debt servicing costs will become unbearable a long time before they reach that point. In our opinion, we are some way off that and the fears are overdone. More immediately, we should remind ourselves the world remains in a deep recession and the forces are still deflationary. The bond market has become very oversold, causing long bond yields to rise from 2.5 per cent to 4.5 per cent over the past five months. We have taken the decision to increase the duration of our bonds to take advantage of these higher yields. For sterling and euro portfolios, we have also opted to purchase US Treasuries as the dollar has fallen since the February highs. It is worth highlighting that long dated US Treasuries rallied 72 per cent last year in sterling terms and 47 per cent in euro terms. In both cases, the combination of the falling dollar and rising yields have reversed roughly two thirds of this 2008 gigantean move. So we not only take the view that both bonds and the dollar may rally, but also have some effective portfolio insurance if economic conditions deteriorate. We continue to hold a further 10 per cent of Absolute Return in domestic inflation linked securities and this position remains unchanged.

4 June 2009: Purchase Berkshire Hathaway

Up until recently, the bear rally has been led by distressed assets which had typically fallen by 90 per cent or more in value terms over a two-year period. It is becoming increasingly clear that this initial move appears to be exhausted and if the broader market strength is to continue, the focus is likely to shift towards the more defensive companies. If, on the other hand, the market rally comes to an end, it is these companies that will be best placed to survive this recession. Given the high level of economic uncertainty, the Absolute Strategy has maintained a focus on high quality assets whether we are invested in bonds, equities, commodities or alternative assets so as to avoid the pitfalls such as liquidity traps and shocks. In our opinion, one of the highest quality companies in the world is Berkshire Hathaway, a diversified investment company controlled by Warren Buffett. Approximately a third of the company is made up of an investment portfolio that has material stakes in great businesses such as Coca Cola, Procter and Gamble, Tesco and Kraft Foods. More recently the company has made investments into Goldman Sachs, GE and Wells Fargo on highly preferential terms. The second division comprises dozens of private companies ranging from NetJets to See's Candies that are all individually managed and independent of head office (which has just 19 staff). The final part is insurance, where Berkshire are renowned for their ability to assess risk and price it accordingly. The company has normally traded with a "Buffett premium", but following poor returns in 2008, this has largely been eliminated. Whilst the stock trades above book value, that significantly understates the value of the private companies which are often carried at book cost as the purchase may have occurred many years ago. According to our research, the stock trades below intrinsic value, which is his preferred valuation technique.

15 May 2009: Asset quality

The Absolute Strategy has made a point of reducing the portfolio volatility over the past few months in order to preserve capital and reduce volatility through these challenging times. The benefits of that were visible in January and February when the market was weak and Absolute held up well in comparison. However in March and April, the stock market rallied sharply and Absolute has lagged behind.

The short term leadership in the market rally has centred upon the distressed assets that have fallen the most and as a general rule of thumb, the greater the distress, the greater the bounce. A stock that has fallen by 90% has doubled, but is still down by 80%. Banks and other highly leveraged companies have performed well. Absolute has minimal exposure to distressed assets and that is the main reason for the lag in performance. The question remains why Absolute does not have greater exposure to risky assets?

The market rally may indeed signal the end of this bear market, but there again it may not. I recall the low quality bear rally that followed the 9/11 tragedy when the bust dotcoms shot up, only to collapse the following year with Enron and Worldcom's help. Our view remains that we are in a severe bear market and there needs to be greater evidence that things are turning up before we are ready to structurally increase exposure to risky assets. It would be a historic first for a bear market of this magnitude to be so quick to recover. Much more time is needed to heal the wounds. Clearly, it is positive that the banks are through their stress tests and are sufficiently capitalised so that they survive, but that does not mean they will necessarily thrive. In our view, this bear market will not be over for another year or perhaps even two. For the mainstream indices to have a rising 200-day moving average is always a good sign especially when accompanied by a drop in long-term volatility. Neither of these factors are in place and hence our bearish time scale.

Of course there are two key areas of market leadership, one of which we are wanting to buy and the other we are already invested. The first is China and we have every intention of buying this market however, since this trade is so well known, it is unlikely to be as good as it sounds. Instead, we would prefer to buy a catch up trade where there is greater value. As things stand, Taiwan is the obvious candidate but is currently four standard deviations over bought which tells us that the train has left the station, at least for now. However, there is every likelihood, that prices will cool and we will get our chance to buy China and related themes. We follow it very closely and while, with the benefit of hindsight, we wished we had invested in early March, the market leadership was not identifiable at that time. It is the behaviour over the past two months that gives clues as to how events will unfurl over the next two years. Thus we intend to buy the dip later this year if a suitable opportunity arises.

The other area of leadership is commodities. We have considered investing in agriculture and oil but again, find these themes very crowded by investors. We can see there will be a modest rise in the oil price to a point of equilibrium, but no super normal returns anytime soon, as this trade is effectively done following the strength over the past few years. Furthermore, the correlation of perishable commodities with equities is very high, so there are no diversification benefits. In other words, perishable commodities are currently similar to investing in an index fund. However, our trading success of index funds in bear markets has been poor compared to our record during bull markets. That has taught us to avoid doing it and stick to finding bull markets which takes us back to China/Taiwan. It is the lack of bull markets out there that causes these trades to become crowded so quickly, thus making good timing so difficult. Gold is the true leader of commodities and that is why we remain invested. It is up modestly so far this year, but has cooled over the past two months as the market has recovered. The fact remains that gold is in a very strong bull market. Whilst western governments have been selling (costing European taxpayers USD40 billion since 1999), China has been buying. We remain extremely bullish on the outlook for gold. In simple terms, it is the highest quality asset of all which can be easily demonstrated by studying financial history. It is a store of value in good times and bad, but performs best when real interest rates are low or negative and the value of fiat (paper) money is in doubt. The way we have become familiar with the words billion and trillion reinforces this point. The case for platinum is similar as I wrote in the last quarterly review.

Government bonds have not done well this year following a surge in 2008. We are bearish for bonds over the long-term due to the excess of issuance and resurgence of inflation, but whilst this equity bear market remains, we continue to be bullish. Government bonds are liquid instruments that pay a materially better rate than cash on deposit. Twenty percent of our bonds are medium dated and 10 per cent inflation linked. This is a modest position with good diversification benefits.

These are difficult times for us all. We are active managers who make active decisions on how to be positioned for the times we face. Our current view is cautious and we continue to aim for capital preservation as our first priority. There will be ample opportunities to make money once this bear market is over, and indeed if it is, we will change our view as things continue to improve. So far, all we see is a normal bear rally. It would have been nice to have traded it but we didn't as we could not make a case that it was sustainable. The most important factor for our long-term success is to trade on the front foot ahead of events and not play catch up on the back foot. That means we will continue to look for opportunities to buy bull markets on the dip, just as we have been doing since 2002.

26 March 2009: Purchase of platinum

In 2008, the platinum price suffered as industrial demand collapsed in line with the commodity market. However, over the past decade, platinum has tended to trade at nearly twice the gold price per troy ounce up until the financial crisis which has returned this relationship back towards parity, a situation not seen since the mid 1990s. Platinum is both a non-perishable precious metal that benefits from investment demand and an industrial metal that is used in the auto and glass sectors and is therefore sensitive to economic activity. Silver is similar in that it has this dual role, but due to its materially lower value is inherently a lower quality asset that has higher volatility. Above all, we are firm long-term holders of gold recognise that platinum is cheap on a relative basis to both silver and gold and with this price comparison recently at the lowest relative level for three decades, this is an attractive opportunity to further increase exposure to the precious metal sector.

12 February 2009: Redemption of MW Tops

In last summer's sell-off, the price of closed-ended funds moved to significant discounts to net asset value (NAV), as the mechanisms to keep the share price and NAV in alignment were overwhelmed by the forced selling that occurred in the wake of the demise of Lehman Brothers. We took action to apply pressure on the board of directors of these investment companies to close these discounts. The first success has come from MW Tops, which traded at a 21 per cent discount to NAV in October where we have accepted the option to redeem shares at NAV (less 0.1 per cent costs). This, combined with a pick-up in the NAV has resulted in a 30 per cent recovery in the share price from the October lows. The discounts on the remaining listed hedge funds in Absolute continue to narrow; for example Dexion Absolute's innovative reverse auction has reduced the discount from 40 per cent to the mid teens. We continue to maintain pressure on the boards of directors which in turn should help realise further shareholder value. On a broader note, we are continuing to reduce our exposure to hedge funds whilst retaining our higher quality single manager and single strategy fund of funds.

3 February 2009: Switch into inflation-linked bonds

During the commodity bull market from 1998 to July 2008, inflation-linked bonds outperformed conventional bonds as rising commodity prices fed through to the rate of inflation. However, what lurked beneath the surface was a stable core rate of inflation that, despite complaints about the rising cost of living, remained low. When the commodity bubble burst in July 2008, inflation-linked bond prices collapsed at a time when conventional government bonds were seen as a safe haven. Between July and November, the implied future inflation rate over the next decade (known as the break even rate) fell from 2.5 per cent to 0 per cent in the USA with similar falls seen in Europe and the UK. Assuming that commodity prices cannot keep falling indefinitely, long-term inflation expectations are now too low and inflation linked bonds are attractively priced. We opted to invest in the inflation linked bond ETFs as the liquidity is materially better than the individual bonds in current market conditions.

7 January 2009: Buying equities and improving asset quality

There is every chance that equities will do better in 2009 than they did in 2008 . While we can discuss specific themes, regions and sectors, 2009 is likely to reward one group above all; that is high quality assets. We can say with confidence that equities are deemed to be cheap and that long term investors should see very high returns from these levels. However, it is unknown how long it will be before economic growth resumes. Given that government bonds are now expensive and the timing of the recovery in the real economy is unknown, investors will be best positioned in high quality assets that have high visibility, strong balance sheets and high liquidity as they are best placed to recover ahead of the rest. Furthermore, if circumstances deteriorate once again, higher quality assets are easier to sell. Absolute has been improving portfolio liquidity in recent months and will continue to do so until clear evidence of the long-term economic recovery materialises. Some might say this is obvious and one should always invest in liquid assets, but in the good times, these assets typically return the least. After all , it was emerging markets, alternative energy technology and resource stocks that made the most money in past few years, all areas that would now be firmly at the lower end of the liquidity spectrum.

It is the intention of the Absolute Service to increase equity exposure in 2009 as evidence of the market recovery grows, but the focus will remain on high quality assets whether it be in equities, credit, real estate or commodities. We have recently purchased a holding in an equity ETF that tracks the Global Titans 50 Index. The fund is diversified across 50 of the largest and most established businesses in the world and yields 4.1 per cent. It is a cost effective means of gaining global equity exposure where financial stocks make up just 12 per cent (with a survivor bias). This follows our recent investments into the FTSE index and gold bullion in November and December. We have sold our emerging market currency fund following a bounce in December. This fund was only able to be dealt on a monthly basis. Absolute's exposure to investments with daily liquidity is at materially higher levels than it was 12 months ago. Finally, we hope to continue to add to equities and other interesting opportunities as this market strength persists.

9 December 2008: Purchase of UK equities

Global stock markets in aggregate have seen their worst year for over a century as the combined impact of the credit crisis, property falls and recession have taken hold. There is a widely held belief that a normal recession had been priced in but then came the failure of Lehman Brothers, an event that led to widespread forced selling as leveraged investors, such as hedge funds, faced margin calls in response to unprecedented redemptions and tightening credit conditions. It goes without saying that equities are now so cheap that it matters less whether profits start to recover in 2009 or 2010, but more that the great companies will recover one day and that today's entry price is attractive as we look beyond the current mess. For a major stock market low to be in place there needs to be a bearish consensus as the lowest prices are discovered on the worst news, just as the highest prices are seen on the best. Furthermore, since this recent post Lehman Brothers phase has been dominated by forced selling, there needs to be evidence that this is dissipating. Market volume (number of shares traded) is now higher on up days than down days which indicates buyers are emerging from the sidelines. Further evidence comes from the improvement in market breadth, a factor that shows more companies are now rising than falling. Fundamental factors such as low interest rates and economic stimuli also have a significant bearing on the future of the economy, but it is up to the markets to interpret these events. For the first time in months, the major indices have made one month highs. None of these factors in isolation make a convincing case for better times ahead, but in aggregate, the picture is becoming clearer. History teaches us that bear market rallies are very powerful and go further and faster than many expect, forcing the cash hoarders, of which there are so many, to buy. The Dow Jones rallied 51 per cent in just six months to 1975 and 156 per cent in the 12 months to 1933. The Japanese market in the 1990s told a similar story.

This trade is the Absolute's first increase in exposure to UK equities since the early Summer and the FTSE has been chosen as the optimal way to invest in this bear market rally. Liquidity remains important and so an index that can be easily traded was the first criteria. The USA has been the relative safe haven as the dollar has rallied so sharply in recent weeks that the S&P 500 is now heavily extended compared to global equities. That leaves Europe as the first choice but within that, the UK's faults have become its strengths. Europe has a thriving industrial base that will take a long time to recover, whereas the UK's index is dominated by oil, pharmaceuticals and telecoms. Financial exposure is not dissimilar in both areas but the FTSE is overwhelming dominated by banks that remain in the private sector as the state owned entities have lost their influence within the index. This trade is relatively modest, but like the recent gold trade, will be increased as this strength continues.

27 November 2008: Increasing government bond duration

The massive rescue packages instigated by many governments has led to fears that the high issuance of government bonds will cause yields to rise. Whilst this simple argument makes sense, the bond market disagrees. The counter argument states that the rapid destruction of wealth due to falling asset prices more than offsets this additional issuance and demand for high quality government paper will remain strong. Post Lehman Brothers, once there was no value in the short dated bonds (their yields went to near zero), the flight to quality shifted along the yield curve driving the mediums to low levels, which is where the Absolute fixed income position has been up to now. Last week, however, it became apparent that the drive for yield continued and the long dated bonds started to rally for the first time in months. Absolute made a modest purchase in the tens and today followed up with a larger purchase in 15 year paper. The overall exposure to government bonds is just under a third of the portfolio and the duration is now medium to long.

25 November 2008: Purchase of gold

For much of the time, Absolute has held a position in gold since its inception in 2002. This has been in part for its defensive qualities, but more importantly because it is a liquid investment in a secular bull market. Despite the popular belief that gold should be a safe haven during periods of financial stress, over the summer period, this was not the case and the position was cut in order to reduce risk. That said, the price of gold is either flat or up in most currencies so far this year, just not in Dollars or Yen, so to say that it failed in its protective role, would not be a view shared by the vast majority of the world's population. All commodities have been very weak and highly correlated to other risky assets, but within that group, gold has stood tall, falling 30 per cent from its high to low versus 52 per cent for the broader commodity market. More recently, the gold recovery has been swift, perhaps driven by reports that central bank gold sales have been the lowest on record as they hoard their remaining reserves. There is a strong chance that now the worst of the selling pressure is receding, gold will once again demonstrate leadership. We have purchased a small position which will be increased, if and when, this early strength continues. In bull markets, it makes sense to buy on weakness, but in bear markets, it is more prudent to buy into strength. Gold has begun to rally ahead of both commodities and equities which is a sign of strength. Should the price rally to new highs and beyond, this trade marks our starting point.

Since market volatility remains high, Absolute is maintaining the overall exposure to risk at the current levels until the road ahead becomes clearer. Furthermore, the correlation between asset classes is high so that equities and commodities rise and fall in tandem. Therefore, this trade will be funded by the sale of a convertible fund, which is the least likely to materially recover over the medium term as many of its investments are now sitting close to, or at their bond floor. The switch from this fund to gold can therefore be considered a matched trade as both assets have recently rebounded to a similar degree.

15 August 2008: Portfolio rebalancing

In recent weeks, the sharp fall in commodity prices has exposed the significant speculative premium that is now being unwound. The good news is that lower commodity prices have reduced inflation expectations in the G7 economies, giving central bankers scope to ease monetary policy which is supportive for the bond market. Currently, equities are attractively valued against bonds and this strength in bonds is likely to flow through to equities in time. The consensus position of asset allocators remains cautious and they are underweight equities and bonds. Instead, they typically favour alternative assets and commodities. This means that when stock markets pick up, there will be a steady stream of buyers that will bid up share prices as they scramble to get back on board, and similarly continued downward pressure on commodity prices. History tells us that the greatest threat to equities is overvaluation as opposed to economic weakness and stocks are attractively priced. Furthermore, market breadth indicators (the number of stock that are rising or falling) have reached extreme levels of bearishness and recent price action has the potential to continue. With dollar strength already underway, US equities are well placed to lead the world.

The Absolute Return Strategy has been defensively positioned in recent months but we believe it is right to increase exposure to traditional assets (equities and bonds) and reduce commodities and some alternative investments. As a result, we have sold our position in gold as it passed through key price levels, sold our developed market inflation-linked bonds and sold our large cap out-performance structured note. On the other side, we have bought a holding in an S&P500 index fund in addition to recently announced purchases such as high yield bonds and convertible bonds. The net effect of this additional equity risk has shifted the Absolute Return Strategy to a broadly neutral equity position as much bad news has already been priced in by the market and we can see the light at the end of the tunnel.

8 August 2008: Purchase of high yield bonds

The Merrill Lynch European High Yield Bond Index now yields 12.7 per cent, which is 8.4 per cent above government bonds, a level not seen since the 2002 Enron crisis. We believe high yield bonds historically perform well in the early stages of the economic cycle and do so with lower volatility, thereby delivering attractive risk-adjusted returns. In addition to the high income stream, when recovery comes, there is a capital uplift from the spread compression which leads to equity-like gains. Should the economic situation deteriorate further, the high yields act as a cushion against further falls. Fears have grown that the default rate will rise sharply and the market has currently priced in an 8 per cent rate. This a far cry from the 1 per cent default rate that is actually occurring. Much bad news has already been priced in by the market and we believe this makes it an attractive time to invest in this asset class just as we did in 2002 when the Absolute Return Service was in its infancy. The funds we have purchased tend to yield a little less and have lower duration than the index (3.9 years) as they tend to hold higher quality assets and are managed more conservatively. The managers are leaders in their field and separate funds have been bought in each portfolio currency.

6 August 2008: Purchase of third convertible bond fund

The HSBC Absolute Return Strategy has purchased a third convertible bond fund to complement the existing two holdings. Convertible bonds are a mix between bonds and equities; the more they rise, the more they behave as equities, whilst the more they fall the more they behave like bonds. This behavioural trait is known as the "delta" whereby a delta of one would be equity-like and a delta of zero, bond-like. Our first holding, focuses on stock picking and has a delta of 0.8. The second has a fixed income profile with a delta of just 0.25. This latest fund is a hybrid with a delta of 0.5. Each manager is specialist in their area of the convertible universe, and we believe the combination of the three funds will have similar characteristics to the global convertible market, but with improved risk-adjusted returns. This third fund is managed by Aviva Morley who have a highly-experienced team located in London and New York and are leaders in their field. Convertible bonds continue to be attractively valued as investors have been unwinding their risk positions. Any broad recovery in markets may see this discount vanish in addition to gains from share prices.

18 June 2008: Purchase of China ETF

Global stock markets have been decimated over the past year in response to the credit crisis. Many market watchers ask the question, when to buy the banks? We take a different view and see the banks as the traffic light on the market: when they flash green, that signals the opportunity to buy the more robust parts of the market. That financials will one day recover is not in question, just that the road to recovery will be prolonged and hazardous. It is interesting to note that the major markets have all given back 50 per cent of this bull market that began in 2003 and ended in 2007. The USA, Europe and the UK have all done this whilst Japan has given back a little more. Financial stocks trade well below their 2003 levels which is a sign of weakness, but their recent key reversal move signals the green light for the broader market to rally. Finally, the emerging markets have tended to give back a little less than 50 per cent, thus holding onto the majority of their gains in recent years which is a sign of strength.

We have purchased an exchange traded fund (ETF) in the Hang Seng China Enterprises H Shares Index. That is the Chinese stocks that are listed in Hong Kong. China remains the engine of global growth and GDP was reported at 10.4 per cent for last year, slightly below the 12 per cent level achieved in 2006/7. The Government has tightened monetary policy which has helped to control inflation, but is not expected to dampen domestic consumption. Exports are likely to suffer as the G7 economies cool but this will reduce the trade surplus which is a positive step forward that will allow the Chinese growth model to normalise towards more sustainable levels. Chinese stocks are well priced and are typically cheaper than G7 stocks despite their higher growth prospects. Given their strong technical position, the continuing economic expansion and the goodwill that will no doubt arise from a successful Olympics, we have bought a small holding in the Chinese stock market.

12 June 2008: Sinopia asset management ('Sinopia') Emerging Markets Fund

Central banks have finally accepted that inflation is a clear and present danger. The relentless rise in oil and food prices has brought back the spectre of 1970s style inflation which erodes investors real wealth. Inflation linked bonds in developed markets offer some protection against inflation but the yields that they offer in return are distinctly modest. Emerging market inflation linked bonds offer a much higher yield and, in addition, provide exposure to their currencies which continue to appreciate against developed market currencies. Sinopia has a strong track record and significant experience in global inflation linked bonds.

10 June 2008: Purchase of BH Global

Brevan Howard is one of the world's leading hedge fund managers with an outstanding track record and $23 billion under management, specialising in Global Macro. BH Global invests in five funds principally trading fixed income and FX. The main allocation is to the Master fund which has 49 traders and has generated annualised returns of 15.3 per cent with a volatility of 5.4 per cent. The returns of this strategy tend to be negatively correlated with global equities as they benefit from dislocations in global markets which typically occur when equity markets fall. The closed ended nature of BH Global also allows access to Brevan Howard's Strategic Opportunities fund which trades longer dated, higher volatility situations with the potential for higher returns. In addition, further diversification is achieved through allocations to their Asian, Emerging Market and Equity Strategies funds.

20 May 2008: Purchase of gold bullion and index-linked bonds

Having significantly reduced commodity exposure in recent months, the corrective phase in metals and agriculture appears to have come to an end as prices have moved from overbought to oversold. The starting point for our re-entry into commodities has been via gold bullion as it is the most liquid and least volatile of all commodities, making it the first choice for long-term investors. If the market proves to be resilient, there will be opportunities to trade back into some of the more volatile areas just as we did in 2007, but are yet to be convinced as some areas have remained exuberant. Energy markets in particular, continue to be heavily extended, leaving them most at risk of a sharp fall in prices. Gold, on the other hand, is oversold and the gold versus oil relationship, which is highly correlated over the very long term, is at an extreme level. Commodities are also attractive during periods of high inflation, something that may soon become recognised by financial markets. The conventional bond market is still in denial about the resurgence of inflation, but many investors disagree. Index-linked bonds (also known as inflation-linked bonds) which deliver real returns above the Consumer Price Index, are moving to a premium and Absolute has purchased medium dated index linked issues.

1 May 2008: Purchase of FRM Credit Strategies

The financial crisis has thrown up a multitude of opportunities in credit markets but it remains uncertain whether there is worse to come. We therefore intend to tread carefully and invest modest amounts of capital into areas with low potential to disappoint. There is real value in many areas of the credit markets but timing the bottom is difficult. Hedge funds can benefit from individual mispricings of securities whilst not being directly exposed to the overall market risk. Whilst the opportunities are compelling, individual manager risks remain high and so we have chosen to diversify away this risk by employing a specialist fund of credit hedge funds. This fund invests in 15 managers across a range of credit strategies including value, long/short, arbitrage and dedicated short. The portfolio is run by an experienced manager who has privileged access to the underlying strategies and ensures that the funds do not employ excessive leverage. Absolute is making a small investment now which is likely to be increased in the future.

29 April 2008: Purchase of convertible fund

The Absolute service aims to deliver enhanced risk-adjusted returns, which typically means having lower volatility whilst keeping the potential for capital growth. Convertible bonds are interesting in that they are a hybrid between bonds and equities. Their equity-like qualities give convertibles the ability to materially rise in price during the good times, whereas their bond-like qualities limit the down side risk as they have a bond floor at which they are redeemed at expiry if share prices fall. Over the long run, global convertibles tend do deliver similar returns to global equities. During bull markets, they lag but still deliver healthy profits, whereas during bear markets, their improved capital preservation combined with a steady income stream, gives them the opportunity to catch up. Over the whole bull and bear cycle, convertibles deliver higher risk-adjusted returns as the returns are similar but the volatility is materially lower.

The Salar Fund specialises in convertible bonds that trade near to their bond floor so can be considered more defensive than the Treetops fund that is already a part of the Absolute Service. Salar is a long only fund managed by Ferox, a specialist convertible hedge fund manager with an experienced management team. The current timing is interesting in that convertible bonds are cheap relative to equities as measured by the implied volatility of both asset classes. Whilst equity volatility has been rising due to increased risks, convertible volatility has been falling. This is thought to be caused by distressed hedge funds and prop desks unwinding their positions, thus making it an attractive time to buy.

In order to maintain equity exposure, the Russian ETF has been sold given the extent of its recovery since the January lows.

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