Morgan Creek ETF Strategy: Greece & Japan

December 19, 2013

ETFs power hedge fund's international focus.

Mark Yusko founded Chapel Hill, N.C.-based Morgan Creek Capital in 2004 as a hedge fund of funds. He also recently launched a mutual fund made up of ETFs, and is now planning on adding its very own proprietary ETF to Morgan Creek’s lineup of product offerings.

Yusko, a former chief investment officer at the University of North Carolina, recently spoke to IndexUniverse staff writer Hung Tran about how the $6.5 billion firm employs ETFs in both its mutual and hedge fund, and why he is currently bullish on Japan and China. I understand you're big on Japan currency-hedged ETFs. So you're bullish on Prime Minister Shinzo Abe’s “Abenomics” and the three “arrows” of economic reform: easy money from the central bank, government stimulus spending, and structural reforms aimed at boosting Japanese industry’s competitiveness?


Yusko: We love Japan, and we think the yen will continue to weaken. So having that currency-hedged ETF option has been a great one. In our mutual fund, the Morgan Creek Tactical Allocation Fund (MIGTX), we use ETFs as a way to gain exposure to certain regions and themes.

So we would put, at the core, WisdomTree Japan Hedged Equity ETF (DXJ | B-45) exposure for a core currency-hedged basket. Then we would buy a basket—since we wanted to be overweight exporters and financials—of direct companies, like Toyota and Panasonic and SMSG and Nomura. But because we wanted those hedged back to dollars, we actually used the short-currency ETF to take that exposure back to dollars.

And yes, we’re very bullish on Abenomics. They’ve committed to a huge amount of fiscal stimulus, and we think that’s going to be good, particularly after the first of the year, when there’s this huge tax break you get if you buy equities.

Also, pension funds are going to start allocating more to equities, and then the government is going to start its fiscal stimulus plan in earnest after the first of the year. And we think the yen is going to be weak for a very long time.

In our Morgan Creek Global Equity Long/Short Fund, we’ve alternatively used DXJ at times and we’ve also used the MAXIS Nikkei 225 Index ETF (NKY | B-52), which has a different makeup than DXJ. Since we’re allowed to go long and short in that fund, we actually short the CurrencyShares Japanese Yen Trust (FXY | A-99) against the long NKY to get a currency-hedged basket. And you still have those positions on?

Yusko: Yes. And I think that’s actually been a pretty popular trade out there. We’ve also used ETFs to gain exposure to countries where we wanted to have a tactical overweight. Historically, we’ve used the iShares MSCI Emerging Markets ETF (EEM | B-100), on both the long and the short side, to increase or decrease our exposure in emerging markets.

We also use ETFs for getting exposure to certain countries that we like. We like southern Europe a lot, so we own the Global X FTSE Greece 20 (GREK), among others, as a core. We also own some individual Greek companies where we want to be overweight. We love what's in the Greek ETF, but we can only own up to 3 percent of any registered vehicle.

So until that grows a little more, we can't own any more of it. But we do love it. We’ll also use ETFs as a way of gaining exposure on a short-term idea, until we can find other ideas to take its place.



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