Hintze cautious after 'too much of a good thing'

Michael Hintze, the founder of $11.7bn hedge fund manager CQS, has used his latest letter to investors to reverse the "constructive" view on markets he has held for the last three years.

In the letter, Hintze wrote that he is inclined to be cautious because of the diminishing impact of global monetary stimulus on economic activity and markets, questions over global growth and geopolitical turbulence.

With this in mind, Hintze said that he has positioned some portfolios to take long positions on short-maturity credit, and short positions on longer-dated credit, where there is less visibility. In equities, he has reduced net long exposure and added to certain commodities, notably agricultural commodities.

Hintze wrote that monetary stimulus is having a diminishing effect: "My view is that while central bank (and government) actions may have stabilised markets and economies, they have also 'kicked the can down the road' and have not resolved the fundamental underlying issues that need to be tackled for a broad-based and sustainable macroeconomic recovery. Like all things in life, it is possible to have too much of a good thing."

The investment outlook is cautious on Europe and China, while more constructive on the US.

Hintze suggested that the eurozone's two main structural problems – indebtedness and fiscal discipline for member states – were yet to be properly addressed, partly because of the challenge of the short-term electoral cycle.

He wrote: "A challenge with a two, four or five-year electoral cycle in democratic systems is that the legislative agenda must (almost ) always have an eye to re-election as its political imperative. It is unclear to me whether there is sufficiently determined leadership to deal with what are serious structural matters."

A Greek exit from the eurozone would be "arguably the most costly and damaging [option] in the medium-term," Hintze wrote. He said: "In my view, the most elegant exit would be to run a dual currency regime whereby existing currency holders (especially depositors) would keep their Euros, with new debt and government transfer payments executed in the 'new' currency. This is high-stakes politics."

Regarding China, Hintze wrote that "expectations that China is a one-direction economic powerhouse are unrealistic," and that "in the short-term there are challenges in transitioning from an export-led manufacturing economy to one where the services sector growth takes up the running".

Hintze was more positive on the outlook for the US. While the US budget deficit and the fiscal cliff are challenges, he said that employment appears to be growing and the US may surprise over the medium-term.

Hintze concluded the letter by saying that further tensions in the South China Sea are inevitable: "Possible conflict could arise between China and one of its many neighbours over sovereign territorial claims in the South China Sea [...] Given that some of the world's most important shipping lanes are to be found in the region including the Malacca and Singapore Straits, we need to be vigilant."

For the first nine months of the year the CQS Directional Opportunities fund was up 27.28%, while the CQS Diversified fund, which invests all its range of in-house products, was up 8.70%, according to investors.

CQS confirmed the contents of the letter but declined to commet further.