2012: A year of potential excessive returns

As we come to the end of 2011 there appears to be ample of opportunities for 2012 to be a great year for large returns. I say this from a macro perspective. Many hedge fund managers have struggled in 2011 trying certain obvious trades that have not worked. Probably the most popular trade that has not worked is to short the Euro verses commodity based currencies (i.e. Australian and Canadian dollar). I have tracked my hedge fund compatriots throughout 2011 on their endeavors to make money from this fundamentally sound trade. Many have failed as they have tried too aggressively to enter this trade, only to have cover their short position on excessive daily volatility. The largest problem with this trade was the simple technical factor that the trade was crowded, i.e. everyone shorting together. In fact I credit the fact that I have avoided crowded trades in 2011 as one of the main reasons I have outperformed my peers.  As 2011 comes to the end I sense most portfolio managers are giving up on this trade. This is exactly why I have started to build a position and thankfully it has started to show positive signs. It might be thought this trade is exploiting the demise of the Euro. Even though this is true and it would benefit, it is actually Euro survival neutral. If the European politicians do come with an answer to restore market confidence, that answer must include a lower Euro. Why? Simply it is twofold: Europe has to export it way out of a potential recession and to solve the credit issues it must print more Euros. The problem is the rest of the world including the US also has the same tactic. In order for Europe to compete it must have a lower value of the Euro to remain price competitive. I believe by the time most market participants will regain the belief in this trade, a canny investor can already be holding a position with a large return. This is just but one of the apparent opportunities developing which is making 2012 look like a great year from a return potential.