Where to Invest 2012 and What to Avoid

By: Bloomberg

Bloomberg TV Exclusive: Fortress fund manager Michael Novogratz talked about his fund's investment strategy with Bloomberg TVs Erik Schatzker and Stephanie Ruhle.

Novogratz talked about improving investing conditions for 2012, and said that "I bet January returns were great for most hedge funds because we're seeing a breakdown of correlation."

Novogratz on what Fortress is focused on this year:

"This year has been interesting. It's been a story of reduced risk premium. Is Europe really going to fix things? We spent most of last year not just nervous but very, very nervous. The whole world was panicked we would have a repeat of 2008, and between the actions of the European governments and the LTRO from the central bank where they are lending unlimited amounts of money to banks, a lot of tail risk, the chance of the system shutting down, is coming out of the market. What you see [now]is multiples expand in the S&P. Emerging-market currencies rally. Broadly, all beta does better. That story probably continues for awhile."

On how Novogratz is responding to the environment:

"You get long risk; we're doing that right now. The worst environment is when all assets are correlated - that means they all move the same and the market doesn't trend...The best environment for a hedge fund is when markets trend and when markets are not correlated. And in the first six months of the year, we're running into that environment. I bet you January returns were great for most hedge funds because we're seeing a breakdown of correlation, which makes our job much easier."

On where to invest and avoid in 2012:

"From an asset class perspective, in 2011 people did very well in G-10 fixed-income markets. I think in U.S. fixed income, you will probably have less opportunity, low volatility, don't see a huge breakdown or rally in yields. Currencies we think will be a place where there is a lot of opportunity, especially if the risk premium trade stays low. We've been trying to invest in places like Mexico, Israel, the Asian currencies. The hard currencies, the emerging-market currencies, will do well."

On why investing in emerging market currencies will play out better in 2012:

"At the beginning of 2011, the expectations for growth around the world, people were talking about 4% U.S. GDP growth. People thought the worst had been over when the growth trajectory was pretty positive. Right now this rally has been mostly based on risk premium coming down. Growth expectations are still very modest."

"I think the consensus is the U.S. muddles through at 1.5%. Europe is flat to down and Asia and the rest of EM has an off year. And what is different is in 2011 ,the emerging markets were raising rates because they have an inflation problem. In 2012 everyone is starting to cut rates. And with Bernanke's move, it has injected the DNA in every central bank on the planet to think that if the U.S. is going to keep rates at zero for a long time, we need to get our rates low, too. With inflation coming down, I think you'll see aggressive rate cuts around the emerging markets which should give those markets a boost and those currencies a boost."

On whether he's worried the bottom will fall out:

"This year will be one where we go from really worried to less worried to worried to maybe really worried. I don't think we will get to confident. Really bull markets come when you're confident."

"The U.S. election won't happen until the end of the year, so we won't have real political progress this year. The European drama, which keeps playing out, will go in chapters. This chapter looks like it should have an ok solution, but the next thing we will all wait for after Greece gets done is does Europe slow so much that we're looking at another fiscal problem in Q1, Q2, Q3, and Q4 where you have to put the brakes and austerity measures are so hard to Italy and Spain that they cannot give themselves out of the box? I don't t think that is a story until the second half of the year, but it will be a story."

On last week's Fed action:

"Last week's action is really important. If there were a story coming out of 2008, it is best encapsulated by the book that Ken Rogoff and Carmen Reinhart wrote, which talked about what happens after credit bubbles."

"Last year, probably in March, everyone said we should have listened to them in the first place. I think what you're seeing now is a delayed reaction to where every central banker in the world almost is completely bought into their story. So when Bernanke said we're going to keep rates low until the end of 2014, three years is a long time in markets. You are seeing all other central bankers getting dovish."

On David Swensen saying that unless you have access to the best professionals available, you shouldn't be in hedge funds:

"That means we better become one of the best professionals around. One of the great things about this business is that it's completely Darwinian. The best performers, if you look at Jim Simons' fund, which you can't get into, it performs year and year out, people would give their teeth to get in, they can charge any fees they want. If you're mediocre, you'll get run out of the business. But I don't think the hedge fund industry is going away. It provides great diversification for portfolios. Our investor base is shifting more towards institution - pension funds and endowments all moving into the hedge fund space."

On liquid assets:

"Our macro fund, we decide we run a completely liquid fund, for lots of different reasons. But Fortress-wide, we have $25 billion of less liquid assets. So we're a big proponent if there is massive liability match. If you have capital you're willing to leave long enough for a liquid assets to play out, we think there's great opportunity."

bloomberg.com

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