The Ec lect ica Fund

The Fund returned 3.5% (net) in Q1. The main positive

contributors to this performance were equities and FX. There

were gains from long positions in consumer staples and

Japanese stocks, as well as gains from shorts in industrial

commodity related stocks. In FX, the Fund profited from being

long the US dollar. Offsetting losses came primarily from long

positions in commodity futures, spread across gold, oil and

softs.

Long Consumer Staples

Given our longstanding caution regarding the prospects for the

global economy we have looked to express equity risk by being

long cash generative businesses with the strongest balance

sheets and the least economic sensitivity. This served us well

in the first quarter when the performance of the S&P consumer

staples index defied recent convention. Such stocks tend to

under-perform their industrial brethren given the seasonal

optimism that tends to surround the global economy at that

time of year. This time around however they out-performed by

rallying 13.8%. But with the annualised Sharpe ratio on our

basket looking unsustainably high, we took a tactical decision

to realise profits towards the end of March.

An unresolved but pertinent question is whether this price

action might mark the start of the next asset bubble? Consider

the plight of a conservative investor: concerned about the risks

to the global economy and hence cyclical equities; fearful of

financial repression in Treasuries; trapped (possibly unfairly) by

the prejudice of the ten-year bear market in US dollars; scared

that governments may have to haircut his savings account in

the bank; and now terrified by the sudden price collapse in

gold. It could be argued that for such an investor all roads lead

to the safest, least volatile, most liquid consumer non-

discretionary blue chips on Wall Street, which provide a 3%

dividend income payable in dollars.

Long US Dollar

The second of our major investment themes is the likely

durability of the US economy relative to the rest of the world,

and the impact this may have on the US dollar. Unlike the rest

of the world, America has dealt with the overhang of bad debts

from the housing bubble through a vicious house price

correction and resulting bust and the recapitalisation of its

banking system. Wages have come down sharply relative to

Asia, the shale gas boom means energy is now far cheaper as

well, and the resulting lower cost base is allowing the US to

reclaim market share within the global economy. As such, US

real GDP is 3.3% above the pre-crisis high of Q2 2008,

whereas the European economy is still languishing 3.1%

below the all-time high recorded in Q1 2008.x

As measured by the DXY Dollar Index, the dollar gained 2.5%

for the first quarter, and seasonally recorded one of its best

monthly performances on record for the month of February.

This strength was partly attributable to investors' perception

that American economic conditions are improving, and also

partly helped by the continuing crisis in Europe. Perhaps more

interesting was another break from recent tradition, as the US

dollar proved less negatively correlated to the performance of

the stock market. It is early to draw anything firm from this, but

the sight of the stock market and the dollar rising in tandem

looks more like the regime which accompanied the last two

dollar bull markets of 1980-85 and 1995-2001.

Long Japanese Equities

Another investment theme we have been leaning toward ever

since the end of 2012 is a long position in Japanese equities.

Back in 2008, we purchased a ten year 40,000 Nikkei one-

touch call option. We had been struck by the historical

observation that it had taken the Dow Jones Industrial Index

twenty five years to recover from the nominal price losses of

the Great Crash of 1929 and make new price highs. The gold

price had required twenty-seven years to overcome its

previous bubble high. Was Tokyo somehow different or would

the persistent inflationary threat of a fiat currency and social

democracy's abhorrence of deflation be such that dire

economic circumstances could once more persuade them to

elect public officials intent on repealing the nominal loss?

In order to turn bullish, we had to see a further deflationary

shock. And as we examined Japan's economy we conceived of

a catalyst. As a consequence of the mercantilist policy of

seeking an external surplus with the rest of the world through

resisting the yen’s strength, the Japanese economy had built

up a huge short position against its own currency. This left

them, we reasoned, vulnerable to exogenous shocks similar in

nature to the Lehman crisis, when the currency strengthened

as foreign denominated assets had to be sold to make good

yen losses registered back home. We reasoned that further

exogenous shocks were likely to produce yet more yen

strength.

2011 saw not one but two huge shocks. The global economy

weakened as a result of the European crisis, and Japan was

struck by a catastrophic earthquake. The yen strengthened

sharply. We had posited that further FX strength would create

duress at the corporate level and sure enough credit spreads

soon widened. By the start of 2012 we had witnessed the

nation's two largest manufacturing debt restructurings, and at

one point it seemed that the impossible was becoming a reality

as household names such as Sharp, Panasonic and Mazda

looked likely to go bust. Even Sony only just managed to hold it

together by issuing a large and very dilutive convertible.

1 EUR A shares.

2 The S&P 500 consumer staples index return for Q1 2013 was 13.8% whilst the S&P 500 industrial index was up 10.1% for the same period (Bloomberg).

3 See first quarter performance of the S&P 500 consumer staples index versus that of the S&P 500 industrial index (Bloomberg):

Q1 2012: 4.8% vs 10.7%

Q1 2011: 1.7% vs 8.2%

Q1 2010: 5.0% vs 12.5%

4 S&P 500 consumer staples index achieved a Sharpe ratio of 7.8 for Q1 2013. Calculation based on daily data and a risk free rate of 1.95% (Bloomberg/EAM).

5 Sources: Bureau of Economic Analysis (US) and Eurostat (Eurozone). US data is Q1 2013 vs Q2 2008. Eurozone data is Q4 2012 vs Q1 2008.

4

3

2

1

5

The Ec lect ica Fund

We reasoned that such was the corporate pain that the political

class would be forced to intervene more directly in the policies

of the Bank of Japan. And, sure enough, as the economic

conditions worsened last year, we saw a newly elected

government fire the institution's two most senior decision

makers and embark on a policy shift on the scale of the Plaza

Accord. This dramatic regime shift and the resulting 20%

depreciation of the yen is very bullish for Japanese assets

(denominated in yen terms) and so with our catalyst in place

we started buying TOPIX index futures and shares in Japanese

property companies.

Receive Rates

However, we also caution that Japan's monetary pivot towards

QE will not create economic growth out of nothing. Instead it

seeks to redistribute global GDP in a manner that favours

Japan versus the rest of the world. This is the last thing the

global economy needs right now. For as we have moved into

spring, business activity appears to be slowing as the inventory

cycle brought about by Draghi’s speech and the re-opening of

Chinese liquidity taps last year fades away. Reported PMIs are

rolling over, and a destocking cycle combined with a resurgent

and competitive Japanese export industry does not bode well

for economies in Europe and the rest of Asia.

This slowdown is occurring at a time when better global

economic statistics over the last six months had served to

enrich the risk premium available at the front end of sovereign

bond curves, US dollar 3y1y rates backing up from 95bps to

150bps as an example. We judged that the combination of

richer rates and weaker economic data justified a much greater

and wider fixed income exposure. Accordingly, since the end of

the quarter, we have initiated positions split geographically

across Australia, Europe, Korea, Switzerland and the US.

Conclusion

In summary, as we move into the second quarter the key

elements of our portfolio are as follows: long the Tokyo stock

market trading just barely greater than its 50 year moving

average (comparable to where gold traded ten years ago and

where the Dow Jones traded shortly after the attack on Pearl

Harbour in 1941), long low variance US equities, long the US

dollar and receiving fixed income at the short end sovereign

curves.

Hugh Hendry, CIO

This document is being issued by Eclectica Asset Management LLP ("EAM"), which is authorised and regulated by the Financial Conduct Authority and registered with the SEC as an

investment adviser. The information contained in this document relates to the promotion of shares in one or more unrecognised collective investment schemes managed by EAM (the

"Funds"). The promotion of the Funds and the distribution of this document in the United Kingdom is restricted by law. This document is being issued by EAM to and/or is directed at persons

who are both (a) professional clients or eligible counterparties for the purposes of the Financial Conduct Authority's Conduct of Business Sourcebook ("COBS") and (b) of a kind to whom the

Funds may lawfully be promoted by a person authorised under the Act (an "authorised person") by virtue of Section 238(5) of the Financial Services and Markets Act 2000 (the "Act") Chapter

4.12 of COBS. No recipient of this document may distribute it to any other person. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness

of, and no liability is accepted for, the information or opinions contained in this document by any of EAM, any of the funds managed by EAM or their respective directors. This does not exclude

or restrict any duty or liability that EAM has to its customers under the UK regulatory system. This document does not constitute or form part of any offer to issue or sell, or any solicitation of

any offer to subscribe or purchase, any securities mentioned herein nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor.

Recipients of this document who intend to apply for securities are reminded that any such application may be made solely on the basis of the information and opinions contained in the

relevant prospectus which may be different from the information and opinions contained in this document. The value of all investments and the income derived therefrom can decrease as well

as increase. This may be partly due to exchange rate fluctuations in investments that have an exposure to currencies other than the base currency of the relevant fund. Historic performance is

not a guide to future performance. The results portrayed for the Eclectica Fund are estimated, unaudited and subject to adjustment. Also, the net results reflect the reinvestment of dividends

and other earnings and the deduction of costs and the management fees and profit allocation to the investment manager and the general partner, as applicable. Particular investors’ returns

will vary from the historical performance due to participation in New Issues and due to the timing of subscriptions, withdrawals, and redemptions. The TOPIX index has not been selected to

represent an appropriate benchmark to compare Eclectica performance, but rather is disclosed to allow for comparison of the Fund’s performance to that of well-known and widely recognized

index. Past performance is no indication of future results. Inherent in any investment is the potential for loss. Eclectica has had positive trading results over certain periods in the past in the

Eclectica Fund. However, prospective investors must consider the uncertain significance of past performance in determining whether or not to invest in the Eclectica Fund. Investors should

not substantially rely on Eclectica’s past record as a prediction of future performance. Investors should not assume that trading decisions made by Eclectica in the future will be profitable. An

investor must realize that he or she could lose all or a substantial amount of their investment in the Eclectica Fund. All charts are sourced from Eclectica Asset Management LLP. Side letters:

Some hedge fund investors with significant interests in the Fund receive periodic updates on the portfolio holdings. © 2005-13 Eclectica Asset Management LLP; Registration No. OC312442;

registered office at 6 Salem Road, London, W2 4BU.

Sources: CRB, Bloomberg, TSE, MOF and Eclectica AM. Data at 30 April 2013.

0

500

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300019

53

19

63

19

73

19

83

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93

20

03

20

13

TOPIX

50yr Moving Ave.

6 Source: Bloomberg.

6