market folly

Last month, we detailed Prologue Capital's commentary where they noted that the US recovery was playing out. We're now back with the hedge fund's March 2010 letter and we find that they still anticipate bullish news as the US cycle continues to progress. For 2008, Prologue finished up 18.86% and for 2009 they were up 12.41%. Year-to-date for 2010, they were up 1.64% and currently have around $990 million in assets under management. Head to our post on hedge fund performance numbers to see how they stack up against other hedgies.

One of the main things we took away from Prologue's commentary was their conclusion that US fixed income presents near-term downside risk. For this they cite a weak seasonal period and the conclusion of the Fed's purchases of mortgage backed securities. At the same time, Prologue is less worried about inflation as it decelerates. Later in the letter, Prologue also mentions that, "Our view of falling inflation is one reason why we still expect the Fed to increase rates later than market pricing currently suggest." They also note that their concerns about upside risk to inflation in the UK have been mitigated by recent data.

Overall though, Prologue is increasingly positive on "smaller open economies with healthy fiscal balances and functioning monetary transmission mechanisms." They see policy tightening coming in Canada, Switzerland and Sweden and think the currencies of those nations are likely to appreciate. Some of Prologue's strategies now include:

- Short duration in the US
- Short the Euro and the Yen, long the Renminbi
- Flatteners in Canada, Australia and Sweden

Embedded below is the full commentary from Prologue's Chief Economist Tomas Jelf:



You can directly download a .pdf here.

Always insightful stuff from Prologue as we get a glimpse into their strategic macro mind. For more insight from this fund, head to our previous coverage of Prologue Capital's commentaries. And for great market insight from various other hedge funds, head to our ever-growing collection of various hedge fund letters.