market folly

Global macro hedge fund Prologue Capital is out with their latest market commentary and we get a look at what themes they're playing. In Prologue's previous investor letter, we learned that they were bullish on Canada, Switzerland, and Sweden. This time around, their Chief Economist Tomas Jelf outlines that there are four broad macro forces in play currently:

1. Strong Global Growth Momentum
2. Close to Zero Percent Policy Rates
3. Disinflation
4. Fiscal Stress

As Jelf notes, "The first three are positive for risk assets and have so far outweighed the negative impact from fiscal stresses. The last three are positives for core fixed income markets and have, to a greater extent than we thought, neutralized the negative impact from positive growth developments. Thus we have been in an environment which is positive for risk assets and neutral for fixed income."

This obviously is quite straight forward as investors yield chase in an environment where interest rates are at the lowest of the low. As such, market participants are willing to take on more risk in exchange for potential return. Not to mention, as a reactionary response to the crisis, bond funds saw massive inflows. And now, capital that was previously on the sidelines has made its way into the equity markets in search of returns. A lot of the year-long market rally has been driven by liquidity as money seeks out a home. Prologue's macro summary outlines just why the environment is positive for risk assets. And while the environment is currently 'neutral' for fixed income, it will eventually shift to 'negative' once interest rates start to (eventually) rise.

Then you compare the above synopsis with Prologue's latest portfolio strategy. They have assembled positions in curve flatteners in small developed countries, are short duration in AUD, and are short the euro and the yen versus the US dollar. Additionally, they've employed relative value strategies "that take advantage of the supply calendar in Europe" and Prologue continues to also underwrite government bonds. Lastly, they are also long the Renminbi and gold. Does this look familiar? It should. As we've detailed countless times, hedge funds are aggressively short the yen and have also been short the euro in size. Of course many prominent hedgies have been long gold for quite some time as well and we've detailed their extensive fundamental research.

Prologue Capital has fared like many fellow global macro funds over the past few years. They avoided losses in 2008 and in fact were up an impressive 18.86%. Then, they returned 12.41% in 2009 and are up 1.88% thus far in 2010. So, while they've underperformed the markets in general recently, they certainly protected from losses when it mattered most. They currently manage just under $1 billion.

Embedded below is global macro hedge fund Prologue Capital's April letter to investors:



You can download a .pdf here.

As always, an interesting macro take from Jelf and the Prologue Capital team. For more global macro research, we also just yesterday posted up investment commentary from John Brynjolfsson's Armored Wolf which also presented a current look at where we stand. To learn from some of the most knowledgeable global macro fund managers around, we highly recommend Steven Drobny's new book The Invisible Hands: Hedge Funds Off the Record.