market folly

It's been a while since we checked in on global macro hedge fund Prologue Capital, so let's get their latest economic assessment. We track the fund as they've shown solid performance through very rough waters, up 18.86% in 2008 and up 12.41% in 2009. Prologue was up 3.69% for the year as of the end of June (net of fees). In the fund's second quarter letter, Chief Economist Tomas Jelf echoes chairman Bernanke's declaration that the US economic outlook remains "unusually uncertain."

The $1.014 billion hedge fund points to strength abroad, notably accelerating economic output in India and Singapore as well as a strong recovery in Germany and the United Kingdom (following the earlier fiscal stresses). This comes after their previous commentary where Prologue saw cause for concern.

Jelf notes that the US saw mostly strong corporate earnings in Q2 yet key economic indicators (confidence, employment, housing and consumer spending) suggest a sluggish recovery ahead. The one bright spot was the improvement in capital expenditures. Second quarter GDP estimates have been reduced to 2.5% in light of the harsher economic reality. Jelf foresees continual deleveraging in the corporate sectors and the perseverance of low rates as the Federal Reserve becomes more cautious.

He argues that the picture in Europe is not nearly as bleak, as the markets have reacted favorably to numerous indicators surprising to the upside. Investor confidence has also benefited from the increased transparency following the completion of the bank stress tests. Weak credit growth and fiscal difficulties still pose challenges in the future.

Given all of the above, how is Prologue positioned? They plan to generate returns via the following core strategies:

- Structurally long duration, particularly in the US via forward swaps and higher yielding countries where appropriate.

- Active participation in the underwriting process of government bonds.

- Exploiting dislocations between futures, cash, swaps and mortgages.

- Relative value strategies within core country yield curves.

- Short Europe vs. the US and the UK.

Definitely an interesting approach by the global macro firm given all the uncertainty out there. For more insightful commentary from hedge fund Prologue, they previously detailed why macro factors are positive for risk assets. In terms of other hedge fund manager commentary, Crispin Odey also recently said that equities remain attractively priced but unloved.