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Weekly Brief: Hedge funds gear up for ECB action with caution

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Going into this week’s ECB meeting, Macro/ CTA strategies maintain large net short positions on the EURUSD cross, which are in line with expectations that the ECB will announce additional easing measures. Indeed, over the recent weeks, ECB officials have been pretty vocal about their intentions and this has contributed to the common currency being dragged close to 1.05 versus USD.


Philippe Ferreira

Head of Research – Managed Account Platform

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Going into this week’s ECB meeting, Macro/ CTA strategies maintain large net short positions on the EURUSD cross, which are in line with expectations that the ECB will announce additional easing measures. Indeed, over the recent weeks, ECB officials have been pretty vocal about their intentions and this has contributed to the common currency being dragged close to 1.05 versus USD.

However, we believe that creating so many expectations can only give room to disappointment. Unless the ECB announces additional monthly purchases from the current EUR 60 billion per month, something that is unlikely at this stage, it is set to miss or just match current market expectations. Technical measures such as the two-tier deposit rate system (implying a higher charge for deposits at the ECB beyond a certain threshold) are less ambitious than present market pricing. As a result, the EURUSD could face upside risks if the ECB disappoints, as we expect.

As mentioned above, Macro/CTA strategies maintain net short positions on the EURUSD cross. However, we note that earlier in the year these strategies had engaged into that trade much more aggressively. We are actually far from the lows observed precisely 12 months ago when the market was expecting the ECB to announce quantitative easing. We also observe that some Macro managers have recently reduced their long European fixed income positions. Some are now in the short side of trade, i.e. expecting Bund yields to move higher. Overall, hedge funds are gearing up for ECB action, but caution is warranted.

In terms of performance, hedge funds continued to move higher in November, up 0.4 per cent according to the Lyxor Hedge Fund Index. Macro managers outperformed, as a result of their long USD and long equity positions. Relative value positions in fixed income also contributed to performance. Meanwhile, Event Driven managers underperformed due to long exposures to health care and energy names. L/S Equity managers also did well in November, up 0.6 per cent with variable bias and market neutral strategies outperforming, as expected. Overall, after delivering a 2 per cent return in October, hedge funds are now on track to achieve a solid Q4.

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