In the context of the release of the inflation report on Feb 12th, the BoE decided to remove the effective 0.5% floor for its benchmark interest rate. The December inflation figure, at 0.5% yoy, was actually the lowest number registered in the past 15 years. Against this backdrop, hedge funds have increased their short positioning on the GBPUSD over the last three months.
Head of Research – Managed Account Platform
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In the context of the release of the inflation report on Feb 12th, the BoE decided to remove the effective 0.5% floor for its benchmark interest rate. The December inflation figure, at 0.5% yoy, was actually the lowest number registered in the past 15 years. Against this backdrop, hedge funds have increased their short positioning on the GBPUSD over the last three months. Along with the JPY and the EUR, the GBP is the most aggressively shorted currency by CTA and Macro managers. As we get closer to the May 7th general election, which is likely to result in a hung Parliament, the GBPUSD positioning is also likely to be influenced by the political climate. In January, short GBP positioning generated gains, but month to date the story has reversed, which is illustrative of the broader environment.
After a strong start to the year, hedge fund returns in February are slightly down and CTAs are now underperforming. Trend reversals in several asset classes have led to losses. Last week we highlighted the trend reversal in commodities. Last week, the strong January job report in the US (see p.2) caused a sharp rise in 10y yields, negatively impacting CTAs' long US duration positions. Meanwhile, Global Macro managers have benefited from their short duration positioning, yet nonetheless gains were offset by losses on long precious metals positions.
With regards to L/S Equity, performance in February is negative so far, dragged down by Asian managers. In the US, the ongoing sector rotation in favor of cyclicals versus defensives proved supportive to several US managers (see p.4). Multi strategy funds are holding up well, assisted by their diversified book.
To conclude, February turns out to be somewhat challenging as a result of trend reversals. Going forward, conditions in equity and FX markets are likely to continue to support Global Macro and to a lesser extent CTA managers. In L/S Equity, we continue to express a preference for variable bias versus long bias managers. Event Driven is showing signals of recovery and our stance is slightly overweight.
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