The battle by central banks to tame inflation continued to present investment challenges and opportunities in June with the US Federal Reserve’s decision to leave rates unchanged for the first time in 15 months catching some managers and investors flat-footed.
- Managers bet on future rate hikes as Fed presses pause
- Oil short sellers ignore Saudi ‘watch out’ warning
- Odey Asset Management in full blown crisis mode
By Mark Kitchen
Head of intelligence, Hedgeweek
The battle by central banks to tame inflation continued to present investment challenges and opportunities in June with the US Federal Reserve’s decision to leave rates unchanged for the first time in 15 months catching some managers and investors flat-footed.
Citadel boss Ken Griffin was among those convinced that despite the pause, the Fed still has more rate rises in reserve, predicting at least one further increase before year end. And the prospect of the US economy going into recession later this year, has prompted his firm, which racked up a record $16 billion return for clients last year, to increase its focus on credit trading and in particular the high-yield credit market, with a mix of long and short strategies.
Data from the CFTC meanwhile, suggested that Griffin wasn’t alone in thinking the Federal Reserve’s interest rate battle to curb inflation still has some way to go, with leveraged investors boosting their net-short two-year Treasury positions for an eleventh straight week in early June, marking the longest short-run on record, according to data going back to 2006.
Over on the other side of the Pond meanwhile, where the Bank of England produced its own mini-surprise with a 50 basis point rate hike rather than the widely expected 25, Man Group boss Luke Ellis said the efforts of central banks around the world to tackle inflation have failed to have a meaningful impact, and threats to the broader global economy remain. Ellis’ view is that rate rises have made a dent in manufacturing but not in services.
Sticking with central bank tactics, speculation that the Bank of Japan isn’t likely to change tack on its existing easy-money monetary policy anytime soon, prompted hedge fund and asset managers to up their bearish positions in the yen, according to CFTC data.
And with both the yen and China’s yuan having fallen to historic lows against the US dollar, Japan and emerging markets hedge funds have benefitted, according to HFR, with the HFRI Japan Index recording a 1.8% YTD gain and the HFRI 500 Emerging Markets Index up +1.3%.
“Structural shifts” in the Japanese domestic market meanwhile, mean now is “an exciting time to be involved in Japan”, according to Citadel’s Ken Griffin, which is perhaps just as well given that the firm is preparing to reopen an office in Tokyo as early as this year. Citadel, which closed its last office in Tokyo in 2008 as part of its restructuring in the aftermath of the collapse of Lehman Brothers, is looking to tap new investment opportunities stemming from a shift by Japanese companies to “being much more focused on generating success for their shareholders and growing their businesses globally”.
Saudi Arabia also sprang a surprise in early June announcing a voluntary cut of one million barrels a day of its own oil output in a bid to “stabilise” the market, with Saudi energy minister Abdulaziz bin Salman warning oil short sellers to “watch out”. Undeterred, hedge funds proceeded to up their short bets though, with wagers against US crude futures and options jumping to the highest level seen in three months.
Famed oil trader Pierre Andurand meanwhile, saw his main hedge fund, the Andurand Commodities Discretionary Enhanced Fund, which makes leveraged bets, fall by another 7% this month, taking year-to-date losses to a record 51%. Earlier this year, Andurand was in bullish mood predicting that oil prices may exceed $140 a barrel by the end of 2023, misplaced optimism it would seem, as elevated inventory levels, resilient supplies from Russia, and increasing shipments from Iran and Venezuela, have kept prices at much lower levels.
And finally, it was also a month that saw Odey Asset Management move into full-blown crisis mode following allegations of serial sexual misconduct levelled at founder Crispin Odey on 8 June. Funds have been gated or shuttered, prime brokers have moved to sever ties, with the firm and discussions have been held over the transfer of funds to rival firms. Odey meanwhile, has been ousted from the business and has lost his status as a “fit and proper” individual in the City of London with his certification with the FCA to perform a role dealing directly with clients having ended on 12 June, two days after he was removed from the hedge fund’s partnership.
