How Hedge Funds Are Trading the ECB’s Moves
The euro’s strength over the past two years–seemingly in contrast to the bloc’s stuttering economy–has baffled hedge funds and other investors alike. But that may be about to end. Thursday’s package of stimulus measures from the European Central Bank has pleased some hedge funds, who think the single currency could finally be peaking. Managers also think that the bank’s actions could be good for so-called risk assets–stocks and bonds. To be fair, the euro was stubbornly resilient in the face of ECB President Mario Draghi‘s measures, but it has driven lower since he began promising action last month and at $1.364 today against the dollar it remains below it’s year-to-date peak of $1.399, hit on May 8.
Aaron Smith, managing director of Pecora Capital in Switzerland, which rose 14.2% last year:
“There’s definitely an opportunity from a trading perspective… U.S. interest rates will start to pick up and euro rates will stay low or go lower. That’s bearish for the euro and bullish for the dollar.”
He has shorted the euro and the yen and bought gold futures. “Gold becomes relatively more attractive as interest rates fall in Europe. What’s the point in sitting in euros earning nothing? The euro at $1.35 can potentially come off much further. It looks like a new trend is emerging.”
Philippe Gougenheim, CEO of Swiss-based Gougenheim Investments which runs $50 million and whose portfolios are up 22% so far this year:
“We’ll probably not see $1.39 or $1.40 again (in the euro)… I don’t know what will be the bottom, but I’m quite confident we’ll not see $1.40. I’m short euro/dollar… I’ve been selling December maturity calls on euro/dollar.
“I was long the Dax and I took profits above 10,000 [which it hit today, as Mr. Draghi was revealing his measures]. This was good for risk assets, but it’s not easy to buy before the (U.S.) unemployment figure tomorrow. We’ll probably re-enter our long position.”
A manager at a hedge fund firm running more than $8 billion in assets, who asked not to be named:
“This is definitely good news for risk assets. They’re trying to improve the supply of credit to improve lending in the real economy… This was positive. The ECB is coming good in doing whatever it takes… It’s positive for credit portfolios.
“A more activist ECB has shown it is committed to act further if needs be. That certainly should be positive in achieving its goals, one of which is a weaker currency.”
Chris Morrison, strategist for Omni Partners’ Macro hedge fund. Omni manages $650 million in assets:
“The ECB can do either very blunt (things) such as rate cuts or QE, or more targeted stuff. For us to go short (the euro) there would have to be more of the former and less of the latter.
“He (Draghi) is saying (that he’s not finished), but he’s got to back that up. QE is in a drawer that is shut and there’s a German foot on that drawer keeping it shut. When is it going to happen? It’s not striking me as happening in the next two or three meetings. It was about the ECB crossing the Rubicon and it didn’t.”
Omni bought some euro against the dollar and sold the Dax index on Thursday.
Pedro de Noronha, managing partner at Noster Capital, which runs $110 million:
“I certainly think it is a good start. (It) should be good for risk assets, but one has to keep in mind that the world economy is already quite “high” on steroids (aka QE) and despite the fact that this should be a positive, it begs the question of how stretched things are to the upside already… (I’m) not adding to my risk here, and (I) have been raising the cash portion of my portfolio lately.” He added that the euro is nearing its peak.