June 4, 2014 4:14 pm

Hedge funds bet on euro decline

By Miles Johnson and Ralph Atkins in LondonAuthor alerts
Hedge funds that specialise in anticipating central bank policy have ramped up their bets that
the euro will fall as markets price in aggressive action from the European Central Bank to
weaken the single currency.
So-called global macro hedge funds, which invest in a wide range of assets in line with their
forecasts and analysis of economic and market trends, have raised their net short position in
the euro against the dollar from about 14 per cent of net assets to about 18 per cent during the
past month, according to data compiled by Lyxor, a $21bn hedge fund investor.
Reversing the euros appreciation has become a top priority for the ECB as it battles to
prevent the eurozone falling into a dangerous deflationary spiral.
Since Mario Draghi, ECB president, hinted in early May that the bank would unveil fresh
policy steps this month, the euro has fallen from almost $1.40 against the dollar to a three-
month low of about $1.36.
Global macro hedge funds have been building their bets that Mr Draghi will embark on a
programme of unorthodox monetary policy, and that this will provide them with further
trading profits.
Many such funds have struggled this year as other previously winning trades have gone into
reverse.
Last year many managers piled into the so-called Japan trade, which involved taking out
large short positions in the yen in the conviction that Tokyos drive to stimulate the economy
through a devaluation of its currency would succeed.
This proved a highly profitable strategy for parts of last year. However, large funds such as
Brevan Howard, one of the worlds largest global macro investors, have not found the same
success with the trade as in 2013, according to their letters to investors.
Further cuts in the ECBs main policy interest rates are widely expected on Thursday,
including the imposition of a negative interest rate on the central banks deposit facility
in effect charging banks for parking funds overnight.
The ECB is also likely to use its liquidity-providing operations to encourage bank lending to
small businesses, especially in the stressed countries of the southern eurozone periphery.
Lower borrowing costs and a re-expansion of the ECBs balance sheet should help drive the
euro lower but there is the risk that fresh investor inflows into the eurozone on stronger
recovery prospects have the opposite effect.
Lyxors data are compiled using the trading positions of about 100 funds managing $12bn of
assets on the companys managed account platform, which in turn mirrors the trading
positions of about $200bn of hedge fund assets, including some of those of Bridgewater, the
worlds largest hedge fund manager.