Prologue Capital Likes Forward Curve Steepeners (Investor Letter) ~ market folly

Wednesday, January 27, 2010

Prologue Capital Likes Forward Curve Steepeners (Investor Letter)

Below you will find Prologue Capital's December 2009 investor letter. Prologue is a UK-based hedge fund managing $800 million. They returned 6.92% in 2006, 7.47% in 2007, 18.86% in 2008, and 12.5% in 2009. They certainly didn't have any problems with the tumultuous markets of 2008. Their letter is part of our wisdom Wednesday series of documents and resources.

Chief Economist Tomas Jelf authored the letter and laid out their strategies for 2010:

- Forward curve steepeners in the US & UK

- Continued exposure to higher UK break even inflation

- Short UK gilts outright and against Europe

- Asset swap narrowers in Germany

- Cross market Eurozone bond strategies that short fiscally challenged countries against core Eurozone countries with healthier fiscal outlooks

- Long gold via options

- Continued active participation in the underwriting process of government bonds

So, some very interesting macro plays there as we continue to see hedge funds wagering on higher interest rates via curve steepeners. Howard Marks of Oaktree Capital has also recently outlined his suggested plays for inflation. Additionally, we've detailed how hedge fund legend Julian Robertson had been betting on higher interest rates via constant maturity swaps (CMS).

It's also interesting to see them play gold via options rather than owning the metal as this leveraged bet offers them more opportunity for upside. We've started to see a few other global macro funds favor options over playing the metal itself, which could be a rising trend. The various long/short equity funds we track on the site have favored owning physical gold (David Einhorn of Greenlight Capital). And of course hedge fund Paulson & Co (John Paulson's firm) has started a gold fund.

Embedded below is Prologue Capital's December 2009 investor letter:

You can also download the .pdf here.

We're continuing our theme of 'wisdom Wednesday' (yes we know, lame name) where we've been posting up insightful letters, research and resources from various sources. We've already posted up:

- Bill Gates' 2010 annual letter
- PIMCO & Bill Gross' February investment outlook
- Bank of America Merrill Lynch's hedge fund trend monitor report
- Corsair Capital Management's investor letter
Definitely check those out for more investment insight.

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