Hedge fund COMAC Capital, the $5.2-billion macro fund run by Colm O'Shea, is bracing for a fresh round of turmoil in European markets, people familiar with the fund said, and is sticking to its bearish strategy despite losing out in this year's rally.
London-based COMAC, down more than five per cent in the period up to mid-March this year, believes the flood of cheap central bank cash into parched markets is only a temporary fix for Europe's ills, and masks the region's poor economic prospects, these people said.
Most hedge funds are returning to winning ways in 2012 thanks to the rally in equity and bond markets and a bullish stance. The average hedge fund has risen 5.03 per cent from the start of the year up to March 15, according to the HFRI Fund Weighted Composite Index.
Bullish funds have benefited from the European Central Bank's one trillion euro cash injection into the financial system and greater confidence that policymakers have finally stopped the eurozone debt crisis from spiralling further out of control. But some macro funds are positioning themselves for a new downturn in Europe, at the same time as they see an improved economic outlook for the US.
Many have bought options linked to volatility, which will rise in price if there is a resumption of the panic that racked markets for most of 2011, people familiar with the sector said.
"A lot of these funds think all this quantitative easing is just a temporary fix and the underlying problems are still there," one of the macro-investors said.
Macro funds make money by wagering how economic trends will play out across asset classes including in rates, currencies, commodities and equities, and are among the best-known.
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Well-known funds in the sector include Brevan Howard, Moore Capital and Tudor Investment, as well as George Soros' Quantum Fund, where O'Shea used to work as a macro trader. COMAC has made several successful calls in the past. It returned five per cent in 2011 compared with a fall of more than five per cent booked by the average fund.
It has returned an annualised profit of upwards of eight percent since its 2005 inception, data seen by Reuters shows.
O'Shea, who read economics at the University of Cambridge, also performed well in 2008 after several successful bets including one on falling U.S. interest rates.
According to its website, COMAC invests across global markets to try and capture "directional market movements that commonly have a strong fundamental reasoning based upon economic and political analysis."
Investors looking for protection against volatile and uncertain markets have made macro funds among the most popular strategies this year.
In a recent survey conducted by Credit Suisse, investors said macro was the most sought-after strategy in 2012, while also predicting that they would be the best performing.
COMAC declined to comment.