The trend of losses for Global Macro funds in February was noted in a previous article; we predicted that the Pharo Macro’s losses could be attributable to its long positions in European debt. As we have more information now, so we can confirm that Pharo Macro lost across its long positions in European debt curves.

Despite losing 0.7 percent in February, Pharo was able to gain from its well-placed shorts in euro and is up 4.8 percent YTD. This puts Pharo Macro in line with a handful of hedge funds that made timely short bets in EU’s troubled currency. Meanwhile large speculators in US have multiplied their short exposure in EUR futures manifold. On the week ending on March 26, hedge funds increased shorts from $5.8 billion to $6.3 billion notional. Euro futures are at the edge of crowded short zone, after their brief stint in the long zone towards the end of last year.

CFTC EUR Futures March 2013

Pharo Macro has a long position in Hungarian rates which was one of the main detractors in Feb. Hungary’s debt rating was downgraded by all rating agencies and recently IMF’s research report warned Hungary to put a stop to frequent rate cuts which is putting the country’s financial stability at risk. Pharo Macro expects the Hungarian rates and currency to bounce back once the rate cuts become too large to sustain.

Other losses in Italian and Greek sovereign bonds where yields widened after unexpected election results surfaced in Italy. Pharo Macro has significantly cut down its position in Italian and Argentine sovereign credit. The monthly commentary in the letter notes the continuing appeals against the US court’s decision that grants the holdout creditors leverage in their case against Argentine government. It is highly likely that Argentina will have to bend to the court’s orders and at the same time the chances of Argentina’s default are higher than ever. Pharo Macro’s position in Argentine debt was a contributor to its underperformance in 2012.

Other losses for the fund were in short Swiss franc and long Russian ruble. Pharo Macro profited from longs in Turkish rates but lost in bullish positions in Turkish lira.