Almost every global macro fund has exposure in Japan and the most bullish ones have taken the largest losses so far. We have mentioned the underperformance of Argonaut Capital and TT International in June, both of which have exposure in Japanese equities. Another macro fund that suffered largely because of its positions in Japan was Woodbine Capital, the fund slid 2.8 percent last month, trimming its year to date returns to +6.5 percent. This was the largest monthly decline YTD.
Woodbine shorts China, Aussie, long Japan
The positive movers for Woodbine Capital were its shorts in Chinese equities and the fund was also up from shorting AUD against the USD. Woodbine has increased shorts in China by buying options that are short the yuan. Like we predicted earlier, the trend of shorting China among hedge funds is bound to increase going further.
Despite of stumbling in its long positions in Japanese equities, the fund increased its exposure in the area as it saw volatility stabilizing in the the region. Woodbine added long exposure in banks and real estate names in Japan, the fund already had positions in Japanese exporters. Woodbine continues to believe that BoJ’s fiscal stimulus will anchor Japan’s growth further and the current government will support more structural reforms after the upper house elections turn out favorable results, where Abe’s party won by a landslide yesterday.
Contrasting fiscal policy in Europe vs U.S
The fund is also positioned to cash into the tougher economic conditions in China by protecting itself from deteriorating growth in the region and also by establishing short positions in Aussie, whose exports to China have taken a hit. Woodbine also notes the contrast in fiscal policy mood in China, U.S versus Japan and Europe. While the former has signaled a tougher outlook for economic policy, the latter has committed itself to prolonged low interest rates.
It is also likely that if U.S does tighten the stimulus, Europe will be affected by rising yields and will therefore have to take a more dovish approach, similar interplay was seen when Fed hinted that it would taper QE by the mid of next year. Earlier, TT International called the rising rates in China and US, a toxic combination for the struggling European countries and emerging economies.
Additionally, Woodbine is also shorting euro against the USD. Like mentioned earlier, as rates in both US and Europe go opposite ways and embattled economies like Portugal and Spain continue on the bumpy road, the euro is expected to take downward pressure.