MH Model Portfolio: Four New Trades Including How to Position for a Dovish BoE
- By Bilal Hafeez
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Portfolio Changes
We made six changes to our portfolio since last week. A summary can be found below:
New positions
DM Rates:
- Receive May 2024 SONIA (target 25 bps cuts) – read here.
- Long 10Y Gilt (FX hedged) vs short 10Y OAT (target -100 bps; stop -25 bps) – read here.
EM Rates:
- Receive 5Y ZAR swap (target 7.50%; stop 8.75%) – read here.
Commodities:
- Long Brent Feb 24 (target $85.0; stop $76.4)
Exited positions
- Long USD vs. European FX basket (EUR, CHF, and GBP)
- Long EUR/GBP.
We exited long USD vs. the European basket after the broad sell-off we saw following last week’s CPI. The trade flipped from a winning position to a loss, ending down 1.2%.
We also closed EUR/GBP taking profit up 0.2%. We still like GBP downside but are wary of further USD downside, which is likely to benefit GBP over EUR (without a GBP repricing).
Open Trades
Following the weaker than expected CPI print last week, we saw a spike in gold, moving our put option further out of the money. The report was almost the perfect storm for this trade in the short run, as gold once again began to be correlated with both USD and rates which provided a tailwind.
In the short term, we think the moves at the short end are overdone. The prospect of higher for longer re-emerging will be a tailwind going forward as it ensures earnings positive cash rates remain a better alternative than owning gold.
Meanwhile being long regional banks and homebuilders on the equity side has worked well. Lower rates have helped both trades, as they feed into lower mortgage rates and lower HTM losses on the banking side.
Historic Performance
Our portfolio has returned +8.7% YTD, up 0.1% since last week, and has returned +51.6% since inception (+11.3 % annualised) with a 1.1 Sharpe ratio. This continues to place it above the average discretionary macro hedge fund (Bloomberg: BHDMAC Index; Chart 1). Our largest risk positions (VaR) are in rates, followed by FX, with the smallest positions in commodities and then equities. Note: Our P&L are paper returns so will be overstated relative to a real invested portfolio.
Current Trades
DM
Rates
- Receive May 2024 SONIA (target 25 bps cuts) – read here.
- Long 10Y Gilt (FX hedged) vs short 10Y OAT (target -100 bps; stop -25 bps) – read here.
- Pay Apr-24 EUR-OIS (target 0 bps) – read here.
- SONIA and SOFR Mar24/Mar25 calendar box (target 0 bps) – read here.
- 5s10s UST steepener (target 15bps) – read here.
- Pay 1Y1Y US OIS (target 5%) – read here.
- Short US10Y vs USD hedged 10Y JGBs (target -450bps) – read here.
Equities
- Long homebuilders and regional banks – read here.
EM
FX
- Long EUR/CZK (target 25:60; stop: 24:00) – read here.
Rates
- Receive 5Y ZAR swap (target 7.50%; stop 8.75%) – read here.
Commodities
- GCK4 $1,850 put option – read here.
- Long Brent Feb 24 (target $85.0; stop $75.0)
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)