Top Hedge Funds That Dodged Crash, Rode Market Back Turn Gloomy

The U.S. Federal Reserve would risk its credibility with a second round of asset purchases because such a measure may have little impact on economic growth, said Colm O’Shea, the London-based hedge fund manager who hasn’t had a losing year since 2004.

The previous asset purchase program, executed last year, was supported by fiscal stimulus measures globally, inventory restocking and significant monetary easing, said O’Shea, 40, who runs $6 billion COMAC Capital LLP.

“The current backdrop for quantitative easing is very different to that of 2009 with many of the other positive drivers during that time not being present in the current environment,” he said in an August investor letter. “It is, therefore, a genuine risk that another sizeable asset purchase/quantitative easing program will have a limited impact on growth.”

The Fed said Aug. 10 that it would reinvest principal payments on its mortgage holdings into long-term U.S. debt securities, adding to speculation policy makers would consider a second round of large-scale purchases of securities, a strategy known as quantitative easing.

A failure of such measures to stimulate growth may lead to the Fed losing its credibility for effective policies and enforce disinflationary expectations, O’Shea said.

There is “a valid question of how effective these tools have been thus far and how effective they can be in the future,” O’Shea said. He didn’t list his trades in the letter.

‘Rising Concern’

Paul Mungo, a spokesman for COMAC, wasn’t available for comment.

O’Shea’s COMAC Global Macro Fund climbed 2.29 percent last month and 3.85 percent this year, according to the letter, a copy of which was obtained by Bloomberg News. Macro hedge funds, which seek to profit from broad economic trends by trading stocks, commodities and currencies, returned 1.45 percent in August and are down 1.53 percent this year, according to Hedge Fund Research Inc.’s HFRI Macro Index.

The hedge-fund industry has returned 0.17 percent in August and 0.18 percent this year through August, according to the Chicago-based research firm.

O’Shea said the outlook for the U.S. economy is becoming a “rising concern” as demand from households and business spending isn’t compensating for waning fiscal stimulus and inventory effects.

‘Air Pocket’

“In essence we are in the middle of an ‘air pocket’ in terms of final demand drivers for growth,” he said in the letter. “The positive effects of the initial recovery, which was led by fiscal stimulus and inventory restocking, are now fading, and household consumption, business investment and export demand are not compensating for the shortfall.”

While central banks are considering ways to lift economic growth, governments are struggling to reduce budget deficits as expansion slows in the second half, O’Shea said. Greece has been effective at meeting deficit targets set by the European Union and the International Monetary Fund, although tax revenue has started to fall behind projections and the government increased spending cuts in response, he said.

Spain and Portugal are in danger of missing their targets based on cash shortfalls for the first half of the year, he said.

“With growth set to slow further in the remainder of the year, which will affect tax revenues, there is a question around how much more fiscal tightening voters will be willing to accept,” O’Shea said. “These issues remain an active driver of markets and can again become a focal point for market participants.”

To contact the reporter on this story: Saijel Kishan in New York at

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