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Faith in policymakers may be "serious error" - Brevan Howard

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(Globalpost/GlobalPost)

By Laurence Fletcher

LONDON (Reuters) - Investors betting that actions by policymakers will prop up financial markets indefinitely could be making a "serious error", says Brevan Howard, one of the world's biggest and most respected hedge fund firms.

The comments by Brevan, which manages $40 billion (26.48 billion pounds) and whose Master fund has never had a losing year, comes as European politicians wait to see whether debt-laden Cyprus will accept an international rescue and avoid a default that would shake the euro zone.

"Looking forward to 2013, the tail risks which have haunted the markets for the last five years appear to have receded for the time being, but have by no means disappeared," Brevan said in a report by listed feeder fund BH Macro published on Tuesday.

"Having faith in policymakers' ability to provide a perpetual put may yet prove to be a serious error; and, with interest rates stuck at zero, investors' ability to easily earn back losses remains severely impaired."

A put option gives an investor the right to sell an asset at a pre-agreed price within a specified time, irrespective of whether the underlying value of the asset falls.

Markets have rallied strongly in recent months after European Central Bank head Mario Draghi pledged in July to do "whatever it takes" to protect the euro zone from collapse, cementing the view the single currency bloc was not headed for imminent break-up.

U.S. markets have also been boosted by bond buying by the Federal Reserve, while the new governor of Japan's central bank is expected to pump huge amounts of yen into the economy.

However, global stock markets fell on Tuesday, extending the previous day's decline as investors continued to fret about Cyprus.

Brevan said it was more optimistic about the opportunities for macro trading - investing in instruments that fluctuate with changes in economic policy - than for some time.

"Policy hyperactivity coupled with investor apathy could lead to significant and persistent price moves in multiple capital markets," Brevan said.

It said the Master fund had a "risk on" positioning while its overall risk levels were moderate.

(Reporting by Laurence Fletcher; Editing by John Stonestreet)

http://www.globalpost.com/dispatch/news/thomson-reuters/130319/faith-policymakers-may-be-serious-error-brevan-howard