Hedge funds have hardly been masking themselves in glory throughout a tumultuous few weeks for markets.
Sharp strikes within the US authorities bond market and in financial institution shares, pushed by failures within the US regional banking sector and the autumn of Credit score Suisse, have left quite a few funds within the crimson for the yr.
Many managers had been discovered to be sitting in trades that appeared apparent on the time primarily based on the superbly rational perception that rates of interest needed to transfer greater to fight stubbornly excessive inflation. Sadly, this additionally meant that these trades turned crowded, and subsequently harmful if funds all rushed to the door to reverse them.
Most painful had been the bets run by macro and computer-driven funds towards authorities bonds. Plenty of managers had made a fortune final yr latching on to the large sell-off in bonds and noticed little motive to alter their view.
However when the collapse of SVB despatched traders dashing into the secure haven of presidency debt and despatched the US two-year Treasury yield tumbling at its quickest tempo since 1987, funds out of the blue discovered themselves in precisely the incorrect place — betting towards an asset that traders desperately needed. Managers racing to unwind their bets solely exacerbated the worth transfer.
One of many funds hit arduous has been Mentioned Haidar’s Haidar Capital, a standout performer final yr when its bond bets helped it make almost 200 per cent. Nevertheless it misplaced 32 per cent from the beginning of March to the center of the month, in line with folks conversant in the info. Considered one of these folks stated this took losses this yr to 44 per cent.
And Chris Rokos’s Rokos Capital, which made greater than 50 per cent final yr, was additionally caught out, with the US Securities and Trade Fee elevating issues after the fund confronted margin calls — although counterparties contacted by the FT stated they weren’t involved about its means to fulfill such calls.
Laptop-driven hedge funds had been additionally hit. Many who attempt to revenue from following market tendencies had been working quick positions in bonds previous to the turmoil and needed to rapidly lower them. Man Group’s AHL Evolution fund misplaced 11.3 per cent in March to the twenty eighth of the month, whereas Progressive Capital Companion’s Tulip Pattern dropped 26.3 per cent in March to the twenty fourth.
London-based Facet Capital slashed its bets on bonds from almost half of its Diversified fund’s finances for threat in bonds in early March to lower than 8 per cent by the tip of final week, in line with investor paperwork seen by the Monetary Occasions.
In the meantime, many funds had been additionally harm by their bets on financial institution shares. In a rising price surroundings, proudly owning banks — which might profit from greater internet curiosity revenue — looks as if a logical transfer.
Hedge funds’ publicity to the sector duly reached a 12-month excessive in early February, in line with a Morgan Stanley consumer word, whereas they ran bets towards different components of the market prone to be hit by greater borrowing prices. That left them badly positioned for the following banking sector shakeout.
Hedge funds had been “not bearish the precise issues” in Europe, stated Bernard Ahkong, co-chief funding officer at UBS hedge fund unit O’Connor. It was “a better rate of interest playbook”.
Not each supervisor was on the incorrect aspect of those strikes. Mark Dowding, chief funding officer at RBC BlueBay, had closed his guess towards authorities bonds previous to the turmoil and was then in a position to placed on a brief guess following the rally. Roy Niederhoffer’s Macro Diversified fund is up 10.3 per cent in March after benefiting from the market volatility and latching on to the bond rally.
However, hedge funds on common have now misplaced 1.7 per cent in March and are down 0.6 per cent this yr up till March 28, in line with knowledge group HFR. Not a terrific look when the S&P 500 fairness index was up about 3.4 per cent over the identical interval.
It marks one more disappointing episode for the hedge fund business. After a decade of becalmed markets dominated by central financial institution stimulus, greater rates of interest had been meant to usher in a brand new, extra beneficial period for managers. Their means to tell apart profitable shares from shedding shares and to foretell main macro tendencies would supposedly as soon as once more repay.
However the transition to greater charges has additionally meant a collection of landmines and violent market strikes which have caught many funds off guard, as found by managers holding overpriced expertise shares early final yr. Buying and selling situations could slowly be turning extra beneficial, however there are prone to be loads of risks forward too.
laurence.fletcher@ft.com
