Hedge funds that bet on big-picture market moves have been hit with steep losses as a spate of recent bank failures upends bets that interest rates would remain elevated.
The souring of the wager led some, including Maniyar Capital Advisors and Haidar Capital Management, to lose more than 20% this month. Many of the funds, which had notched big gains as rates marched steadily upward in 2022, are now flat to down for the year following a steep recent drop in Treasury yields. So-called trend-followers, which try to take advantage of momentum in markets, also were hurt.
Some macro funds sustained lesser losses. Bridgewater Associates’ flagship Pure Alpha fund had lost a little more than 3% in March through 17 March in its higher-volatility share class, while Switzerland-based EDL Capital, started by former Moore Capital Management money manager Edouard de Langlade, lost 5%, said people familiar with the firms.
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Overall, macro hedge funds lost an average 3.5% in the period, according to data from research firm HFR.
Macro investors since late 2021 had widely been betting that stubbornly high inflation and a tight job market would cause the Federal Reserve to raise rates faster and for longer than previously expected. Instead, recent banking turmoil put a dent in rate expectations, with the yield on the two-year US Treasury note notching its largest weekly decline since 1987 last week. (Yields fall as bond prices rise.)
Bonds also surged overseas. Traders say losses funds were taking on their bets against Treasurys spread to Japanese government bonds as managers unwound similar bets in efforts to curb losses.
Many of the funds use leverage, or borrowed money, to amplify their bets, which can boost gains if the wagers pay off but prove costly if they sour. “The magnitude of the losses really boils down to the fact that this was a levered trade that abruptly unwound,” said Greg Dowling, chief investment officer of investment consulting firm Fund Evaluation Group.
In the span of some 48 hours in early March, Silicon Valley Bank’s collapse changed investors’ expectations about the path of interest rates in the US, Dowling said. Where investors previously expected that the Federal Reserve would continue to raise rates, they suddenly were confronted with the possibility that the central bank would ease up, fearing a banking crisis could tip the US economy into recession. Such regime shifts are usually accompanied by months of changing data and messaging from the Federal Reserve.
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The Fed on 22 march approved a quarter-percentage-point rate increase but signalled it might be done hiking sooner than previously expected, causing Treasury yields to slip further.
London-based Maniyar, a macro hedge fund partly owned by Paul Tudor Jones, lost 22% for the month through 17 March, according to people familiar with the firm. Haidar’s Jupiter fund, which gained 193% in 2022, lost 32% for the period, said a person familiar with the firm. Bloomberg News earlier reported Haidar’s loss.
Among trend followers, which also profited by betting on higher rates last year, the Tactical Trend fund of the $18bn Graham Capital Management lost about 10% for the month through to 17 March, said people familiar with the firm. Stockholm-based Lynx Asset Management’s diversified trend-following strategy, the Lynx Program, also lost roughly 10% for the period.
Rob Christian, investment chief at K2 Advisors, a Franklin Templeton unit that invests more than $10bn of client money in hedge funds, said some giveback of outsize gains was to be expected for trend followers, officially known as commodity trading advisers, or CTAs. “I always tell people you have to have an iron stomach to invest in CTAs,” he said.
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A rare fund that profited is $1bn Key Square Capital Management, based in Greenwich, Connecticut. In a March 13 investor letter, founder Scott Bessent, a former investment chief for George Soros, wrote that Key Square the prior week had increased its funds’ exposures to gold and safe-haven currencies, shorted bank stocks and pulled back on energy exposure. Bessent since late last year had warned his clients that banks could face losses in their fixed-income and structured-products portfolios.
SVB’s failed attempt to sell shares before it collapsed the week of March 6 was a signal to Bessent that Fed rate increases were causing stress in the financial sector, he wrote. It was one of several “signposts” that prompted him to further position Key Square’s portfolio for deepening turmoil.
A person familiar with the firm said Key Square’s main hedge fund was up 2.5% for the month through 17 March. Another fund employing more leverage had gained 5%.
Write to Juliet Chung at Juliet.Chung@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com
This article was published by The Wall Street Journal, part of Dow Jones
