A Wrong-Way Bet on Bond Yields Triggered Rokos, Alphadyne Losses
(Bloomberg) -- A rapid convergence in key global bond yields is behind losses for some of the biggest macro hedge funds.
Chris Rokos’s hedge fund has sunk 11% in October, in part because of wagers that the difference between short- and long-term U.K. and U.S. government bond yields would widen, according to people familiar with the matter. Instead, they’ve tightened.
The market’s shift to expecting Bank of England rate hikes sooner caused most of the harm at Rokos Capital Management, the people said. The fund, down 20% for the year, is on track to post its worst annual loss ever.
The firm isn’t alone as traders bet central banks will curtail stimulus measures much faster than had been expected, roiling so-called steepener trades.
Over at Alphadyne Asset Management, there is less pain than the disastrous June that forced the firm to dramatically reduce risk, but returns are still in the red. Alphadyne has lost more than 1% this month, pushing year-to-date returns to minus 13% through Oct. 22, people said, who asked not to be identified because the information is private. It still held some bets -- though far less than before -- that the Treasury curve would steepen, one of the people said. It had also wagered on a steeper yield curve in continental Europe, another person said.
At the end of September, convertible bond arbitrage and credit long-short hedge funds had, in aggregate, one of their biggest bets on a steeper 2- to 10-year U.S. yield curve since June 1999, according to research and analytics firm PivotalPath. That hasn’t panned out, given that that Treasury yield gap has sunk to around 107 basis points from 121 basis points at the end of September.
The funds had made “quite a sudden shift” since January, when they were mostly invested in a flatter curve, PivotalPath Chief Executive Officer Jon Caplis said.
Meanwhile, the Caxton Global Investments Fund and CQS Global Convertible Bond Fund both managed to post positive returns for 2021 through September -- up 5.6% and 2.6%, respectively -- but steepener trades on U.S. Treasury yields ate into profits, one of the people said.
Representatives for the hedge funds declined to comment.
The thesis behind bets on steeper yield curves hinges on the Federal Reserve and other central banks not having to raise rates soon, something that should -- all else being equal -- tend to keep short- and long-dated bond yields relatively far apart.
But hopes for that outcome are disappearing fast as the threat of persistent inflation starts to undermine easy central bank policies. The flattening of yield curves quickened this week after the U.K. reduced bond-issuance plans and the Bank of Canada accelerated the timing of potential future rate increases.
Losses on steepeners contrast with giant profits found elsewhere in October, including the almost 7% surge in the S&P 500.
Macro funds broadly were up 6.3% year to date through September, according to Bloomberg Hedge Fund Indices. As a group, they’re underperforming the broader hedge fund industry after being whipsawed by trades related to rising inflationary expectations earlier this year.
Investors have been losing patience and pulled $3.3 billion from macro funds this year, according to eVestment. That compares to $30 billion of net inflows into the broader hedge fund industry.
“It’s time to put up or shut up for macro managers,” said Adam Taback, head of high-net-worth investments at Wells Fargo Advisors. “There’s a lot of ability these days to find trades in rates, fixed income, currencies and commodities. So if they don’t do well in the next 6 to 12 months, it’s going to be difficult to defend them.”
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