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Central Bankers Are Blowing Up Macro Hedge Funds

Central Bankers Are Blowing Up Macro Hedge Funds

Some of the most storied names in the hedge fund firmament are nursing staggering losses after bond yields whipsawed in recent weeks. Central bankers would do well to acknowledge that market dislocation doesn’t just afflict financial players; with borrowing costs generally jumping around in a haphazard fashion, their recent communications failures pose real risks to the real economy.

Disorder abounds across fixed-income markets. Benchmark government debt yields surged in recent weeks, only to abate either back to where they were at the start of last month or even lower in the case of U.K. and Germany. Yield curves have changed shape in dramatic fashion, with disjointed moves at the short end and the long end. When adjusted for inflation, rates in several markets and at several maturities are at record lows.

Central Bankers Are Blowing Up Macro Hedge Funds

That wild ride has caught out some of the biggest hedge funds. Element Capital, which oversees about $15 billion, was down 6.7% in October, extending this year’s loss to 9.9%, according to the Financial Times. Chris Rokos is poised for his worst year ever after losing about 18% last month, with Rokos Capital Management down more than 26% in 2021. Alphadyne Asset Management, Brevan Howard Asset Management and Exodus Capital Management also suffered in October.

There will undoubtedly be some traders who’ve made correspondingly large profits from the turbulence. Bond market swings have become wilder as central banks have bungled their forward guidance about the prospects for inflation and their likely policy response.

Central Bankers Are Blowing Up Macro Hedge Funds

The chief villain of the piece is Andrew Bailey, starring in a remake of the very British RomCom “Unreliable Boyfriend.” Reprising a role originally played by Mark Carney in 2014 , the plot involves the Bank of England governor prognosticating on the need to raise interest rates to subdue inflation, only to fail to make good on the threat/promise – depending on your market position – when decision time actually swings around.

Bailey told an online panel last month that “we, at the Bank of England have signaled, and this is another signal, that we will have to act.” Yet when the central bank met to set interest rates on Nov. 5, no action was taken. Fixed income markets released a collective sigh of exasperation at the flip-flop.

Christine Lagarde has played a supporting role in the drama. She was asked directly at the European Central Bank’s Oct. 28 press conference whether the market was wrong to anticipate higher interest rates by the end of next year. “Not for me to say,” she replied, giving an additional boost to already elevated futures rates and government bond yields.

Less than a week later, she said in an interview with Portuguese television that 2022 was “off the charts” as far as a potential rate increase was concerned. That pushed futures market levels lower — but has left the yield premium investors demand to own Italian debt rather than German bonds at an elevated level.

Central Bankers Are Blowing Up Macro Hedge Funds

For once, the Federal Reserve has had nothing more than a cameo appearance in the production, having successfully announced a taper of its quantitative easing program without triggering a tantrum.

It was, though, first with the line that price increases would prove only transitory and has stuck with that script, albeit with a tweak. In September, faster inflation was emphatically “largely reflecting factors that are expected to be transitory.” By the time it met last meet, the Fed had revised that guidance to “largely reflecting transitory factors,” a subtle but important rewrite.

With figures released on Wednesday showing U.S. consumer prices rising at an annual pace of 6.2% in October, their fastest pace in 30 years, the Fed’s dialogue looks destined to be in rewrite mode in the coming weeks.

Sympathy for the money-losing hedge funds will be in short supply, given their self-professed ability to generate even more alpha in volatile markets. But the ramifications of central bankers mumbleswerving their way into obfuscation go beyond the profit-and-loss accounts of portfolio managers; market lending rates, not official benchmark rates, still set the pace for borrowing costs for consumers and companies.

To be fair, the economic environment central banks are trying to simultaneously predict and shape is particularly unsettled. The challenges for financial soothsayers include fractured supply chains, labor market opacity, and the heightened unpredictability of consumer spending versus saving in a post-lockdown scenario.

But that’s all the more reason for policy makers to tread even more carefully than usual when pronouncing on the likely path of interest rates or the outlook for consumer prices or the prospects for growth. Sometimes, leadership means confessing that the future is becoming more uncertain, something central bankers seem to find hard to admit. As Falstaff says in Shakespeare’s Henry IV Part I, “the better part of valor is discretion.” That’s a line policy makers would do well to memorize for their next public appearances.

In 2014,when quizzing Bank of England Governor Mark Carney about when interest rates might rise, Labour Member of Parliament Pat McFadden accused him of "behaving a bit like an unreliable boyfriend; one day hot, one day cold. And the people on the other side of the message are left not really knowing where they stand."

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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