Hedge funds’ deflationary trade losses increased in July


Hedge Fund Update

The losses of hedge funds that bet heavily on so-called reinflation transactions piled up in July, and this summer’s dizzying rise in US government debt pushed U.S. Treasury yields to multi-month lows, exacerbating the losses.

Graham Capital Management, Rokos Capital Management, and Brevan Howard are among the funds that have suffered. Graham’s $2.6 billion absolute return fund fell about 4.5% in July and then rebounded by 0.8% this month. Rokos fell 3.8% last month, while Brevan Howard fell 3.9% in the $1.2 billion portfolio managed by trader Alfredo Saitta.

Deteriorating transactions depend on the view that the U.S. getting rid of the higher growth and inflationary pressures brought about by the coronavirus pandemic will severely affect the longer-term Treasury bonds, and the value of their fixed payments will vary over the longer period of consumer price increases. Eroded over time.

The U.S. central bank’s pledge to ignore what it considers “temporary” inflation — leading to its long-term goal of over 2% — has inspired bigger bets.

For a while, bets on U.S. Treasury bonds and flooded into so-called “steep” transactions, which made profits when longer-term Treasury bonds sold at a faster rate than short-term Treasury bonds. Publish Several big-name managers get huge profits.

However, it turns out that the 10-year bond yield fell from a peak close to 1.8% in March to as low as 1.13% in August, which has proven to be painful.Although benchmark bond yields have retraced some of their declines, after rising on Friday release In the strong July employment report, the index is still within the recent trading range, closing at around 1.28%.

Hedge funds’ losses from shorting U.S. Treasuries began to increase significantly in June. Amazing transformation From the Federal Reserve, this shows that there is less perception of rising inflation than previously thought.

Some investors were eventually forced to cover short positions, exacerbating the trend of rising prices and falling yields. In the next few weeks, these losses deepened. Rokos, Brevan and Graham declined to comment.

Lower yields Puzzled Policymakers and investors are alike, and Fed Vice Chairman Richard Clarida revealed at an event on Wednesday that he was “surprised” by the sharp drop. Chairman Jay Powell also recently admitted that there is no “real consensus” on the factors that drive the market, and called on investors who point out “technical factors, which are something you cannot fully explain.”

Some market participants believe that the lower yield is because this year’s growth and inflation have peaked. The spread of the Delta Coronavirus variant supports this argument, which hinders the reopening of the global economy.

Other investors believe that macroeconomic forces may not be the only factor driving changes in yields. Tom Graff, head of the fixed income department at Brown Advisory, said that the steady decline unaffected by data releases may indicate that the current decline in yields is driven by algorithmic traders. Algorithmic traders may have taken clues from the decline in yields that began in May and have driven this momentum.

Hedge funds may experience more pain in reinflation transactions. According to JPMorgan Chase’s survey of customer positions, short positions in U.S. Treasury bonds are still relatively high compared to the level in the first quarter. Despite recent losses, some funds still insist on waiting for higher yields to emerge.

Eric Winograd, senior fixed-income economist at AllianceBernstein, said there are several triggers that may break the cycle of low yields. The news of the peak of Covid-19 cases, or evidence that the Delta variant will not cause widespread economic damage, may boost confidence in the economic rebound and labor market recovery, paving the way for the Fed to start reducing its $120 scale. Billion asset purchase plan.

“The yield is too low,” said Gerlof de Vrij, senior portfolio manager at hedge fund Capstone Investment Advisors. “The story of reinflation is still very active.”


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