Hedge funds that trade bonds and currencies are on course for their best year since the global financial crisis, boosted by sharp interest rate hikes that have inflicted heavy losses on equity specialists and traditional investors.
So-called macro hedge funds, made famous by the likes of George Soros and Louis Bacon, have had a barren period in which markets were soothed by trillions of dollars of central bank bond purchases after 2008. But this year they have thrived thanks to seismic moves in global bond markets and a run-up to the dollar as the US Federal Reserve and other central banks battle rising inflation.
Among the winners is billionaire trader Chris Rokos, who has rallied from last year’s losses to gain 45.5% in 2022, helped by bets on rising interest rates, even amid the UK market turmoil in the autumn. It leaves Brevan co-founder Howard on track for his best year since launching his fund, now one of the world’s largest macro funds with approximately $15.5 billion in assets, in 2015.
Caxton Associates chief executive Andrew Law gained 30.2% in mid-December in his $4.3 billion macro fund, which one investor said is closed to new money. Said Haidar’s New York-based Haidar Capital gained 194% in his Jupiter fund, helped by bets on bonds and commodities, which were up more than 270% at one point this year.
“It reminds me of the early part of my career, when macro funds were the dominant investment style,” said Kenneth Tropin, chairman of the $19 billion Graham Capital, which he founded in 1994, referring to strong times for macros. traders in the 80s, 90s and early 2000s.
“They were really hedge funds that were intentionally uncorrelated to people’s underlying exposure to stocks and bonds,” Tropin added.
Global equities are down 20% this year, while bonds have recorded their biggest declines in decades, making 2022 a year to forget for most asset managers. But hedge funds that can bet against bonds or treat currencies as an asset class have taken a leap forward. Macro funds averaged 8.2% gains in the first 11 months of this year, according to the HFR data group. That puts them on track for their best year since 2007, during the onset of the global financial crisis.
Traders profited from bets on rising yields, such as the US 2-year debt, which rose 0.7% to 4.3%, and the 10-year gilt, which rose from 0.7% to 4.3%. 1% to 3.6%. A surprise change by the Bank of Japan in its yield curve control policy, which sent Japanese government bond yields soaring, provided a further boost to yields.
“They’ve given all the macro traders a nice Christmas – even the security guards at the offices are low on Japanese government bonds, I think,” joked a macro hedge fund manager.
With the “artificial suppression of volatility” by ultra-loose monetary policy now gone, macro traders are likely to continue to profit from their economic research, said Darren Wolf, global head of investments, alternatives at Abrdn.
Computer-guided hedge funds have also benefited, with many of the market’s moves providing long-lasting trends. These so-called managed futures funds rose 12.6%, their best year of returns since 2008.
London-based Aspect Capital, which manages around $10 billion in assets, gained 39.7% in its flagship Diversified fund. It benefited from markets including bonds, energy and commodities, with its biggest single win coming from bets against UK gilts. Leda Braga’s Systematica gained 27% in its BlueTrend fund.
“We are in a new era where the unexpected continues to happen with alarming regularity,” said Andrew Beer, a managing director at US investment firm Dynamic Beta. Rising yields and fast-moving currencies have provided opportunities for trend-following funds, he added.
The gains contrasted sharply with the performance of equity hedge funds, many of which endured a miserable year as high-growth but unprofitable tech stocks that soared in the bull market were plunged by rising interest rates.
Chase Coleman’s Tiger Global, one of the biggest winners of the surge in tech stocks at the height of the coronavirus pandemic, is down 54% this year. Andreas Halvorsen’s Viking, which exited equity trading on very high multiples earlier this year, was down 3.3% through mid-December.
Meanwhile, Whale Rock, a Boston-based technology-focused fund, lost 42.7%. And Skye Global, founded by former Third Point analyst Jamie Sterne, fell 40.9%, hit by losses on stocks like Amazon, Microsoft and Alphabet. Sterne wrote in a letter to investors seen by the Financial Times that he was wrong about “the severity of macro risks”.
Equity funds overall are down 9.7%, putting them on track for their worst year of returns since the 2008 financial crisis, according to HFR.
“Our biggest disappointment came from those managers, even well-known managers with a long track record, who failed to predict the impact of rising rates on growth stocks,” said Cédric Vuignier, head of liquid alternative managed funds and research at SYZ Capital. “They didn’t recognize the paradigm shift and buried their heads in the sand.”
With the exception of 2020, this year has marked the largest gap between the top and bottom deciles of hedge fund performance since the aftermath of the 2009 financial crisis, according to HFR.
“Over the past 10 years, people have been rewarded for investing in hedge fund strategies related to [market returns]Graham Capital’s Tropin said. “However, 2022 was the year to remind you that a hedge fund should ideally give you diversity too.”
Additional reporting by Katie Martin