Hedge funds that trade bonds and currencies are on course for their best year since the global financial crisis, boosted by the sharp rises in interest rates that have inflicted heavy losses on equity specialists and mainstream investors.
So-called macro hedge funds, made famous by the likes of George Soros and Louis Bacon, went through a barren period when markets were soothed by trillions of dollars of central bank bond purchases after 2008. But this year they have flourished thanks to seismic movements in global bond markets and a bull run in the dollar while the US Federal Reserve and other central banks are fighting skyrocketing inflation.
Among the winners has been billionaire trader Chris Rokos, who bounced back from losses last year to get 45.5 percent in 2022, helped by bets on rising interest rates, including during Britain̵[ads1]7;s market turmoil this autumn. That leaves the Brevan Howard co-founder on track for his best year since launching his own fund, now one of the world’s largest macro funds with about $15.5 billion in assets, in 2015.
Caxton Associates chief Andrew Law gained 30.2 percent through mid-December in his $4.3 billion macro fund, which is closed to new money, according to an investor. Said Haidar’s New York-based Haidar Capital has gained 194 percent in its Jupiter fund, helped by bets on bonds and commodities, after at one point this year rising more than 270 percent.
“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-asset Graham Capital, which he founded in 1994, referring to strong periods for macro traders. in the 1980s, 1990s and early 2000s.
“They were really hedge funds that were intentionally uncorrelated to people’s underlying exposure in stocks and bonds,” Tropin added.
Global stocks have fallen 20 percent this year, while bonds have posted their biggest falls 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 jumped ahead. Macro funds increased by an average of 8.2 per cent in the first 11 months of this year, according to the data group HFR. 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, for example in US two-year debt, whose yield has risen from 0.7 percent to 4.3 percent, and the 10-year gilt, which has risen from 1 percent to 3.6 percent. A surprise change by the Bank of Japan in yield curve management policy, which sent Japanese government bond yields higher, provided a further boost to yields.
“They’ve given all the macro traders a nice Christmas – even the security guards in the office are short Japanese Treasuries, I think,” said one macro hedge fund manager.
With the “artificial suppression of volatility” from 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.
Data-driven hedge funds have also benefited, with many of the market moves producing long-term trends. These so-called managed futures funds are up 12.6 percent, their best year of returns since 2008.
London-based Aspect Capital, which manages about $10 billion in assets, took a 39.7 percent stake in its flagship Diversified fund. It profited from markets including bonds, energy and commodities, with its biggest single gain coming from bets on British gold. Leda Braga’s Systematica got 27 percent in its BlueTrend fund.
“We’re entering a new era where the unexpected continues to happen with alarming regularity,” said Andrew Beer, managing member at US investment firm Dynamic Beta. Jumped yields and fast-moving currencies offered opportunities for trend-following funds, he added.
The gains are in stark contrast to the performance of equity hedge funds, many of which have endured a miserable year as the high-growth but unprofitable tech stocks that climbed the bull market were sent tumbling by rising interest rates.
Chase Coleman’s Tiger Global, one of the biggest winners from skyrocketing tech stocks at the height of the coronavirus pandemic, has lost 54 percent this year. Andreas Halvorsen’s Viking, which moved out of share trading at very high multiples early this year, lost 3.3 per cent until mid-December.
Meanwhile, Boston-based Whale Rock, a technology-focused fund, lost 42.7 percent. And Skye Global, set up by former Third Point analyst Jamie Sterne, lost 40.9 percent, hit by losses in stocks such as Amazon, Microsoft and Alphabet. Sterne wrote in an investor letter seen by the Financial Times that he had been wrong about the “severity of the macro risk”.
Equity funds as a whole are down 9.7 percent, which puts them on track for the worst year of returns since the financial crisis in 2008, according to HFR.
“Our biggest disappointment came from those managers, even well-known long performers, who failed to anticipate the impact of rising interest 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 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 correlated with [market returns]”, Graham Capital’s Tropin said. “But 2022 was the year to remind you that ideally a hedge fund should also give you diversity.”
Additional reporting by Katie Martin