(Bloomberg) - The hedge fund traders watched as a nightmare scenario played out in the world’s bond markets.
From Australia to the U.K. to the U.S., government bond yields abruptly moved against them last week amid growing speculation that central banks will accelerate plans for raising interest rates in the face of persistent inflation. The losses piled up -- and for a few became so big that the firms halted some trading to contain the damage.
Balyasny Asset Management, BlueCrest Capital Management and ExodusPoint Capital Management each curtailed the betting of two to four traders after they hit maximum loss levels, according to people with knowledge of the matter, who asked not to be identified because the information is private. That step stopped traders from changing their positions, an extraordinary risk-management move used so firms can reassess trades or unwind them.
ExodusPoint lost about $400 million last month, leaving it down 2% in October, people said. The fund is still up 2.8% year-to-date.
Millennium Management also suffered amid the tumult and is continuing to monitor its macro portfolio managers’ trades, people said. The fund is down about 0.4% for October and up 10.9% for the year, they said. Meanwhile, Point72 Asset Management’s macro business was said to see some losses from the bond-market moves.
The hits show how even some of the most sophisticated traders have been caught flat-footed by the rapid shift in sentiment that has raced through markets. In some cases, the losses could be offset by the stock rally that’s driven the S&P 500 to new record highs.
Representatives for the firms declined to comment.
Many hedge funds had been betting that central banks would be slow to raise interest rates, seeing the surge in consumer prices as a temporary side-effect of the pandemic.
But that view has been challenged as hawkish comments from the Bank of England cemented expectations for a rate hike, the Bank of Canada shut down its bond buying program and Australian policymakers abandoned a key short-term yield target. In the U.S., where the Federal Reserve is widely expected Wednesday to announce plans for winding down its bond purchases, markets are now pricing in two rate hikes by December 2022.
That has upended trades betting that the gap between short- and long-term bond yields would widen, which would happen if markets expected growth and inflation to accelerate in the face of loose monetary policy. Instead, that gap narrowed.
In the U.S., the difference between two- and 10-year Treasury yields flattened by 13 basis points on Oct. 27, marking one of the biggest one-day moves in the yield curve of the past two decades, according to Cornerstone Macro’s estimates. That came as the two-year Treasury yield almost doubled last month to about 0.5%. An upward move hadn’t approached that degree since December 2009, when the two-year yield jumped to about 1.14% from 0.66%.
The volatility this year has led to heavy losses for some of the best known macro traders in the world. Billionaire Chris Rokos’s hedge fund losses worsened to 20% through Oct. 22 this year, in part because of wagers that the yield curve would steepen in the U.K. and U.S. Alphadyne Asset Management, which has never had a down year in its flagship hedge fund since it started up in 2006, lost more money last week and was down 17% through October this year, Bloomberg reported on Tuesday.
Another hedge fund that suffered heavy losses was interest-rate-focused Frost Asset Management, which slumped almost 18% last month largely due to the sharp rise in Swedish short-term interest rates and flatter yield curves, according to the fund’s backer Brummer & Partners AB.
By Nishant Kumar and Hema Parmar
