Hedge Funds Whiplashed in Wild March Markets

Trend-following and macro hedge funds have been badly wrong-footed in a week of wild market gyrations and are selling stocks to make up for souring bets on higher interest rates, banks and traders say.

Commodity trading advisers (CTAs) – funds that try to profit by buying or selling when there is a clear direction in markets – slumped 4.3% in the three days to Monday, according to analysis from UBS.

Trend investment managers this week such as Systematica, DB Platinum Advisors and Dunn Capital Management had funds that were down 10%, 7.8% and 4.6% for the month respectively, according to bank research seen by Reuters The companies did not immediately respond to requests for comment.

Funds that trade on macro economic factors also faced turmoil in government bond markets.

“We have seen certainly on (last) Friday and Monday capitulation trades from hedge funds, so all hedge funds have been short duration positioned and we have heard a lot of desks needed to shut down their risk,” said Kaspar Hense, a senior portfolio manager at BlueBay Asset Management.

Hedge funds felt this “brutally” in Japanese markets, Hense said, where positioning from hedge funds and CTAs had been particularly “one sided” in anticipation of an end to the Bank of Japan’s yield curve control policy.

British macro hedge fund manager Crispin Odey’s main fund posted a minus 4.7% February performance and is down 3% so far this year, said a note from his hedge fund to clients. But the hedge fund manager remained upbeat about market conditions.

“Events like the collapse of SVB, to the extent that they dissuade the Fed from raising short rates, play into my hands,” Odey said in the note, referring to the collapse last week of U.S. lender Silicon Valley Bank.

Interest rates, he warned, were too high for financial assets, but not high enough to temper inflation.

“Markets will seesaw between believing that the tightening cycle is over, to finding out that it has barely begun. This is a choice of evils and lies behind a trading market that is probably trending down,” he said. Odey’s fund returned over 150% in 2022, said another letter seen by Reuters.

Very few macro economic funds tracked by bank research seen by Reuters have reported March numbers.

The Graticule Asia Macro fund as of March 10 was down for the month by 3.7% and a Fulcrum Diversified Absolute Return fund was down for the month by 2.6% as of March 14, the research showed. The companies did not immediately respond to requests for comment.

The SG CTA index, which tracks the 20 largest such managers, dropped 4% on Monday, its largest one-day fall on record. Calculated since 2000 by Societe Generale, the index covers CTA managers including AQR Capital Management, Winton Capital Management and Graham Capital Management.

JPMorgan analysts said in a note CTAs lost around 7% from March 8 to March 13 due to short positions in government bond futures and the yen as well as long positions in equities.

The fall in CTA fund values has been triggered by extreme volatility in interest rates since the collapse of Silicon Valley Bank last week.

“Most of the pain came from bonds and equities although all asset classes contributed negatively,” UBS analysts said in a report on CTAs. “As a response, CTAs have significantly reduced their long positions in equities, selling $25 (billion)-$30 billion worth of stocks since the announcement of the SVB collapse.”

Concerns over the stability of Credit Suisse on Wednesday set off another round of twists and turns in the bond market and sent the ICE BofA MOVE index of bond volatility to its highest level since the 2008 financial crisis.

“It means financial conditions are very tight now … and intra-day price actions are going to be very volatile too,” Gilbert Wong, head of Asia quantitative research at Morgan Stanley, said in a note advising his clients to be careful.

He suggested they should lower gross and net exposures and be prepared for a highly volatile market near term.

CTA strategies were successful last year. They thrived while markets kept pushing interest rate expectations higher and sending the dollar on a long rally.

The SG CTA index had its best year on record in 2022.

Many CTAs had positioned for rate expectations to continue rising because of the stickiness of high inflation.