Key Takeaways
- • Up to 100 European rates traders have left London hedge funds, up from roughly the mid-70s a few weeks earlier, according to traders and headhunters cited by eFinancialCareers.
- • The exodus follows losses in leveraged carry trades on French government bonds (OATs) and other European government bonds (EGBs), which were hit as French yields rose amid political turmoil.
- • Sources describe the losses as significant and sector-wide, though the exact extent is unclear and not all departures involve losses.
- • Many departing traders are bound by non-competes or guarantees, and banks may rehire them to manage ECB exposure and bond books.
- • Market participants question whether European fixed income carry strategies can return to their prior form, with fears that Italian BTP spreads could follow OATs.
Summary
London hedge funds running European government bond strategies are experiencing significant turmoil, according to traders and headhunters cited by eFinancialCareers. Individual funds declined to comment on recent performance, but industry insiders say conditions have been poor. A senior trader at a liquidity provider said, "Everyone has blown up," adding, "They are all out." Traders at banks who track former colleagues report that the number of departures has risen from the mid-70s a few weeks ago to closer to 100 now.
The departures follow years of heavy hiring by London hedge funds in European rates trading. Sources describe the episode as the end of an era for a strategy in which funds bought French government bonds (OATs) and financed them in the repo market, using the bonds as collateral and earning the carry between the bond yield and the repo rate. As French yields rose amid political turmoil, OATs sold off and the leveraged trade was upended. One senior bank trader characterized many of these managers as carry operators rather than true portfolio managers, while noting that many funds had been long France and long Italy in the belief that the trade was low risk.
The extent of losses is not clear, and not all departures will reflect losses. Traders and headhunters nonetheless say losses across the sector have been significant, with one bank trader calling it "systemic" and a "huge shock" to the hedge fund job market. A headhunter said banks may need the former traders to manage ECB exposure and bond books, and warned that the market fears BTP spreads could follow the path of OATs. Some sources also said several portfolio managers who left this month had also suffered losses in March, and that the European carry trade is now being questioned.
Re-employment may be constrained. Many departing traders are subject to non-competes, and some remain on guarantees. Banking pay is also far lower than hedge fund compensation, with one trader noting that the traders earned $1m+ and that such pay is typically available only to desk heads. One portfolio manager said around 10% of those who have left did so voluntarily, citing an opportunity to run their own fund with outside capital.
The departures follow years of heavy hiring by London hedge funds in European rates trading. Sources describe the episode as the end of an era for a strategy in which funds bought French government bonds (OATs) and financed them in the repo market, using the bonds as collateral and earning the carry between the bond yield and the repo rate. As French yields rose amid political turmoil, OATs sold off and the leveraged trade was upended. One senior bank trader characterized many of these managers as carry operators rather than true portfolio managers, while noting that many funds had been long France and long Italy in the belief that the trade was low risk.
The extent of losses is not clear, and not all departures will reflect losses. Traders and headhunters nonetheless say losses across the sector have been significant, with one bank trader calling it "systemic" and a "huge shock" to the hedge fund job market. A headhunter said banks may need the former traders to manage ECB exposure and bond books, and warned that the market fears BTP spreads could follow the path of OATs. Some sources also said several portfolio managers who left this month had also suffered losses in March, and that the European carry trade is now being questioned.
Re-employment may be constrained. Many departing traders are subject to non-competes, and some remain on guarantees. Banking pay is also far lower than hedge fund compensation, with one trader noting that the traders earned $1m+ and that such pay is typically available only to desk heads. One portfolio manager said around 10% of those who have left did so voluntarily, citing an opportunity to run their own fund with outside capital.
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