Key Takeaways
- • Graham Capital's Tactical Trend fund has gained more than 31% year to date, including a 3.3% gain last month, according to people familiar with the performance.
- • Winton's Diversified Macro fund was up 17.5% in the year through the end of the latest week, while Aspect Capital's flagship strategy gained about 21% year to date and almost 5% in the latest month, per investors familiar with the figures.
- • US 10-year Treasury yields have climbed from around 4% at the end of February to above 5.2%, creating a sustained directional trend that favours systematic trend-following strategies, according to a Financial Times report cited by Hedgeweek.
- • Brent crude has risen roughly 40% since the outbreak of war in Iran in February, reinforcing inflation concerns and expectations that central banks may keep or raise rates.
- • Germany has emerged as a relative haven within sovereign debt, while hedge funds have been forced to unwind trades betting on Italian bonds outperforming German Bunds.
Summary
Quantitative hedge funds are emerging as major beneficiaries of this year's sharp sell-off in global government bonds, with trend-following strategies profiting from sustained moves in yields, according to a report by the Financial Times as cited by Hedgeweek. The move has been driven by inflation concerns, higher energy prices and resilient US economic data. US 10-year Treasury yields have climbed from around 4% at the end of February to above 5.2%, while government debt in France, the UK and Italy has also come under significant pressure. As bond prices fall and yields rise, systematic funds positioned against fixed income have benefited from a persistent directional trend.
Connecticut-based Graham Capital is among the managers to have benefited. Its Tactical Trend fund has gained more than 31% so far this year, including a 3.3% increase last month, according to people familiar with the performance. Winton's Diversified Macro fund was up 17.5% in the year through the end of the most recent week, while Aspect Capital's flagship strategy has gained about 21% year to date and almost 5% in the latest month, according to investors familiar with the figures.
The performance reflects the environment in which quantitative trend-following strategies tend to thrive: persistent moves across multiple asset classes that allow models to establish and maintain directional positions. Oil has been a significant contributor to the backdrop, with Brent crude rising roughly 40% since the outbreak of war in Iran in February. Higher energy prices have reinforced inflation concerns and expectations that central banks may need to maintain or raise interest rates. The report notes the environment is reminiscent of 2022, when aggressive central bank tightening drove trend-following funds to substantial returns from short positions in government bonds.
The bond rout has also produced significant divergences across developed sovereign debt markets. Germany has emerged as a relative haven as investors reassess exposure to higher-debt countries and US Treasuries, benefiting from perceptions of stronger fiscal credibility and lower debt levels. Hedge funds have been forced to unwind previously popular positions, including trades betting on Italian government bonds outperforming German debt.
The sharp moves have increased the importance of positioning and leverage across rates markets. As crowded trades are unwound, market volatility can increase rapidly, creating both opportunities and risks for systematic and discretionary hedge funds.
Connecticut-based Graham Capital is among the managers to have benefited. Its Tactical Trend fund has gained more than 31% so far this year, including a 3.3% increase last month, according to people familiar with the performance. Winton's Diversified Macro fund was up 17.5% in the year through the end of the most recent week, while Aspect Capital's flagship strategy has gained about 21% year to date and almost 5% in the latest month, according to investors familiar with the figures.
The performance reflects the environment in which quantitative trend-following strategies tend to thrive: persistent moves across multiple asset classes that allow models to establish and maintain directional positions. Oil has been a significant contributor to the backdrop, with Brent crude rising roughly 40% since the outbreak of war in Iran in February. Higher energy prices have reinforced inflation concerns and expectations that central banks may need to maintain or raise interest rates. The report notes the environment is reminiscent of 2022, when aggressive central bank tightening drove trend-following funds to substantial returns from short positions in government bonds.
The bond rout has also produced significant divergences across developed sovereign debt markets. Germany has emerged as a relative haven as investors reassess exposure to higher-debt countries and US Treasuries, benefiting from perceptions of stronger fiscal credibility and lower debt levels. Hedge funds have been forced to unwind previously popular positions, including trades betting on Italian government bonds outperforming German debt.
The sharp moves have increased the importance of positioning and leverage across rates markets. As crowded trades are unwound, market volatility can increase rapidly, creating both opportunities and risks for systematic and discretionary hedge funds.
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