Quant hedge funds reap big gains from global bond sell-off
Trend-following portfolios have latched on to sharp rise in yields this year as Iran war and strong US economic data fuel inflation fears
Computer-driven hedge funds are making big profits out of a rout in global government bonds that has pushed US and European borrowing costs to multi-decade highs.
Funds using computer models to find and latch on to market trends have been running big bets against fixed income this year and have benefited as the Iran war and, more recently, strong US economic data have fuelled investors’ inflation fears.
Yields on 10-year US Treasuries have surged from around 4 per cent at the end of February to more than 5.2 per cent, while French, UK and Italian bonds have also sold off sharply. Yields rise as bond prices fall.
Among funds to benefit is Connecticut-based Graham Capital, whose Tactical Trend fund is up more than 31 per cent so far this year, including a 3.3 per cent gain last month, according to two people familiar with the matter.
London-based Winton, founded by billionaire Sir David Harding, gained 17.5 per cent in the year to last Friday in its Diversified Macro fund, while Aspect Capital’s flagship fund is up 21 per cent so far this year and gained almost 5 per cent last month, according to people who have seen the numbers.
“The embers of inflation are still glowing red,” said a director at one quant fund. “From about July onwards our risk has been pointed towards bonds, energy and currencies.”
All three funds make bets across asset classes and have made gains in other areas too. For instance, both Winton and Aspect made money by betting on energy markets, as the Iran war has kept oil prices stubbornly high.
Driving the surge in global bond yields and expectations of interest rate rises this year have been soaring crude prices, with benchmark Brent crude up around 40 per cent since the war began in February.
Fading hopes for a negotiated end to the Iran conflict have ignited a fresh burst higher in crude prices in recent weeks. Brent settled at $102.31 on Thursday.
The Federal Reserve increased its policy rate last month for the first time since 2023, responding to a jolt higher in inflation, and the European Central Bank has raised rates twice, while the Bank of England is expected by traders to follow suit in the coming months.
The inflationary impact of the war has been compounded by resilient US economic data that has stoked bets on higher US rates, while concerns over record government and corporate debt sales have meant investors demanding ever-higher yields to lend over the long term.
Rising yields have also forced some investors to unwind lossmaking positions, which has exacerbated the moves, according to market participants.
Trend funds tend to do best in years where there are clear, persistent trends across several months. One of the best years for the industry was 2022 when central banks kept increasing interest rates to fight persistent inflation, with quant funds profiting by betting against government bonds.