Hedge funds profit as bond selloff pushes yields higher

Hedge funds experienced substantial profits as government bond prices plummeted, driving up borrowing costs in the US and Europe to their highest levels in decades. Computer algorithms guided these funds in predicting market trends, prompting them to amass significant positions against fixed income securities throughout the year. Heightened concerns over inflation, driven by the Iran conflict and robust US economic indicators, fueled this trend.

10-year US Treasuries witnessed a surge in yields from approximately 4% at the conclusion of February to surpass 5.2%. Similarly, French, UK, and Italian bonds experienced declines. Notably, Graham Capital’s Tactical Trend fund achieved a year-to-date gain of over 31%, including a 3.3% increase in September, according to sources privy to the information.

Winton’s Diversified Macro fund increased by 17.5% through September last year. Similarly, Aspect Capital’s flagship fund gained 21% in the same period, with a further 5% rise in September, according to sources familiar with the figures.

A director at a quant fund noted that inflation's repercussions were still evident. Since July, these funds had shifted their risk focus towards bonds, energy, and currencies. Graham Capital, Winton, and Aspect profited across various asset classes. The increasing prices of Brent crude, which rose by roughly 40% due to the Iran war starting in February, further bolstered their gains.

Brent crude settled at $102.31 on Thursday. Heightened fears of an unresolved conflict contributing to soaring crude prices, particularly in recent weeks.

The Federal Reserve raised its policy rate last month for the first time since 2023, responding to the persistent inflation. The European Central Bank also increased interest rates twice. Traders anticipate the Bank of England to follow suit in the upcoming months. Resilient US economic data bolstered the expectation of higher US interest rates.

Record government and corporate debt sales led investors to anticipate higher yields for long-term lending. Some investors unwound their losing positions as yields rose, exacerbating market fluctuations.