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A sharp spike in bond yields last week caught some hedge funds unaware, and saw macro and long-short funds in general give back February profits to end the month modestly up, several market participants said.

Hedge funds, which target returns that outperform the markets, take positions in a variety of assets such as bonds, currencies and equities, depending on the strategy employed.

The sharp rise in yields - which saw ten-year Treasury yields hit a one-year high of over 1.6% on Thursday - came after a tumultuous January when some funds got burned by holding short positions in stocks caught up in the GameStop trading frenzy.

“The pace and the degree of the move in yields was a bit more aggressive than people thought,” said Brooks Ritchey at $10.7 billion hedge fund solutions group K2 Advisors, which invests client money in hedge funds.

Long-short equity hedge funds don’t take bets in the bond market but many failed to anticipate the spillover from the bond market, which shaved $2 trillion from global equities, said several fund-of-funds.

Troy Gayeski, partner and co-chief investment officer at SkyBridge Capital, which runs $3 billion in its main fund, said that equity funds went from having a “monster month” up 4-6% with one as high as 11%, to only gaining 2-3%.

“Very similar to the back half of January, many of the longer-bias long-short managers, or equity-focused event funds gave back a large portion of their gains from earlier in the month,” said Gayeski.

Comprehensive data on performance for the month is not expected until mid-month. However, HFRX data, which is made up of a small group of global funds and can be an early indicator of industry performance showed that equity-focused hedge funds ended Friday up 1.5% for the month, after gains of 4.1% in the first 19 days of February.

Meanwhile, the HFRX macro index ended the month up 1.3% on Friday after performance of 2.7% between Feb. 1 and Feb. 19, the data showed. Macro hedge funds bet on macroeconomic trends, often using currencies, bonds and commodities.

The tougher February came after a challenging beginning to the year. Hedge funds began 2021 up a modest 0.9% on average in January after several stocks, led by videogame maker Gamestop were targeted by retail investors, showed data from industry tracker Hedge Fund Research (HFR).

Macro-focused hedge funds posted even smaller gains of 0.2% in January while long-short strategies made 0.78%, according to the HFR data.

Long-short “alpha,” or outperformance, also showed a fall in performance amid the sharp rise in bond yields, reaching as high as 2.7% for the first 19 days of the month before falling in the last week of February, according to a note from Goldman Sachs seen by Reuters. Goldman did not respond to a request for comment.

The yield spike came on expectations that an economic rebound would force the Federal Reserve to tighten monetary conditions sooner than anticipated. Yields have since retreated.

Darren Wolf, global head of investments, alternative investment strategies at Aberdeen Standard Investments, who manages $13 billion in hedge fund assets, said that hedge fund managers “had a ‘don’t fight the Fed’ mentality, and didn’t have short rate bets on in much size,” meaning the yield spike didn’t benefit them.

Wolf said last week wasn’t a huge event for the macro managers in Aberdeen’s portfolio, but added that they were up 1% to 2% on average in February after the strategy made gains of 2.3% for the entirety of 2020, according to HFR data.

“Some of our managers thought that the U.S. 10-year might trade near 1.5% sometime this year,” said K2′s Ritchey. “Some others thought that by year-end, rates might be 1.7%. But it was faster, farther than even the bond bears thought.”

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