Skip to main content

Trend-following hedge funds have been badly wrong-footed in a week of wild gyrations in the bond market and are selling stocks to make up for souring bets on higher interest rates, banks say.

Commodity trading advisers (CTAs) – funds that try to profit by buying or selling when there is a clear direction in markets – slumped 4.3 per cent in the three days to Monday, according to analysis from UBS.

The SG CTA index, which tracks the 20 largest such managers, dropped 4 per cent on Monday, more than it had previously on a single day. Calculated since 2000 by Societe Generale, the index covers CTA managers including AQR Capital Management, Winton Capital Management and Graham Capital Management.

JPMorgan analysts said in a note CTAs lost around 7 per cent from March 8 to March 13, due to short positions in government bond futures and the yen, as well as long positions in equities.

The fall in CTA fund values has been triggered by extreme volatility in interest rates since the collapse of Silicon Valley Bank last week.

“Most of the pain came from bonds and equities although all asset classes contributed negatively,” UBS analysts said in a report on CTAs.

“As a response, CTAs have significantly reduced their long positions in equities, selling $25-$30-billion worth of stocks since the announcement of the SVB collapse.”

Concerns over the stability of Credit Suisse on Wednesday set off another round of twists and turns in the bond market and sent the ICE BofA MOVE index of bond volatility to its highest level since the 2008 financial crisis.

“It means financial conditions are very tight now … and intraday price actions are going to be very volatile too,” Gilbert Wong, head of Asia quantitative research at Morgan Stanley, said in a note advising his clients to be careful.

He suggested they should lower gross and net exposures and be prepared for a highly volatile market near term.

CTA strategies were successful last year. They thrived while markets kept pushing interest rate expectations higher and sending the dollar on a long rally.

The SG CTA index had its best year on record in 2022.

Many CTAs had positioned for rate expectations to continue rising because of the stickiness of high inflation.