Hedge funds reap big returns from global interest rate overhaul
High levels of inflation and supply chain bottlenecks have created the best conditions for hedge funds trading bonds and currency markets since the crisis, says one of the pioneers of macro investing 2008 financial.
Kenneth Tropin, who founded $17 billion asset Graham Capital in 1994 and was previously managing director of billionaire John Henry’s investment firm, is among renowned macro managers reaping the rewards as central banks are rapidly raising interest rates to fight soaring inflation.
“I can’t remember a more interesting time to be a macro investor since the financial crisis. We find a lot of opportunities,” said Tropin, who is also the chairman of Connecticut-based Graham, in an interview with the Financial Times.
“Inflation has been so low for so long that central banks have underestimated the potential for this genie to come out of the bottle and how far it could go,” he said. “It’s quite easy to see that global central bank policy has shifted from a headwind to a tailwind for macro.”
Tropin also pointed to the war in Ukraine and supply chain issues that could take “a very long time” to resolve as factors adding to market volatility.
Macro trading, made famous by George Soros and Louis Bacon, involves betting on global bonds, currencies and commodities and tends to thrive when there are big moves in these markets. However, many funds have struggled for years to make money as central bank stimulus measures have suppressed volatility in interest rates and other markets they like to trade in.
The outbreak of the coronavirus pandemic has proven to be a major opportunity for them to take advantage. As central banks rushed to ease monetary policy, the funds bet that bond prices would rise. Some, like Andrew Law’s Caxton Associates, made record gains.
Last year proved more difficult for some as markets began to worry that interest rates were set to rise much faster than central banks had indicated. Chris Rokos’ Rokos Capital and New York-based Alphadyne were among those hit hard by the fall in policy-sensitive short-term government debt.
This year, however, the funds have been better prepared to sell off in the bond markets, particularly in longer-dated paper – a price move they have been anticipating for years. They were also able to profit from betting on one bond against another.
Graham’s Proprietary Matrix fund is up 23.8% this year, while its Absolute Return fund has gained 14.3%.
Among the other funds that benefit from it, Brevan Howard, one of the best known names in the sector. The hedge fund has been bearish on government bonds and focused much of its trading on mid-term maturities in the market, said a person familiar with its positioning.
Brevan’s $9 billion master fund has gained about 13% this year.
Rokos, a former co-founder of Brevan, is up 12.5% this year in his Rokos Capital, helped by bets on rising bond yields. Meanwhile, Crispin Odey’s European fund Odey gained around 87%, helped by aggressive betting against longer-dated bonds.
Tropin said that while he didn’t think inflation would rise much from current levels, investors were underestimating how long it would take for inflation to fall back to the US Federal Reserve’s target level.
“Some of the pressures that have pushed inflation higher are not about to ease,” he said. “It could take two and a half or three years” before he comes back into line.
Tropin added that after major moves in the markets this year, his funds were positioned more cautiously at the moment. But he remains optimistic about future business opportunities.
“I like the odds that the market will continue to be volatile and have big ranges,” he said. “Over a cycle of three to five years, is it going to be really good for the macro? I think.”