US bond rally eases stress on rising market hedge funds

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Falling US bond yields and a weakening greenback are serving to drive a restoration in rising market-focused hedge funds, after some managers together with $12bn-in-assets Pharo Administration struggled following a tricky begin to the yr.

Rising market funds gained 1.9 per cent final month, in accordance with information group Eurekahedge, forward of a 1.1 per cent achieve amongst hedge funds extra broadly. That leaves them up 5.4 per cent this yr, nonetheless behind common hedge fund positive aspects of practically 8 per cent.

Rising market managers have been benefiting from a current decline in US Treasury yields, which soared earlier this yr because the easing of coronavirus lockdown restrictions raised investor expectations of a robust US financial restoration and rising inflation.

The ten-year Treasury yield soared from 0.9 per cent initially of the yr to greater than 1.7 per cent on the finish of March as costs fell. Nonetheless, it has since fallen again beneath 1.5 per cent, pushed partially by rising US-China tensions.

Traders typically pull out of rising markets when US progress picks up and Treasury yields develop into extra enticing, however they have an inclination to pour money back in when US bond yields fall. The weakening of the greenback over the previous two months has additionally helped to push down the prices of servicing debt in rising markets, as so much their debt is denominated within the dollar.

Line chart of US 10 year bond, yield % showing US treasuries have rallied

London-based Pharo, which is headed by former Merrill Lynch banker Guillaume Fonkenell and which is among the world’s greatest rising markets hedge funds, was hit onerous within the first quarter.

Its $5.6bn Gaia and $5.3bn Macro funds, which had each made cash in every of the previous 5 years, had been down practically 9 per cent and seven per cent respectively on the finish of March, in accordance with numbers despatched to traders, whereas its Buying and selling fund was down round 11.5 per cent. The agency had been bullish on rising markets and on some longer-dated rising market bonds, stated an individual acquainted with its positioning.

Nonetheless, it has pared a few of its losses over the previous two months, benefiting from the extra beneficial situations for rising markets. Its Gaia fund is now down 6.3 per cent this yr to the top of Could, in accordance with individuals who had seen the numbers. Its Macro fund is down 4.7 per cent, whereas its smaller Buying and selling fund has misplaced 7 per cent, the folks stated.

“The final yr has been powerful for fund managers” in rising markets, stated Peter Sleep, senior portfolio supervisor at Seven Funding Administration.

Pharo declined to touch upon what had pushed efficiency.

Different funds which have gained not too long ago embrace London-based Carrhae Capital, which was up 2.7 per cent in its hedge fund and 4.5 per cent in its lengthy fund final month, in accordance with numbers despatched to traders. The hedge fund has gained 2.1 per cent for the yr, whereas the Lengthy fund has gained 9.6 per cent.

Ali Akay, Carrhae’s chief funding officer and a former companion at hedge fund SAC, stated that rising US bond yields had pushed rising market traders from progress shares into worth shares, which had benefited a few of its positions.

laurence.fletcher@ft.com

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