It’s been a big week in macro trading. With resurgent inflation and the straitened situation in the Strait and its surroundings, the Fed hiked rates for the first time in three years. The Bank of England didn’t, but it suggested hikes are coming. The market is awash with chatter that at least one large hedge fund was wrongly positioned for what has transpired.
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Far be it for us to speculate on which large hedge fund this might be. There are suggestions smaller London macro funds may have come unstuck too. Losses this week are said to be in the region of hundreds of millions of dollars.
Macro hedge funds lost money in March, when funds like Caxton, Taula and Brevan Howard’s Master Fund fell 15%, 9.6% and 6% in the month in the immediate fallout from the Iranian war. Many then bounced back. The Brevan Howard Master Fund was up 3.7% in the year through to May. In early August Taula was still down, but by a lesser 5%.
As US treasury yields rise, running a hedge fund becomes more difficult. Citadel CEO Ken Griffin said in May that investors are looking for returns “equivalent to the risk free cost of capital, plus 4%.” At current rates, funds returning less than 8% are unlikely to be popular destinations for investment.
While macro funds lick their wounds, fixed income traders in banks are also having third quarter angst. Both Bank of America and Goldman Sachs explicitly said this week that fixed income trading revenues had softened versus the first half. Only JPMorgan was explicitly ebullient. There has been “broad-based strength across FICC and equities,” said Douglas Petno, CEO of the commercial and investment bank, in reference to Q3.
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