One London hedge fund cut jobs after March. The rest are now scared of making big bets against Keir Starmer

Given that the UK now has the highest government borrowing costs in the G7 and that yields on 10 year gilts are the highest they’ve been since 2008, it may not be an opportune time to say that bond traders are less active than they would usually be. And yet market insiders say this is so.

Multiple sources in the market say hedge funds are much less active than previously in the gilt market, particularly when trading “short end” gilts that mature in less than seven years. This follows allegedly “massive” losses in March, when UK inflation and rates expectations adjusted suddenly following US attacks on Iran.

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“There were some horror stories after March,” says one top London trader. “Now both flows and diversity of direction have been massively reduced. It seems that funds that lost money in March have cut risk taking. That’s partly because of earlier losses and is also because the bid-ask has widened so much.” 

Another top London market maker confirmed that liquidity at the short end of the market is much less than it used to be. “No one really wants to run much unhedged risk overnight because there is so much risk of random news moving market,” added the trader. A senior hedge fund manager says PMs were shocked and burned by “poor communication from the monetary policy committee” when the war began. As a result, he said there’s now less risk appetite in UK rates and reduced willingness to make counter-directional bets. “This is why there’s multi-year highs,” he adds in reference to spiking gilt rates.

The newfound risk aversion comes after major hedge funds lost money in the chaos of March. The Wall Street Journal reported that both Citadel and Millennium lost $1.5bn each early in the month, with Citadel losing $1bn of that from its macro business. Balyasny, Marshall Wace, ExodusPoint and Taula reportedly lost money too. 

In a standard drawdown situation, hedge funds are quick to cut staff. On this occasion, they didn’t do so. While market insiders say there have been a few portfolio manager (PM) exits, the only really notable cuts seem to have been at Brazilian hedge fund SPX Capital. Bloomberg reported last week that SPX is closing its London office and transferring some staff elsewhere as it focuses on improving ‘lackuster performance.’ Publicly available data suggests SPX globally made a 5.5% loss in March.

While SPX’s London partners are leaving, other top London macro PMs are still in situ. Major figures in the London rates market, from Greg Knight, Stefan Ericsson and Lewis Morton at Taula, to Michael Graham at Citadel, or George Tyrell and Keren Ma at Balyasny have gone nowhere. This might be because they weren’t associated with the March losses and their books are now up. But insiders say there are other reasons for holding onto PMs too.

Headhunters suggest hedge funds’ willingness to keep senior portfolio managers (PMs) following deep drawdowns two months ago also reflects recognition that March was an abnormal month. “There’s been more patience with that particular drawdown,” says one headhunter. “I suspect they looked at the aggregate book and decided they could tolerate the pain and the approach seems to have paid off.” 

While March was cruel, April was kind to hedge funds, with many making strong gains early in the month from one of the many ceasefires. Business Insider subsequently reported that April was one of the strongest months for hedge funds since 2020.  

One senior portfolio manager says there’s also an understanding that replacing people takes time and that everyone had a bad March. “Very very few macro PMs made money, so anyone you replace people with will also have lost,” he says. 

Instead of cutting heads, then, it seems that macro funds in London may simply have cut risk. This is bad news for PMs hoping to make big bets on Britain’s political turmoil. It’s might good news for the country as a whole, unless thin markets and risk aversion means everyone bets the same way.

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