Systematic hedge funds are benefiting from this year’s sharp sell-off in government bonds, with trend-following strategies capitalising on a sustained rise in yields as inflation concerns intensify, according to a report by the Financial Times.
Computer-driven funds that seek persistent market trends have built sizeable positions against fixed income as the war involving Iran, higher energy prices and resilient US economic data have fuelled expectations that inflation and interest rates will remain elevated.
The 10-year US Treasury yield has climbed from around 4% at the end of February to above 5.2%, while government bonds in France, the UK and Italy have also come under heavy selling pressure. On 1 October, the US 10-year yield reached 5.342%, its highest level since 2002, highlighting the scale of the move.
Several prominent quantitative managers have benefited from the trend. Graham Capital’s Tactical Trend fund was up more than 31% for the year at the time of the latest figures, including a 3.3% gain in September, according to people familiar with the performance.
Winton’s Diversified Macro fund had gained 17.5% over the year through late September, while Aspect Capital’s flagship fund was up 21% year-to-date and gained almost 5% during September, according to people familiar with the figures.
The managers operate across multiple asset classes, meaning their returns have not been driven solely by government bond positions. Winton and Aspect have also benefited from positions in energy markets as the conflict involving Iran has helped keep crude prices elevated.
Brent crude has risen by roughly 40% since the conflict began in February, reaching $102.31 a barrel on Thursday. The increase in energy costs has added to concerns that inflation could remain persistent and has contributed to expectations of further monetary tightening.
The Federal Reserve raised its policy rate last month for the first time since 2023 in response to renewed inflationary pressure, while the European Central Bank has raised rates twice. Investors are also positioning for the Bank of England to increase borrowing costs in the coming months.
Strong US economic data has reinforced expectations of higher rates, while the scale of government and corporate borrowing has added another source of pressure to bond markets. Investors are demanding higher yields to absorb long-term debt issuance, while some market participants have been forced to unwind losing positions as yields have risen, adding momentum to the sell-off.