Hedge Funds Kicked Off 2021 With $49 Billion Sale of Treasuries (link)
Hedge funds offloaded the most Treasuries in nine months in January. The Cayman Islands, seen as a proxy for hedge funds and other leveraged accounts, dumped $49 billion of U.S. sovereign bonds.
The selling came on the back of the Democratic victories in the January 5 Georgia run-off race which paved the way for bumper stimulus spending to revive the U.S. economy. Bets for growth and inflation to quicken have since gained traction, fueling a jump in Treasury yields to the highest in over a year.
The data suggest hedge funds were well positioned for what was to follow, as yields surged another 34 basis points in February.
Bridgewater Co-CIO Sees Inflation Spiral Forcing Fed Into Action (link)
The U.S.’s “extreme” approach to fiscal stimulus looks set to turbocharge consumer prices while threatening the post-crisis bond and stock rally, says Greg Jensen at Bridgewater Associates.
Traders are betting the economic revival will force the Fed’s hand sooner. Eurodollar contracts suggest a roughly 75% chance of tighter policy by December 2022.
Labor-friendly policies and slowing globalization mean technological progress is the only disinflationary force around. Meanwhile, fiscal and monetary policy makers are likely to offer yet-more support until breaking point.
“If the risk to equities is higher rates, rates don’t help,” Jensen said. “The ability to use bonds to diversify has got significantly worse and obviously the ability to use bonds to get returns has got significantly worse.”
Ray Dalio Says It’s Time to Buy Stuff Amid ‘Stupid’ Bond Economics (link)
“I believe cash is and will continue to be trash (i.e., have returns that are significantly negative relative to inflation) so it pays to a) borrow cash rather than to hold it as an asset and b) buy higher-returning, non-debt investment assets.”
“If history and logic are to be a guide, policy makers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected.”
“Because of limitations of how low interest rates can go, bond prices are close to their upper limits in price, which makes being short them a relatively low-risk bet.”
“Watch central bankers’ actions—i.e., see if they increase their bond buying when interest rates are rising led by long-term interest rates and when the markets and economy are strong—because that action would signal that they are experiencing supply/demand problems.”
“Also, watch the rates of change in the injections of these stimulants in relation to the effects they are having on the economy’s vigor because the more stimulants that are being applied per unit of growth, the less effective they are and the more serious the situation is.”
How hedge funds have navigated the recent SPACs sell-off (link)
Lyxor Asset Management said over-subscribed SPACs have allowed managers to pick and choose their initial shareholders, opting for strategic institutional partners over retail investors.
“While SPACs have become key contributors to their returns, hedge funds appear to have taken a more modest toll. They are generally highly diversified, more selective, and involved in primary markets,” said Berthon, senior strategist, Philippe Ferreira
In contrast, retail investors typically step in later, and at higher prices, and “are usually less finicky regarding the subtleties around SPACs trading.”
Lyxor suggested the recent sell-off could hasten structural changes in SPACs, toward improved sponsor-investor alignment. “The correction has partially cleaned up excess valuation and might lead investors to be more careful.”
BlueBay spotlights emerging markets opportunities following US yield spike (link)
The move in higher real rates has proved a headwind for EM fixed income – but has led to some eye-catching divergences in performance, said Anthony Kettle at BlueBay
EM fixed income returns were squeezed this week, with local currency markets underperforming, selling off by some 1.8 per cent, while corporate credits dipped 29 basis points, and sovereigns fell 82 bps.
“The performance of corporates is much closer to the performance of developed market credit, despite still being a laggard in this context. This leaves EM sovereign hard currency credit a clear underperformer in the credit space this year.”
BlueBay observed how the recent US yield spike has created a rotation trade momentum within equities. Tech stocks have been dumped in favour of value names, triggering a rise in equity volatility, while commodities have duly rallied as investors sought classic reflation trades amid OPEC+’s surprise move to maintain production cuts.
Hedge funds now front-runners to boost investor returns this year, says Credit Suisse survey (link)
70% of investors plan to amend their portfolios this year due to the lower bond yield environment. Hedge funds are the most favoured asset class to bolster the current 60/40 mix and plug the funding gap, followed by high-yield credit, equities, and private credit.
Equity-focused strategies are among the most popular class of hedge funds with investors. Survey data shows that seven out of the top 10 overall strategies were equity-oriented, with investors eyeing healthcare, fundamental, emerging markets, and TMT focused managers this year.
Regionally, meanwhile, Asia-Pacific is the most in-demand region among allocators, with China the most preferred country.
As private markets continue to evolve and expand, more than half (53 per cent) of allocators are now using hedge funds to invest in private markets equity, with family offices and endowments and foundations the most active.
61% of allocations over the past 12-18 months have flowed into non-traditional structures – mainly custom offerings such as co-investments and managed accounts – as investors increasingly look to bespoke solutions for specific investment objectives