Financial Turmoil Hits Macro Hedge Funds

Maniyar, Haidar funds suffer from big bond moves prompted by failed banks

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Several recent bank failures have thrown off bets that interest rates would remain elevated, resulting in steep losses for hedge funds that made big bets on market movements.

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As a result of the soured bet, some investors, including Maniyar Capital Advisors and Haidar Capital Management, lost more than 20% of their investments this month. A steep recent drop in Treasury yields has resulted in a flat to down year-to-date performance for many funds which had enjoyed solid gains in 2022. A number of trend followers suffered losses, as they tried to take advantage of market momentum.

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Less severe losses were sustained by some macro funds. The Pure Alpha fund, which is managed by former Moore Capital Management money manager Edouard de Langlade, lost about 3% in March through Friday in its higher-volatility share class, according to people familiar with the firms. Switzerland-based EDL Capital lost 5% in March, said sources. 

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Across the macro hedge fund sector, HFR data show an average loss of 3.5% in the period.

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According to macro investors, since late 2021, the Federal Reserve has been expected to raise rates faster and for longer than previously expected because of stubbornly high inflation and a tight job market. Rate expectations have been dented by recent banking turmoil, with the yield on the two-year note falling at its fastest pace since 1987 last week. 

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Overseas bonds rose as well. The managers of funds are unwinding similar bets in an effort to curb losses on their Treasury bets. 

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Leveraged funds, or funds that borrow money to increase their bets, can amplify their gains if the wagers succeed, but can also benefit them if the wagers fail. Greg Dowling, a chief investment officer of investment consulting firm Fund Evaluation Group, says the losses were caused by a leveraged trade that abruptly unwound. 

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Investors' expectations about the direction of interest rates in the U.S. changed in just 48 hours in early March after Silicon Valley Bank collapsed, Mr. Dowling said. A banking crisis could tip the U.S. economy into recession, and investors suddenly found themselves confronted with the possibility that the Federal Reserve might ease rates. Fed data and messaging typically change for months after such regime shifts.

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Treasury yields dropped on Wednesday when the Federal Reserve approved a quarter-percentage-point rate increase, but suggested it might be done hiking sooner than anticipated.

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According to people familiar with the firm, London-based Maniyar, which is partly owned by Paul Tudor Jones, lost 22% this month. According to a person familiar with the firm, Haidar's Jupiter fund lost 32% in 2022 after gaining 193%. 

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As for trend followers, who made money last year by betting on higher interest rates, the Tactical Trend fund of Graham Capital Management, an $18 billion hedge fund, lost about 10% for the month through Friday, according to people familiar with its management team. It has also been reported that Lynx Asset Management, with its diversified trend-following strategy known as the Lynx Program, has lost approximately 10% over the same period. 

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There was a chance that trend followers, also known as commodity trading advisers or CTAs, would suffer some giveback from outsize gains. Rob Christian, investment chief at K2 Advisors, Franklin Templeton's unit that invests over $10 billion in hedge funds, told a financial magazine. As a rule of thumb, I advise my clients that in order to invest in CTAs, they have to have an iron stomach.

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It is rare for a fund of $1 billion, based in Greenwich, Conn., to benefit from it. According to a Key Square shareholder letter dated March 13, written by a former investment chief for George Soros, Scott Bessent, the firm had raised exposures to gold and safe-haven currencies, shorted bank stocks, and pulled back its energy exposures over the prior week. Since late last year, Mr. Bessent has been warning his clients that banks may suffer losses in their structured products and fixed-income portfolios.

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According to Mr. Bessent, SVB's failed attempt at selling shares the week before it collapsed indicated to him that the Fed rate increase was causing financial stress. A number of "signposts" he had heard led him to position Key Square's portfolio for further turmoil in the coming years as one of several "signposts" he was seeing. 

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During the month of March, Key Square's main hedge fund gained 2.5%, while a second fund using more leverage gained 5%, according to a person knowledgeable about the company.