Goldman Sachs lost around $200mn while Leda Braga’s Systematica Investments was among the prominent hedge funds that were hit hard in the market upheaval following the collapse of Silicon Valley Bank.
Bond prices rocketed in highly volatile trading at the start of this week, when SVB’s demise sparked a flight to safety and led investors to question how much further the US Federal Reserve can lift interest rates. That caught many traders off guard, and collided directly with hedge fund strategies that had profited handsomely in 2022 from betting on further aggressive monetary tightening.
The pain has affected a clutch of the best-known speculative investors in the market.
At Goldman, a trading desk that handles interest rate products lost around $200mn, according to people familiar with the matter. Goldman declined to comment.
Among hedge funds, many computer-driven funds that latch on to market trends had been betting for most of the past two years that the large rally in the two-year Treasury yield would continue. But on Monday, the market moved violently the other way. With prices soaring, the yield on the two-year Treasury note fell at its fastest pace since 1987.
The Schroder Gaia Bluetrend fund, run by Braga’s Systematica, fell by 10 per cent this month to the end of trading on Monday, according to numbers sent to investors, taking losses this year to about 11.5 per cent.
“What’s hurt a lot of people in macro [bets on global bonds and currency moves] is that everyone was positioned for rates rising,” said one hedge fund industry insider.
Some funds raced to unwind their positions, further fuelling the bond rally. The “erratic prices action” led to “many investors triggering stop losses on short positions”, said Mark Dowding, chief investment officer at RBC BlueBay.
Among other computer-driven funds losing money, Man Group, one of the world’s biggest hedge fund firms, lost 10.6 per cent in its $5.4bn Evolution fund this month and 7.1 per cent in its $5.9bn Dimension fund.
And Rotterdam-based Transtrend, which manages $5.6bn, lost 9.6 per cent on Monday.
Just over half its losses came from bond bets, although losses were within its risk tolerances, said a spokesman, and the fund has stuck with its short positions in US bonds.
Such quant funds are down on average by around 6 per cent this month, according to a Société Générale index of these portfolios.
However, a few hedge funds have been able to profit during the market turmoil, particularly those betting against bank stocks.
Barry Norris, chief investment officer at Argonaut Capital, profited by shorting SVB and has also been betting against Credit Suisse for several weeks, helping his fund to gain 4.5 per cent this month.
The Swiss bank’s shares, which are now down by more than one-third this year, fell sharply after the chair of Saudi National Bank ruled out further investment. On Friday the shares fell further, despite the pledge of liquidity support from the Swiss National Bank.
Short interest in Credit Suisse was running at just 3.2 per cent of its shares outstanding at the start of the week, according to S&P Global Market Intelligence. But short positions have shot up to 8.2 per cent as of Thursday, as concerns have grown about the lender.
“The problem with Credit Suisse is that it was already suffering from deposit flight,” said Norris. “If you can’t stop the deposit flight then the only way out is to be taken over by a bigger bank.”