- Credit funds and CTAs benefit as Fed goes ‘higher for longer’
- Hedge funds up basis trade activity to record levels
- AIMA et al mount SEC legal challenge over new private funds rules
By Mark Kitchen
Head of Intelligence, Hedgeweek
The US Federal Reserve’s adoption of a ‘higher for longer’ approach to interest rates in the ongoing battle against inflation, saw markets turn more volatile and fragile in September as investors repositioned accordingly.
A number of high-profile names warned of a deteriorating economy and the ongoing threat of a US recession including Pershing Square’s Bill Ackman, who predicted further increases in 30-year US interest rates. He revealed his fund meanwhile, remains short on bonds due to the prospect of inflation remaining at an elevated level.
The higher for longer interest rate environment also created attractive opportunities for credit hedge funds that focus on distressed debt, with the Eurekahedge distressed debt hedge fund index revealing that credit hedge funds are up an average of 5.9% so far this year making credit one of the best-performing strategies of 2023.
With higher central bank interest rates putting pressure on some small and medium-sized corporate borrowers, they have been forced to offer significantly higher rates to tempt potential lenders to take on their riskier credit.
Falls in both US and European bonds, as well as the value of the yen, in the early part of the month meanwhile, benefitted CTAs who, according to JPMorgan, ended August with strong net short positions in all three asset classes, as well as a smaller net bearish position in Hong Kong stocks.
By mid-month economists at the US Federal Reserve and the Bank for International Settlements were warning that an increase in basis trade activity, which saw hedge funds up their short positions in some US government bonds to record highs, posed a risk to the stability of the whole US Treasuries market.
Not all bond market participants agreed though with some, including BNY Mellon CIO Jason Granet, positioning hedge funds using the strategy – which takes advantage of the premium of futures contracts over the price of the underlying bonds – as providers of crucial liquidity at a time when the government is issuing more debt.
September also saw a big US regulatory development with the Alternative Investment Management Association (AIMA), and Managed Funds Association MFA, teaming up with four other industry bodies, to mount a legal challenge to the adoption of the new Private Funds Advisor Rules by the US Securities & Exchange Commission (SEC).
While the SEC has responded by saying it will “vigorously defend the challenged rule in court”, a report from the Financial Times suggested that AIMA et al had good cause for concern predicting that hedge funds and other private investment firms, including private equity and venture capital funds, would face having to spend billions of dollars to ensure compliance with the new regulations.
Undeterred by the prospect of increased regulatory scrutiny, September also brought news of several new entrants to the space including 30th Century Partners, a new Hong Kong based multi-strat from Millennium Management alumnus and the former head of Morgan Stanley’s prime brokerage operation in Asia, Kurt Baker, which is targeting $3bn and a June 2024 launch. And in London, former Deutsche bank colleagues Michael Sutton and Alex Mahler are readying Alinor Capital Management, a new distressed debt fund which, with an anticipated £500m at launch, will be one the largest European hedge fund debuts this year.
