Global markets demonstrated the madness of the proverbial March hare last month, as the demise of not one, but three banks, in a matter of days triggered turmoil that provided hedge funds with plenty of challenges, but investment opportunities too.
- Banking crisis triggers bond market turmoil
- Quants caught flat footed as volatility soars
- Cut-price bank AT1s provide investment opportunities for some
By Mark Kitchen
Head of Intelligence, Hedgeweek
Global markets demonstrated the madness of the proverbial March hare last month, as the demise of not one, but three banks, in a matter of days triggered turmoil that provided hedge funds with plenty of challenges, but investment opportunities too.
First Silicon Valley Bank, champion of tech start-ups everywhere, went to the wall, followed swiftly by another, smaller US operation, Signature Bank, with the subsequent market turmoil seeing some high-profile systematic hedge funds suffer their worst ever day of losses. It was Credit Suisse’s controversial ‘rescue’ by rival UBS though, that really stirred things up, as Swiss regulator Finma opted to wipe out completely the value of $17.35 billion of the bank’s Additional Tier 1 (AT1) bonds – instruments that would normally rank higher than shares in the capital structure of an organisation.
According to data compiled by Bloomberg, on Monday 16 April, following SVB’s collapse, the Schroder GAIA BlueTrend lost 7.4%, while the Aspect Diversified Trends Fund fell 5.9%, and the Lynx UCITS Fund declined by 6.9% on the back of big swings in bond markets as traders pulled bets on further interest rate increases. The SG Trend Index meanwhile, which measures returns of some of the largest quants in the world run by firms such as Winton, Systematica Investments and AQR Capital Management, fell by more than 5.6% on the same day to record its second-worst daily decline on record.
The carnage continued as the full impact of Finma’s AT1 decision hit home with some Credit Suisse AT1 bondholders reportedly considering legal action, and investors becoming jittery about the ‘value’ off other Additional Tier 1 bank bonds.
The subsequent big swings in the bond markets, saw some big name macro managers chalk up big losses with Chris Rokos taking the decision to de-risk the portfolio at Rokos Capital Management after suffering double-digit losses. Said Haidar meanwhile, saw his flagship Jupiter macro hedge fund lose almost a third (32%) for the month, taking year-to-date losses to 44%, with his short fixed income positions taking a big hit, as bond market volatility soared.
The banking crisis fallout hit the commodities markets too, with oil trader Pierre Andurand’s Commodities Discretionary Enhanced Fund losing 23% in the first 17 days of March alone, taking YTD losses to about 40%.
As the old adage goes, though, for every loser there’s a winner, and Marathon Capital Management certainly came out on the upside of the Credit Suisse-UBS tie-up racking up a $30 million profit in a matter of days after a well-timed bet on the bank’s bonds paid off.
Other investors too, saw opportunities among the mayhem, including Crispen Odey who took a typically bullish view on the UBS-Credit Suisse deal by investing 2% of Odey Asset Management funds in UBS shares.
With AT1 bank bonds trading at discounts, Louis Gargour, the chief investment officer and managing partner of $550 million hedge fund LNG Capital, spotted an investment opportunity, telling Reuters that: ”The most compelling trade is other large independent well-capitalised European institutions such as Deutsche Bank, Societe Generale, and Intesa, where you can achieve significant long-term yields by taking the view that AT1s will not be converted into equity.”
