Like we have said in previous posts, credit focused hedge funds are on a tough road going forward. U.S. debt wiped off $317 billion of market value in June alone, one of the steepest declines in multiple years.
Record Outflows From Bond Funds
Every investment analyst firm has its own worst estimate of bond outflows and losses. According to TrimTabs Investment Research, these massive selloffs have cleaned out $70.8 billion from bond mutual funds and ETFs. As per data from Investment Company Institute, the result of the selloff has been that Q2 marked the first three month period when investors pulled out more cash than they put in since 2008. ICI’s data pertains to taxable-bond and municipal-bond mutual funds.
Credit Suisse’s research tells another ‘worst’ story, their analysis estimates that the June bond outflows amount to $60 billion, worst number since 1990s, reports Financial Times. FT’s Cardiff Garcia points out that while the outflows have been massive, they are not as alarming as they look. These funds have taken in long periods of inflows so the selloff could be a much needed correction. The credit market is likely to get more patchy going further as the recent jobs report was taken as a signal of QE taper. Mortgage credit and treasuries are set to take more losses after taking in multiple years of inflows.
However the extent of tightening in bond assets certainly exceeded the expectations of seasoned traders like Jeff Gundlach and Bill Gross. Yields for 10 year U.S. bonds peaked above 2.8 percent in last week, now around 2.66 percent. Gross’s Pacific Investment Management Company, PIMCO, took in $14.5 billion in redemption in June, a record number, out of which $9.9 billion were withdrawn from flagship PIMCO Total Return Fund. The fund has lost 3 percent in the year.
Gundlach, the other bond king, counted redemptions of $1.2 billion from his $38.7 billion DoubleLine Capital Total Return Fund.
Losses from credit focused hedge funds have been equally painful. Pine River Fixed Income was down 1.4 percent in June, the fund is up 5.2 percent YTD. John Paulson who has taken severe media scrutiny in his Gold fund, also dropped in the credit focused strategy. Paulson Credit Opportunities, a $5.8 billion portfolio, was down 3.7 percent in June, bringing YTD return to 12 percent. Paulson’s Gold fund is down 65 percent for the year after losing another 23 percent last month.
Paul Tudor’s Tudor Tensor fund suffered the largest loss, slipping -4.5 percent in June. BTG Pactual’s Global Emerging Markets and Macro Fund took a loss of about 2.5 percent in June. The $5 billion fund was up 28 percent in 2012.
Coherence Capital, a fixed income long/short credit fund dropped 1.4 percent last month, after exiting several of its holdings. The fund is up 10.6 percent for the year. Coherence is run by Sal Naro who previously served as the head of UBS AG’s fixed income assets.
Quant Funds Miss Trends
Managaed Futures strategy, also called CTAs or quant funds have gone side by side with credit funds in marking losses. BlueCrest Capital‘s BlueTrend Fund went under with a huge loss of 17 percent between May 17, to the end of June. Reuters reports that the decline was the fund’s worst peak to trough loss in history. This equalled a loss of $2.9 billion in for the fund.
Winton Futures Fund dropped 1.7 percent in June, Renaissance Technologies’ Renaissance Institutional Futures Fund was down 4 percent last month, bringing the YTD decline to 7 percent. Cantab Capital lost a massive 14 percent in June, dipping 19 percent for the year.