Hedge funds Caxton and Kirkoswald profit from bets on lower rates

Bets on lower interest rates have fuelled profits for hedge fund managers including Andrew Law’s Caxton Associates and former Moore Capital whizz Greg Coffey in a chaotic period for markets.

Mr Law’s London-based Caxton, one of the world’s oldest and best-known funds, has gained more than 3 per cent in its main Global fund since the start of last week, taking returns this year to 7 per cent. A portfolio run solely by Mr Law also profited and is up 8 per cent this year.

Mr Coffey made a 5.2 per cent gain last month at New York-based Kirkoswald Capital Partners, the hedge fund he started in 2018 after coming out of retirement, said two people who had seen the fund’s performance figures.

Like a number of macro traders — fund managers who bet on moves in bonds, currencies and stocks — both Mr Law and Mr Coffey have been wagering on rising prices for bonds. Such assets have been lifted in anticipation of further easing of monetary policy by central banks to combat the economic damage caused by the coronavirus, and as investors have sought havens from the stock market rout of the past week.

Yields on two-year Treasuries have slumped from 1.35 per cent going into last week to 0.83 per cent as of Monday, and they dropped briefly below 0.75 per cent following the US Federal Reserve’s surprise 0.5 percentage point cut in interest rates on Tuesday. Yields fall when prices rise.

Yields on the 10-year US Treasury note, meanwhile, have dropped from 1.47 per cent going into last week to a low of 1.02 per cent on Tuesday.

“With recessionary fears in the air, funds that own bonds have done well,” said Amin Rajan, chief executive of consultancy CREATE-Research. Equity funds, however, “are having a torrid time”.

The gains take returns for Mr Coffey, who manages close to $2bn in assets, to more than 6 per cent this year. Last year he posted returns of 28 per cent.

Funds that bet on volatility have also gained. The Vix index — known as the stock market’s “fear gauge” — jumped from 17.1 percentage points going into last week to nearly 50 at one stage last week. During the course of that week the S&P 500 dropped 11.5 per cent, although it has recovered around 2 per cent so far this week.

Greenwich, Connecticut-based One River Asset Management, posted a 17.2 per cent gain in its Long Volatility fund last week, taking this year’s gains to around 14.5 per cent. Its computer-driven Dynamic Convexity fund made 7.8 per cent last week, taking this year’s gains to 8.2 per cent.

The gains come at a testing time for hedge funds, many of which have been running bets on rising stock prices. Equity hedge funds were down 3.8 per cent on average in February, according to data group HFR.

Among funds to have been hit are computer-driven funds that bet on market trends and patterns. Aspect Capital, which made 20 per cent last year, lost 4.3 per cent last week, according to numbers sent to investors and seen by the Financial Times, reducing gains this year to 0.6 per cent. The fund lost money betting on rising stock prices but made some back with its positions in bonds.

Man Group’s $4.1bn AHL Evolution fund, which bets on trends in niche markets such as emerging-market interest rate derivatives and German power, fell 3.8 per cent last month, meaning it is down 3.9 per cent this year. Its $6.3bn Dimension fund, which uses machine learning and other techniques to trade volatility, stocks and other assets, lost 3.7 per cent last month and has dropped 3.4 per cent this year.

laurence.fletcher@ft.com