Quant Hedge Funds Score Big Gains on Bond Market Selloff

Computer-driven hedge funds that follow market trends have posted significant gains by betting against government bonds amid a sharp selloff in fixed-income markets. The rout has pushed borrowing costs in the United States and Europe to their highest levels in decades, rewarding funds that built large bearish positions throughout the year.

Trend-Following Strategies Prevail

Several quantitative funds have seen strong performance from the bond market turmoil. According to people familiar with the matter, key results include:

• Graham Capital’s Tactical Trend fund gained over 31% this year through September, including a 3.3% increase last month.
• Winton’s Diversified Macro fund was up 17.5% for the year through the last week of September.
• Aspect Capital’s flagship fund has returned 21% year-to-date, with a gain of nearly 5% last month, according to people who saw the figures.

These funds have profited as the price of government debt in the U.S., U.K., France, and Italy has fallen. The yield on the benchmark 10-year U.S. Treasury note, which moves inversely to its price, climbed from around 4% at the end of February to over 5.2%.

Inflation and Geopolitics Drive Yields Higher

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The selloff has been fueled by a combination of persistent inflation, resilient U.S. economic data, and geopolitical tensions. "The embers of inflation are still glowing red," a director at one quant fund told reporters, adding that his fund's risk has been concentrated in bonds, energy, and currencies since July.

The ongoing Iran war has also contributed to market jitters, keeping energy prices elevated. Brent crude has risen approximately 40% since the conflict began in February, settling at $102.31 on Thursday. Winton and Aspect reportedly profited from related bets on energy markets.

Hawkish Central Banks and Market Dynamics

Central banks have responded to inflationary pressures with tighter monetary policy. The Federal Reserve raised its policy rate last month for the first time since 2023, while the European Central Bank has increased rates twice. Traders widely expect the Bank of England to follow suit.

The market moves have been intensified by record government and corporate debt sales, which require higher yields to attract buyers. Additionally, some investors have been forced to unwind losing positions as yields rose, further accelerating the price declines, according to market participants.