(Bloomberg) — Alphadyne Asset Management hedge fund is one of the biggest victims of a short squeeze in the global bond market, with its $12 billion macro trading strategy entangled in a series of bad bets on rising interest rates.
The investment firm is staring at losses of about $1.5 billion after its hedge funds collapsed through July, according to people familiar with the matter. Its flagship Alphadyne International Fund lost about 10%. It also runs a leveraged version with roughly the same number of assets.
Alphadyne’s losses, the largest publicly disclosed among macro hedge funds, are particularly surprising because Alphadyne’s strategy has never seen a downturn since its inception in 2006. advance in June, according to data collected by Bloomberg.
A spokesperson for New York-based Alphadyne declined to comment.
The losses show how even the most plugged-in investors have been trampled by the sharp rally in US Treasuries over the past four months. Amid some of the highest inflation rates in the US in decades, interest rates have fallen, baffling bond traders around the world.
In one of the most dramatic moves in the Treasury market, the five- to 30-year yield curve flattened by more than 25 basis points in three days in June, the sharpest decline since the peak of market volatility in March 2020. The gap barely extended until the end of the month. Alphadyne had been pushing hard on steeper turns and was slow to respond, the folks said.
Macro hedge funds in general are starting to lose interest from investors after a record year of gains in 2020 for some of the biggest players. Net inflows into it turned slightly negative after investors raised $5.6 billion in June, according to data collected by eVestment.
In June alone, Alphadyne’s flagship fund fell 4.3%, its worst month on record, with the managers positioned for a steeper US yield curve and higher interest rates in general, people said, asking not to be identified because the information is private.
In July, Chief Investment Officer Philippe Khuong-Huu continued to drive down bets, reduce directional short bets and relative value plays in the US and Europe and close broken Treasury curve trades, according to a person familiar with the matter. All told, it lost another 2.5% last month.
Alphadyne was founded by Khuong-Huu and Bart Broadman, colleagues from JPMorgan Chase & Co. According to its website, investors include pensions, insurance companies and sovereign wealth funds. In 2017, Alphadyne converted its Asia team into Astignes Capital Asia Pte, which focuses on trading interest rate and currency instruments in the region. Broadman is now CIO of Singapore-based Astignes.
Khuong-Huu, who the New York Times described in a May article as a Frenchman of Vietnamese descent, was the head of interest rates for Goldman Sachs Group Inc. in the early 2000s before Alphadyne was founded. During his time at the Wall Street bank, he overlapped with Glenn Hadden, who spent more than a decade there trading global Treasuries and US Treasuries before leaving in 2011 to take up interest rate trading at Morgan Stanley.
Hadden joined Alphadyne in 2014 and is considered one of the best portfolio managers according to those familiar with his trading. That has largely paid off – Alphadyne posted double-digit profits in each of the previous four years.
Hedge funds and other major speculators have largely scaled back bets on Treasury futures in the first five months of 2021 after paying off securities earlier in the year. In early June, according to data from the Commodity Futures Trading Commission, leveraged funds had built their largest net long position in 10-year bond futures since 2013.
Since then, speculators have taken another bearish turn, particularly in so-called ultra-bond futures. Hedge funds now have the largest net short position in those contracts in nearly a year.
(Money flow updates in the seventh paragraph)
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