Computer-Driven Hedge Funds Behind Bund Fall

        By Christopher Whittall
        While the European Central Bank has gobbled up eurozone bonds, another group of investors has dumped them at a much faster clip, hastening the recent selloff in the region's bond market.
        Certain computer-driven hedge funds built up large bets that bond prices would rise after the ECB announced its quantitative-easing program in January, data from Royal Bank of Scotland Group show. The funds, known as commodity trading advisers, then quickly sold their bond holdings in late April as the market turned.
        "CTA selling engulfed ECB buying by a factor of three--enough to be a strong spur for the bond selloff," said RBS strategist Clement Mary-Dauphin.
        CTAs invest in futures contracts across stocks, bonds, currencies and commodities and tend to follow the momentum of the market. They typically set risk limits to guard against potential losses and will shed their positions once these limits are breached, said Nikolaos Panigirtzoglou, an analyst at J.P. Morgan Chase & Co., creating a self-reinforcing cycle of rising volatility and position cutting.
        Mr. Mary-Dauphin said CTA funds are "a bit overlooked by other investors" even though "they are major players and can move the market."
        Between March and mid-April, the ECB bond-buying program pushed the yield on German government bonds, or bunds, to a record low of 0.05%. Soon after, bond yields began to rise, culminating in a volatile spike on May 7. German 10-year bond yields were 0.63% Wednesday. Bond yields fall as prices rise.
        By analyzing CTA fund returns compared with bond-market performance, RBS estimated CTAs have sold EUR100 billion worth of 10-year futures since the second half of April. This flow equates to almost three times the EUR60 billion of bonds the ECB buys every month under its quantitative-easing program.
        Aref Karim, chief executive of QCM, a CTA fund with $63 million of assets under management, said his firm aggressively cut positions toward the end of April "for all portfolio assets," starting with government bond-related investments in mid-April. Mr. Karim said his fund has lost money because of the sharp selloff in markets, though his returns for this year as of end-April were almost 8%.
        Heiko Zuehlke, head of investor relations at Amplitude Capital, a CTA fund with about $2 billion in assets under management, said his fund avoided the worst of the potential losses because it typically holds positions for only a few days, allowing it to dump losing positions quickly.
        The pressure is also mounting on CTAs to drop their bond bets. Average CTA returns for the year are down 0.5%, according to Lyxor Asset Management. They had been up almost 9% earlier this year prior to the bond selloff.
        Analysts are still debating the trigger for the dramatic bond market reversal. Some point to growing optimism over economic growth in Europe and signs of a rebound in inflation--scenarios that would ordinarily lead to higher bond yields. Either way, RBS's Mr. Mary-Dauphin notes heavy selling from CTAs undoubtedly "magnified the move."
        "When everyone has the same trade at the same time, you can get this kind of wave of mass selling," he said.
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        (END) Dow Jones Newswires

        May 13, 2015 07:33 ET (11:33 GMT)

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