Hedge Fund Managers Have Become Bipolar
But are markets truly sane?
There has been lots of data and news running in the market since Thanksgiving. A first punch was the new Covid strain, followed by a fast hook from a hawkish Fed.
…Well, asset managers aren’t really Mike Tyson material, and therefore they got K.O.
Maybe some hedge fund managers got some brain damage after this fight and turned bipolar or maybe after spending some time in this insanity of a market, you start to go nuts. After all, the stock market is not really made for light-hearted people.
Despite all of this, one thing is for sure: Hedge funds have been caught in two minds on what to do with safe haven assets during recent market turmoil, according to the latest data from Commodity Futures Trading Commission.
The Japanese Yen
When you say safe haven assets, the first thing that comes to mind is the Japanese Yen. The second most liquid currency that can be traded in the Forex market, the Yen still remains the best place to park money during high volatility periods.
Just remember in March 2020, when Covid was spreading around the globe, USD/JPY was falling to a 4 year low, as money was flowing in the safe haven currency.
It is well known that hedge funds have built a sizable net-short position in the yen, as Japan is running some impressive QE. When the mainstream media was flooded with omicron news, asset managers were caught on the wrong foot. They rushed to cover, slashing their bearish yen wagers.
Treasuries
United States bonds are another safe place for your money. After all, the United States can’t go bankrupt and default on its debt, even though the president sleeps all day in the Oval Office and can’t even keep his eyes open during an event.
Now, after talking about the yen, you would expect that big money managers cut down on short bets on Treasuries. Well, sorry to disappoint you, but they stood firm betting against Treasuries. They actually increased net short bets across the curve by the most since April 2020.
Explanation
We know that market participants are insane and that markets are even more insane. Therefore, trying to deliver a clear explanation is a difficult task at hand, but we will do our best.
During the omicron turmoil, safe haven asset prices increased shortly. Hedge funds had a win on the short term in yen by covering the short bets and a loss in treasuries. Treasury prices are expected to fall as the Federal Reserve withdraws the liquidity and we get closer to a rate hike.
Therefore, money managers used the win from the yen bets to hedge against the loss in treasuries. This move allowed them to use the market’s fear in order to build a stronger new short position in Treasuries by selling near a high.
Despite us mocking hedge fund managers for not being sane, this portfolio adjustment seems to have worked according to plan as Treasuries prices resumed their fall as yields rise. This move for sure give hedge funds a certain competitive advantage.