Gross Calls Bund Short ‘Well Timed, Not Well Executed’

Bill Gross sees his short of the German bund market—which he revealed last month—as “well timed but not necessarily well executed,” according to his latest outlook letter.

The Janus Capital portfolio manager and ex-PIMCO chief announced the trade in an April 21 tweet, calling German 10-year bunds “the short of a lifetime.” As of April 30, it was the second-largest position in Gross’ unconstrained bond fund’s portfolio, Janus data showed.

Gross Bund Tweet

Ten-year notes yielded about ten basis points when Gross publicly made the call, and did indeed fall in price while rising in yield over the next month.

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In executing the play, however, Gross not only bet that yields would climb but also stipulated a narrow range in which the securities would trade.

The $1.5 billion mutual fund ended up down 2.5% over the month, Morningstar data showed, trailing its peer group which remained largely steady. Trailing total returns for the three months ending May 27 place Janus’ unconstrained product in the bottom decile (91st percentile) of comparable funds.

Still, Gross argued in his posting that the bund short “was a prime example of opportunities hatched by the excess of global monetary policy.” Central banks’ “tag team match” of zero-based policy interest rates and quantitative easing “continue to encourage malinvestment in financial assets as opposed to the real economy,” he continued.

Developed sovereign bond markets nevertheless offer arbitrage plays, Gross maintained.

“Even in this modern era of malinvestment in financial assets, investors should want to choose the least overvalued asset to hold, and the most overvalued asset to sell. For an unconstrained fund that can both buy and sell, the current opportunity is a rare one.”

The key, then, is executing on it.

Gross Bund Source: Bill Gross Investment Outlook (5/27/2014)

The world’s largest hedge fund managers are dominating the capital invested in the asset class, according to Preqin.

The data provider found the top 11% of managers controlled 92%—or $2.78 trillion—of total hedge fund assets at the end of Q1 2015. These 570 managers also each held at least $1 billion in assets, qualifying their membership of the “$1 billion club”.

“The $1 billion club has continued to grow over the past 12 months, both in terms of the assets they command and their influence on the hedge fund industry,” said Amy Bensted, Preqin’s head of hedge fund products.

Of these top firms, more than 400 managing $1 billion to $4.9 billion collectively controlled $892 billion while 22 managers with $20 billion or more, had $790 billion all together, the report said.

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Older managers with a “consistently strong track record over many market cycles” were prominently featured in the $1 billion club, Preqin found. On average, managers with more than $20 billion were established in 1992.

These larger firms are also able to offer a wide range of strategies, the report said, allowing managers to benefit from diversification to generate even greater absolute returns.

According to the report, 41% of managers with more than $20 billion in assets offered four or more strategies while half of managers with $1 billion to $4.9 billion only provided a single core strategy.

The newer firms in this group of leading hedge fund managers were likely to show excellent performance over a shorter term to attract capital or spin out from older and larger firms.

Such links to larger hedge fund firms allowed newer managers to bring on existing track records and even some executives, the report said, to help establish trust and assurance with investors.

Preqin ranked Bridgewater Associates as the world’s largest hedge fund, with $169.5 billion in assets under management. AQR Capital and Man Investments came in second and third, managing $64.9 billion and $50 billion respectively.

Preqin HF