London's macro hedge fund pain as up to 100 people are out: "Everyone has blown up"

If you're a London hedge fund manager covering European government bonds, these are dark days. Individual funds aren't commenting on recent performance, but headhunters and industry insiders are clear that things have not been good. "Everyone has blown up," says one senior trader at a liquidity provider, "They are all out."

The exodus of European rates traders from hedge funds comes after years of heavy hiring by London hedge funds. Traders who stayed behind in banks have been keeping a tally of how many of their often former colleagues have been spewed out again. A few weeks ago it was in the mid-70s. Now they say that closer to 100 people are out.

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Both traders and headhunters say it's the end of an era. For years, hedge funds have leveraged French government bonds (OATs) in the repo market, using the bonds themselves as collateral while making money on the carry that's the difference between the yield and the cost of the repo. As French yields have risen amidst political turmoil, OATs have sold off and the whole highly leveraged trade has been upended. 

"These people weren't even real portfolio managers," claims one senior trader, watching from the sidelines in a London bank. "They were just using EGBs as a carry asset. Buying bonds, sitting on the carry and getting a percentage cut. It was fun for a while. You had a lot of PMs who were long France and long Italy, but with inflation coming in and rates high, it wasn't going to last."

"Every bubble has its moment," reflects one portfolio manager in the sector. 

The extent of the losses is not clear, and not everyone who has left a fund in the past month will have lost money – some departures will have other causes. But traders and headhunters say losses across the sector have been significant. "This is systemic," says one bank trader, who describes it as a "huge shock" to the hedge fund job market. 

The big question now is what will become of all these unwanted hedge fund traders. Some are expected to go back to banks. "Banks need them to manage their ECB exposure and bond books," says one headhunter, speaking on condition of anonymity. The big fear now is that spreads on BTPs (Italian government bonds) will go the way of OATs, he adds.

Not all the ejected hedge fund traders will want to go back, though. And some may not be able to. Many of those now out are bound by non-competes. Some are still on guarantees and in no hurry to find new jobs. And in any case, banking pay doesn't compare, observes the bank trader. "These guys were all getting $1m+, but you will only get that as a desk head," he says. 

It's possible that other funds will hire them. However, there are suggestions, too, that the European fixed income asset class will never be the same again. Many of the portfolio managers who blew up this month also blew up in March, says the senior trader at the liquidity provider. "They've blown up twice on the same trades." Another trader observes that a lot of funds moved into the European fixed income space in the belief that it was easy money: "The whole European carry system is now being questioned." 

Some of the portfolio managers who've left have done so of their own accord, though. One says that around 10% of those who've left have gone voluntarily. "It's very hard for allocators to find people willing and able to take risk," he says. "So sometimes you have the opportunity to run your own fund with capital from others." 

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