Key Takeaways
- • London-based hedge funds have shed close to 100 European government bond traders and portfolio managers, up from around 75 in recent weeks, according to eFinancialCareers.
- • Losses are concentrated in leveraged carry trades on French government bonds (OATs), financed through repo, as rising OAT yields amid political instability pushed bond prices down.
- • Some portfolio managers had already suffered losses on similar strategies earlier this year, raising questions about the sustainability of European sovereign bond carry trades.
- • Italian BTP spreads widening is a further risk to leveraged fixed income portfolios, per market participants.
- • The scale of losses is unclear, and not all departures are performance-related; some traders left to launch independent funds.
Summary
London-based hedge funds have lost close to 100 European government bond traders and portfolio managers following significant losses on leveraged fixed income strategies, according to a report by eFinancialCareers. Industry sources estimate departures have risen from around 75 to nearly 100 in recent weeks. The exits follow years of aggressive hiring by multi-strategy hedge funds seeking to capitalise on European sovereign debt markets.
The losses are concentrated in leveraged carry trades involving French government bonds, known as OATs. Funds used repo financing to build sovereign debt positions, earning the spread between bond yields and borrowing costs. Rising French government bond yields amid political instability have pushed down bond prices, pressuring leveraged positions and forcing funds to reassess their exposure. Traders cited by eFinancialCareers said some portfolio managers had suffered similar losses earlier this year, raising concerns about the sustainability of European sovereign bond carry trades.
Market participants have also warned that widening spreads on Italian government bonds (BTPs) could add pressure to leveraged fixed income portfolios. The scale of the losses remains unclear, and not all departures are performance-related. Industry sources said some traders left voluntarily, including to establish independent funds with external capital.
Banks could absorb some displaced traders, given their interest in European Central Bank exposure and sovereign bond expertise. However, non-compete restrictions and compensation differences may limit immediate moves, as some hedge fund traders previously earned more than $1m annually.
The departures mark a sharp reversal for a sector that had attracted substantial capital and talent into European rates strategies. The losses are prompting renewed scrutiny of leverage and of the risk-adjusted returns available from sovereign bond carry trades.
The losses are concentrated in leveraged carry trades involving French government bonds, known as OATs. Funds used repo financing to build sovereign debt positions, earning the spread between bond yields and borrowing costs. Rising French government bond yields amid political instability have pushed down bond prices, pressuring leveraged positions and forcing funds to reassess their exposure. Traders cited by eFinancialCareers said some portfolio managers had suffered similar losses earlier this year, raising concerns about the sustainability of European sovereign bond carry trades.
Market participants have also warned that widening spreads on Italian government bonds (BTPs) could add pressure to leveraged fixed income portfolios. The scale of the losses remains unclear, and not all departures are performance-related. Industry sources said some traders left voluntarily, including to establish independent funds with external capital.
Banks could absorb some displaced traders, given their interest in European Central Bank exposure and sovereign bond expertise. However, non-compete restrictions and compensation differences may limit immediate moves, as some hedge fund traders previously earned more than $1m annually.
The departures mark a sharp reversal for a sector that had attracted substantial capital and talent into European rates strategies. The losses are prompting renewed scrutiny of leverage and of the risk-adjusted returns available from sovereign bond carry trades.
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