Key Takeaways
- • Up to 100 European rates traders have left London hedge funds, up from a mid-70s tally reported a few weeks earlier, according to traders and headhunters cited by eFinancialCareers.
- • The departures follow sharp losses on leveraged carry trades in French government bonds (OATs) financed through the repo market, as rising French yields and political turmoil sent OATs sharply lower.
- • A senior trader at a liquidity provider says "Everyone has blown up" and that many portfolio managers who lost money in the current month had also suffered losses in March.
- • Traders and headhunters describe the losses as systemic and the sector's shock to hedge fund hiring as significant, though the full extent of losses is unclear.
- • Some displaced traders may return to banks, but many are bound by non-competes or guarantees, and bank pay is far below hedge fund levels.
Summary
London hedge funds trading European government bonds are under significant strain, with up to 100 rates traders now out of work, according to traders and headhunters cited by eFinancialCareers. Individual funds declined to comment on recent performance. Industry insiders say the tally has risen from the mid-70s a few weeks ago, following years of heavy hiring by London hedge funds in European fixed income. One senior trader at a liquidity provider summarized the situation: "Everyone has blown up. They are all out."
The reported losses center on a leveraged strategy in French government bonds (OATs). Hedge funds have used OATs as collateral in the repo market and earned carry, the spread between the bond yield and the repo financing cost. As French yields have risen amid political turmoil, OATs have sold off, upending the trade. A senior trader at a London bank characterized the strategy as using euro government bonds as a carry asset rather than a true portfolio view, and said it could not last once inflation and high rates arrived. Some portfolio managers had been long France and long Italy. The sources note that the extent of losses is unclear and that not all departures reflect losses, as some have other causes.
The outlook for those displaced is uncertain. A headhunter, speaking on condition of anonymity, said banks need such traders to manage ECB exposure and bond books, and expressed concern that spreads on Italian government bonds (BTPs) could follow OATs lower. Many departing traders are bound by non-competes or remain on guarantees, and bank compensation falls well short of hedge fund pay, with one bank trader noting that $1m+ packages are typically available only to desk heads. Some sources suggest the European fixed income carry model is now being questioned more broadly. A portfolio manager who left voluntarily, estimated at around 10% of departures, argued that allocators are reluctant to back risk-taking and that running a fund with outside capital remains an option.
The reported losses center on a leveraged strategy in French government bonds (OATs). Hedge funds have used OATs as collateral in the repo market and earned carry, the spread between the bond yield and the repo financing cost. As French yields have risen amid political turmoil, OATs have sold off, upending the trade. A senior trader at a London bank characterized the strategy as using euro government bonds as a carry asset rather than a true portfolio view, and said it could not last once inflation and high rates arrived. Some portfolio managers had been long France and long Italy. The sources note that the extent of losses is unclear and that not all departures reflect losses, as some have other causes.
The outlook for those displaced is uncertain. A headhunter, speaking on condition of anonymity, said banks need such traders to manage ECB exposure and bond books, and expressed concern that spreads on Italian government bonds (BTPs) could follow OATs lower. Many departing traders are bound by non-competes or remain on guarantees, and bank compensation falls well short of hedge fund pay, with one bank trader noting that $1m+ packages are typically available only to desk heads. Some sources suggest the European fixed income carry model is now being questioned more broadly. A portfolio manager who left voluntarily, estimated at around 10% of departures, argued that allocators are reluctant to back risk-taking and that running a fund with outside capital remains an option.
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