Last November, when we first looked at the monstrous short exposure in the rates complex, we said that a short squeeze of a lifetime in rates was on deck.
*TREASURY 30-YEAR BOND YIELD DROPS AS MUCH AS 11 BASIS POINTS
Short squeeze of a lifetime on deck pic.twitter.com/P7ESWsYyG8
— zerohedge (@zerohedge) November 4, 2020
Six months later, in June with yields first spiking – and benefitting all the shorts – thanks to what we now know was Japan’s massive pension fund, the GPIF dumping billions in Treasurys, and then sliding rapidly, we observed that a “record short squeeze was accelerating“…
… the only thing we did not know was who was the unlucky fund suffering massive losses as yields ground ever lower.
We now know: Bloomberg just reported that hedge fund Alphadyne Asset Management has “emerged as one of the biggest casualties from a short squeeze in the global bond market”, with its $12 billion macro trading strategy suffering massive losses as a result of a relentless short squeeze that pushed yields as low as 1.15% on Monday, and resulting in losses of $1.5 billion.
Alphadyne’s funds plunged through July, Bloomberg sources reported, noting that the flagship Alphadyne International Fund lost about 10%. It also manages a leveraged version with about the same amount of assets; needless to say the losses there were even worse.
Curiously, just as we were pointing out the record short squeeze to our readers in June, the Alphadyne flagship was actually suffering through them, and the fund tumbled 4.3% that month, its worst month ever, after its managers positioned had positioned for a steeper U.S. yield curve and higher interest rates broadly. In retrospect all the fund was doing was reacting to the late March surge in yields, which we noted yesterday was the cause of GPIF’s Treasury liquidation ahead of its historic reallocation which slashed holdings of TSYs from 47% to 35%, and which they mistook for confirmation of a secular reflation trade.
Waiting in vain for a reversal higher in yields, the fund eventually capitulated and by July, CIO Philippe Khuong-Huu was continuing to pare back wagers, decreasing directional short bets and relative-value plays in the U.S. and Europe and closing out busted Treasury curve trades, according to a person familiar with the matter. All told, it lost another 2.5% in July.
Some background on the pedigrees behind Alphadyne which are so impressive memories of LTCM come to mind:
Alphadyne was founded by Khuong-Huu and Bart Broadman, who were colleagues at JPMorgan Chase & Co. Its investors include pensions, insurance companies and sovereign wealth funds, according to its website. In 2017, Alphadyne spun off its Asia team into Astignes Capital Asia Pte, which focuses on trading interest rate and currency instruments in the region. Broadman is now CIO of Singapore-based Astignes.
Khuong-Huu, who the New York Times described in a May article as a Frenchman of Vietnamese descent, was Goldman Sachs Group Inc.’s head of interest rates in the early 2000s before forming Alphadyne. During his time at the Wall Street bank, he overlapped with Glenn Hadden, who spent more than a decade there trading global government bonds and U.S. Treasuries before leaving in 2011 to run interest-rate trading at Morgan Stanley.
Hadden joined Alphadyne in 2014 and is considered one of its top portfolio managers, according to people familiar with his trading. That’s largely paid off — Alphadyne posted double-digit gains in each of the previous four years.
Well at least we know the names of the geniuses who were behind the relentless grind lower in yields as they were covering their increasingly money losing Treasury shorts.
Of course, Alphadyne is hardly the only fund to suffer huge losses on Treasury shorts, although other speculators broadly scaled back bets against Treasury futures during the first five months of 2021, after offloading securities earlier in the year according to Bloomberg, and by the start of June, leveraged funds had built up their largest net long position in 10-year note futures since 2013, according to Commodity Futures Trading Commission data. Alas, Alphadyne held on and now faces huge losses.
But in an ironic twist, since June, specs have again taken a bearish turn, especially in long-dated ultra bond futures, where yields just tumbled to February levels.
And since leveraged funds now have the biggest net short position in those contracts in almost a year, it’s just a matter of time before we learn of even more losses in the days to come as more funds are forced to cover, first pushing yields even lower before – after all the technical overhang is cleared up – yields spring right back up again.