Hedge funds exit bond bets, eye Swissie trade

LONDON Thu Sep 15, 2011 8:54am EDT

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LONDON (Reuters) - Hedge funds have been jettisoning fixed-income bets that profited them this summer in favour of currency carry trades, after Switzerland's move last week to cap the soaring franc made it more attractive to short sell, fund firm Signet said.

Robert Marquardt, founder of the fund of hedge funds firm, said managers feel short bets on fixed income have run their course and were now looking at borrowing euros and Swiss francs, where rates look set to remain low, to buy emerging market currencies.

"Managers are putting on currency plays because the long interest rate play is played out and a rising interest rate environment tends to support the currency," he told Reuters in an interview this week.

"Short and long-term interest rates both collapsed over the summer. Managers long (of) those bonds did very well. But that trade is finished for now," he said. "Rates (in many developed economies) are not going to go lower -- they are flat, or they will rise."

German 10-year bond yields have dropped below 1.8 percent this week from above 3 percent at end-June, while 10-year Treasury yields have dropped below 2 percent from 3.2 percent, benefiting macro funds betting bond prices would rise as the economic outlook deteriorated.

Brevan Howard, one of Europe's biggest hedge fund managers, for instance, made close to $1.5 billion (949 million pounds) over three weeks in August, the FT reported.

Marquardt said hedge funds were now putting on carry trades -- where low-yielding currencies are used to buy high-yielding assets -- and buying currencies such as the Korean won or Mexican peso and may also target the Brazilian real and Malaysian ringgit, where interest rates are rising or are higher than in Europe.

SWISS FRANC

The move comes after the Swiss National Bank last week surprised investors with an exchange rate cap, saying it would no longer tolerate a rate below 1.20 francs per euro and would defend the target.

Having strengthened close to parity las month from more than 1.3 francs to the euro in April as risk-averse investors moved to safe havens, the franc fell around 9 percent in a day. Its cap could make it attractive for funds wanting to go short.

"Managers and investors in general are tending to buy rising or higher interest rates currencies, and funding that with the low interest rate currencies of the severely indebted, slow-growing developed world," Marquardt said.

Some hedge funds are starting to use the euro, rather than the dollar, in carry trades, he said, adding: "...if it is the euro it may as well be the Swiss franc.

"I do know a number of managers who were bearish the Swiss franc due to its extremely overvalued situation, which they saw as unsustainable; they had been waiting for a peak to happen so they could swap to the franc as a funding currency," Marquardt said.

Last week's move by the Swiss National Bank hit managed futures hedge funds, which try to make money from latching onto market trends, although some managers that had short bets gained.

Mike Dever, founder and director of research at U.S.-based Brandywine Asset Management, which manages computer-driven funds with $100 million in assets, saw his fund profit from being short the franc, and said he expected it to weaken further.

"The market had built up so much enthusiasm a month ago, you knew it was not going to sustain itself in perpetuity. The market had pretty much shot it at that point, it had received all the enthusiasm it could at that point," he told Reuters.

"We are still net short, just because I think the back has been broken. My expectation is that it will continue to ratchet lower over the next 3-6 months."

(Editing by Dan Lalor)

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