When last Thursday morning the ECB, widely expected to unleash an epic bazooka, instead revealed the tiniest of water pistols, it did not only impair its own credibility and "forward guidance", it sent a shockwave through the markets by not only slamming European equity markets, but by send the Euro currency soaring by 3% or the most since 2009. To be sure, Mario Draghi did try to engage in some unprecedented market jawboning, when he admitted he was trying to talk markets up ("Not really... well of course") but by then it was too late and the damage had been done.
How much damage?
Considering that virtually every macro hedge fund had fallen to Draghi's hypnotic spell that the EUR was going lower, further abetted by Goldman's confident call that the EURUSD would see a 300 pip move lower on Thursday, it is safe to say that everyone was on the same side of the boat.
CFYC Commitment of Traders data confirm this, showing that bets by hedge funds on the euro falling outnumbered bets on the euro rising by 4.7 to 1 as of Nov. 24. Which explains the violent, almost unprecedented market response to the ECB's disappointing announcement.
"Everyone and their mother were short the euro," one London-based hedge-fund investor told the WSJ.
And, as the WSJ adds betting on a weaker euro and a stronger dollar has been one of the most popular positions for macro hedge funds, if only until Thursday when things... changed.
Hedge-fund investors say the lion’s share of major macro funds had bet against the euro ahead of Thursday’s ECB meeting, when President Mario Draghi underwhelmed markets with news of a cut in the deposit rate to minus 0.3% and a six-month extension of its bond-buying program.
“I think it’s been painful for a lot of people,” said Michele Gesualdi, chief investment officer of Kairos Partners in London, which oversees €8 billion ($8.7 billion) in assets and invests in hedge funds. “Pretty much everyone was short the euro. The view was very clear for everyone.”
But while traders know that "everyone" suffered massive losses, what they would especially like to know is "who specifically" did, just so their potentially forced liquidation trades can be frontrun. Here are some answers courtesy of the Journal:
Man Group, which runs $76.8 billion in assets, said on its website that its $4.4 billion AHL Diversified fund lost 5.1% on Thursday.
Among other funds to have been running bets, to a greater or lesser extent, against the euro were Brevan Howard Asset Management, which oversees about $25 billion in assets; Tudor Investment Corp.; Moore Capital Management; and Caxton Associates, said investors. It isn’t clear what the funds’ positions were at the time of the announcement.
Tudor lost about 1% on Thursday, an unusually steep loss, in part because of the euro positioning, a person familiar with the matter said. Brevan also fell a relatively large amount, said a separate person with knowledge of the fund’s performance.
If it was only the FX loss, the damage would have been manageable, however since "hedge" funds always do precisely the opposite of what their name suggests, and instead of actually hedging their exposure, they doubled down by also being long European stocks - a trade directionally equivalent to the short EUR position:
Many funds have also been positioned for rising European stock prices, a similar position to the bet on a weaker euro, as a way of profiting from what they thought would be greater ECB stimulus. Such positioning on stocks may have proved even more painful than currency bets, said Sam Diedrich, who manages a portfolio of investments in hedge funds at California-based Paamco, which runs $9 billion in assets. “This will be a painful surprise for a lot of hedge funds,” he said.
Here are the biggest culprits:
Among funds to report early numbers to investors was Winton Capital Management Ltd., a computer-driven manager that runs more than $30 billion in assets. Its flagship fund, which bets on market trends, fell 3.3% on Thursday, said one hedge-fund investor who had seen the performance number. Winton declined to comment.
Aspect Capital, which runs $5.1 billion in assets, saw its flagship computer-driven fund fall 4.5% on Thursday, according to an investor update reviewed by The Wall Street Journal.
Finally, please shed a tear for the robots, who were slammed the hardest in their attempts to extrapolate the future based on recency-bias and momentum:
Computer-driven funds, which latch on to trends, may have been hit even harder than funds run by humans, investors said. Broker Newedge’s Trend Indicator, a model portfolio that simulates the bets that these computer-driven funds may place, was positioned for the euro to fall as of Wednesday, while it has also been showing bets on rising German bond prices and rising stock prices. German bonds and stocks both fell sharply Thursday.
And so once again the "hedge" fund industry gets slammed, having put all of its eggs in a central banker's basket, assuring even fewer investors who are willing to pay 2 and 20 next year just to underperfom the market, but nobody more so than macro funds. "The losses threaten to derail a recent recovery in macro funds, which have struggled in recent years as ultralow interest rates have made fixed-income trades hard to profit from and as central banks’ moves have often proved to be hard to anticipate."
Finally, since most funds haven’t yet reported Thursday’s performance to investors, expect many more unpleasant surprises, perhaps coupled with yet quiet or not so quiet liquidation in a world in which even a 3% (levered) daily loss can mean the difference between life and death for even some of the most respected investors, all of whom have become an anacrhonism in a world where central bankers have been chief risk officers of the market since 2009.