VIXplosion Sends Bill Gross' Fund Sliding Into The Red

While we await a list of active manager casualties who blew up on yesterday's vol explosion - we doubt this will be readily available - we highlighted some funds which, like Man and Option Solutions, suffered losses as great as 65% on the day's moves.

Now, as Bloomberg reports, another - more unexpected - loser has emerged from the ashes of yesterday's historic VIX move: none other than former bond king, Bill Gross himself.

According to its latest daily update, Gross’s $2.2 billion "unconstrained" fund, the Janus Henderson Global Unconstrained Bond Fund, tumbled by 0.83% as markets plunged Monday. This may not sound like a lot but keep in mind that this is largely a fixed-income platform, and the drop happened to be its biggest since Dec. 30, 2016. It was also the worst one-day performance in Morningstar Inc.’s nontraditional bond category among 64 funds with at least $20 million in assets.

Finally, the one day swing reversed the fund’s year-to-date total return to a loss of 0.63% from a gain of 0.2%.

To be sure, the one-day loss clearly paled against the record 1,175-point crash in the Dow Jones Industrial Average, the move comes at a time when Gross has correctly called the recent rout in bonds, having recently declared the onset of a "mild bond bear market" before the 10Y yield spiked to 2.80%, while highlighting his returns compared to more traditional bond funds.

While the reason for the sharp daily drop is unclear, Bloomberg notes there are several possible explanations including:

  • The volatility spike: As a source of higher returns, his fund relies on selling the equivalent of insurance against big market moves. “Higher volatility in markets present opportunity to earn higher returns by selling volatility not cash bonds,” Gross said in a Tweet posted Monday. In retrospect, he may have sold a little too much.
  • Duration, or interest-rate sensitivity, that Gross recently put at minus two years, meaning the fund is positioned to benefit from rising bond yields. Ten-year U.S. Treasuries fell almost 14 basis points on Monday, the largest decline since September. “As yields go up and bond prices go down, the fund makes money,” he said in a Feb. 1 email. Of course, yields dropped sharply on Monday amid the flight to safety, which could have resulted in the substantial underperformance.
  • Holdings tied to currencies, commodities or other assets. When the fund’s returns slid at the end of December, he attributed it in an email to “an unanticipated decline in the dollar, which led to a gold price increase. The fund was short gold at the time.”

Gross’s Janus fund, which holds a sizable portion of his own personal fortune, has returned an average of just 2.2% annually over the last three years, ranking in the bottom half of its Bloomberg and Morningstar peer groups.