Hedge funds return to government bonds

Some hedge funds who shunned or bet against European government bonds only three months ago are buying again as a sharp rise in yields offers them returns after a lacklustre 2016 for the industry.

Most hedge funds spent last year aggressively “short” on government bonds, but portfolio managers at individual funds and investment companies that invest in hedge funds — so-called fundsof-funds — said some are changing their view.

“We hear diverging opinions,” said Pacome Breton, head of portfolio management at hedge fund allocator FQS Capital Partners. “Some after the rally up to December were cautious and taking profit for better entry points.” Other funds are buying on the expectation that faster inflation will keep yields at higher levels, he said.

Hedge funds are often first off the mark to identify trends, so concerted buying of government bonds may herald an increased allocation to government bonds by the wider investment industry.

On the flip side, they are also agile and could quickly exit their holdings if the market turns, for example in connection with political risks linked to Dutch, French, German and possibly Italian elections in 2017.

Last year, low yields kept many hedge funds away from government bonds, though some did invest in “ultra-long” bonds with a higher yield issued by Eurozone countries.

Since then, yields have risen sharply across the board on signs of an improving global economy, expectations of reduced central bank monetary stimulus and with the election of Donald Trump as US President raising hopes for fiscal stimulus and higher inflation in the world’s richest country.