The huge "hedge fund short" 101
Many have published a chart that say "hedge funds have the largest speculative short futures position in history". The data is accurate. It also needs interpretation.
Here's my chart it's a few weeks old but illustrates my point
The hedge fund short is someone else's long. That long is institutional investors. It's very big. But that is not the important story. This unlike the ES charts which looked the same and were a choose your fighter Long Only Simps vs Hedge funds (which I got completely wrong)
Respect Long only Simps 🫡
Hedge funds short ES covered like mad. I was wrong.
But fixed income futures positions are quite different. While the long side of the positions are indeed levering up by long only asset managers the short side which is getting so much doomism is more complex
H/T @leadlagreport for this example
Why do hedge funds short bond futures
Speculation IS a real thing!
BUT also to hedge out interest rate risk on something they are long in the derivatives or cash market like:
Corporate and High Yield Bonds, Physical Treasury Bonds, Mortgage Bonds, Muni's, Converts, EM debt etc
For example let's say long only institutions bid up futures to lever up a bet. A hedge fund can buy the correspond US Treasury to that futures contract and take out a spread between the futures and cash markets. It's an arbitrage between the cost of leverage in the futures
Markets and the actual cost of leverage the hedge fund is able to achieve in their funding of the UST long position.
Now. It's possible that the hedge fund is purely speculative or it's possible that they own the bond and are using repo to finance the long and are short the
Futures. Let's go to the data. As this "historic" futures short has been built. Levered long positions have grown by half a Trillion dollars. Either that should be added to the long position of real money
Or should be subtracted from the short position of hedge funds who are doing the cash and carry arbitrage. I won't show all my data but just say that this is a complex topic and the signal in Fixed Income is pretty weak regarding TFF rates data the doomers are posting
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AUM and returns for multi strategy funds 101. Because people struggle with my summing up of my alpha and beta returns instead of "using a weighted average" I thought it may be useful to help people understand how professional money management works.
My experience is from decades of personal first hand knowledge. At my own hedge fund, Bridgewater, Brevan Howard, and first hand knowledge from PM's and owners of multi strategy pod shops. At the end of the day what matters is the return on AUM. What real dollars are earned
on the capital invested. Thats where this 101 will end. But first I'll start with basic concept of return that are often confused by many, including people on this app, who have not sat in an end investor or hedge fund owner seat. What is the denominator for return calculations.
Manage your future money or your spot money 101 You can't do both and sometimes (Japan) you can't do either. Bonds or Money Choose your fighter.
Since the Fed began tightening all G4 currencies have depreciated va hard money and a consumption basket. But future money (bonds)
Are Trading in a range. Future money is being protected via issuance policy and CB reinvestment policies and QT taper. Yield curves ex Japan are pretty average steepness. Despite spot money losing purchasing power and store of value
In Japan decades of YCC even modestly being unwound is showing that sometimes you can't protect spot money or future money at all. For now the policymakers are protecting future money and the market is all in short spot money via
How do issuers attempt to understand their financing costs relative to various alternatives and relative to competitors costs? How do investors determine the expected return of their investment choices? How do futures and options traders
Determine the appropriate risk free rate to determine the forward price of the underlying asset they are trading? Lastly how do global issuers, investors, and derivatives participants determine these things in their local currency.
The answer is they all swap to floating
What does that mean. We all know what a floating interest rate is. It's essentially the return on overnight cash (really 3 month sofr in the U.S.)
By swapping all investments back to overnight cash one can then compare the return in excess of cash
There is no "Maturity Wall" 101.
Though this is a myth you may not be relieved by this thread.
Have you seen the doomer charts about the maturity wall of US Debt. It is a clear signal that you should unfollow those who post it. It usually starts with 9TN of debt comes due.
Notice the huge wall of debt maturities in the last chart. Sometimes the FURU posting the chart will do it monthly. Particularly when trying to suggest the Fed should cut rates to save the FURU's precious bags. Close to 6TN coming due in the next 3 months. OMIGOD PANIC!
Whats going on here? Well to put it simply the US has outstanding as of 4/30 6TN T bills. The distribution of these tbills looks like this. Notice while the graph above does not include it every month 4 week tbills mature and refinance and should be added to the next month.
Firstly it is not a time to make extreme statements. Breathe people.
What happened?
Moody's lowered its credit rating of the U.S. joining S&P who moved in July of 2011 and Fitch in August of 2023 at a AA rating instead of the highest grade AAA 🧵
Here's how I'm thinking about it.
1. Is there any technical consequences for holders of the debt 2. What happened in markets when S&P and Fitch downgraded and what was happening with fiscal policy? 3. Will the downgrade and possible market moves impact the fiscal policy makers
The technical concern that many will doom about is that some holders are prohibited from holding debt that isn't rated AAA by at least one rating agency. Those holders could be forced sellers.
In reality what has happened in the past and what is almost certain to happen
Fed reinvestment 101. It's in no way QE It's balance sheet size neutral and reserves neutral.
Ever since the Fed has held US Treasuries they have had some of those US Treaasuries mature. In periods when neither QE or QT is active
the proceeds from maturities are reinvested in treasuries. They are purchased for many years now via a process called an Add-on to a treasury auction.
The treasury auction today sold 42BN ten years to the private sector. The yield was set completely independently from the
Fed. Which had recently had 14.8BN of maturities reinvested that payment in a side deal with the Treasury at the auction price set by the private sector. The amount of US debt outstanding didn't change based on the Fed 's action, the bank reserves in the system didn't change