Element Capital hit with $1bn loss in bond market shake-up

Element Capital sustained a roughly $1bn loss last month, making the New York hedge fund run by Jeffrey Talpins one of the highest-profile victims of the October tumult across bond markets.

Element, which with $15bn in assets is one of the world’s biggest macro hedge funds, lost 6.7 per cent in October, according to people familiar with the fund’s performance. That takes the firm’s loss this year to 9.9 per cent.

The group declined to comment.

The loss comes after a painful month for macro hedge funds, several of which were caught out by the swings in fixed income markets prompted by a reassessment of how swiftly global central banks will act to slow the rapid growth in prices that is affecting many economies.

Among other funds to suffer was Chris Rokos’s $12.5bn-in-assets Rokos Capital, which lost about 18 per cent last month. New York-based Alphadyne also lost money, while London-based Crispin Odey suffered almost 50 percentage points of performance losses from early October to the end of the month.

Many managers who were expecting interest rates to stay low for some time based on what central banks had been saying earlier in the year were surprised by the Bank of England’s hint in late September that it could lift interest rates before the end of the year to try to curb inflation. The more hawkish BoE sentiment, coupled with decisions by policymakers in Australia and Canada to begin reining in stimulus programmes, triggered a slump in short-term government bond prices around the world.

Some funds were wrongfooted by positions they held in short-term bonds. Others lost money as “steepener trades” — bets that long-term yields will rise faster than short-term yields — were hit, forcing some managers to liquidate positions. Yields rise as prices fall.

Element is one the macro hedge fund sector’s best performers over the long term, having generated average annual gains of more than 18 per cent over the 16 years since it was founded. It has been closed to new investors since 2018, and this year the Financial Times reported it was planning to return $2bn of cash to investors in order to focus on performance.

The firm made one of the most prescient bets of the pandemic last autumn, telling clients that the BioNTech/Pfizer vaccine would be 75 to 90 per cent effective, far more than investors were expecting. Two weeks later, the companies announced the vaccine was more than 90 per cent effective, sparking a huge rally in many stocks.

In September the firm, which uses a range of economic research to make bets on moves in bonds, currencies and commodities, hired Gertjan Vlieghe, who until August was a member of the BoE’s rate-setting Monetary Policy Committee.

Additional reporting by Robin Wigglesworth

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