Our pick of the trades that worked out well or crashed and burned in 2018.
Oil: when one-way bets go bad
Even the most seasoned oil investors struggled to time the market’s gyrations in 2018.
As oil rallied towards a four-year high of $86 a barrel in October, hedge fund energy specialist Pierre Andurand — who has made his name by riding crude’s cyclical swings — looked like he was on course for another bumper year. He was not alone. Exchange and regulatory data showed investors were betting big on US sanctions on Iran tightening the market to such an extent that the only way was up for crude.
But the supposedly one-way bet unravelled. With the administration of US president Donald Trump increasingly concerned about the rising oil price, Washington decided to soft-pedal sanctions on Iran. At the same time, official data started to show that the US shale boom was growing even faster than investors anticipated.
The result was a brutal 30 per cent reversal in prices in just two months, which left many hedge funds — including Andurand Capital Management — nursing losses.
By December Opec and Russia were resorting to a deal to cut back oil output to stop prices falling further. With the US shale juggernaut showing little signs of slowing, 2019 might be a case of “once bitten, twice shy” for oil investors looking for a price recovery. David Sheppard
Bitcoin: colliding with reality
Investors using derivatives to short bitcoin would have had a very lucrative year.
Products such as futures and contracts-for-difference emerged last year to allow more investors to cash in on the soaring bitcoin price. The debut of bitcoin futures by CME Group, the world’s largest futures exchange, in the week before Christmas a year ago marked the peak of bitcoin’s price at more than $19,000. It has since tumbled 80 per cent in the intervening 12 months, to around $4,000.
But it is unlikely many investors profited. Brokers and clearing houses, still feeling their way in a volatile market, demanded high levels of margin from investors to safeguard their trades. Open interest in bitcoin futures at CME and CBOE combined is less than 10,000 contracts, which is little changed from the start of the year.
Stephen Innes, head of Asia trading for Oanda, the currency trading platform, said the bitcoin community needed to give markets some breathing room.
“Frankly cryptos need an extended period of ‘boring times’. The problem is that bitcoin is never far from the limelight with everyone chiming in ‘I told you so’, whether it’s a $500 bounce higher or lower.” Philip Stafford
Short-maturity Treasuries: a bright spot
The US Federal Reserve’s interest rate increases were a major headwind to the global bond market for much of the year, but one corner has held up well: short-dated US government debt.
Treasury bills maturing in less than a year have returned 1.7 per cent this year, according to a Bloomberg Barclays index. Rise, an exchange-traded fund that aims to benefit from rising interest rates by using Treasury derivatives, has returned 4.5 per cent.
This may seem like a middling performance, but it comes over a period when global bonds have lost about 1.8 per cent, corporate debt has dropped 3.5 per cent, and emerging market bonds shed more than 6 per cent — making 2018 one of the worst years on record for fixed income. Robin Wigglesworth
Leveraged loans: a win is just about a win
Another area of the debt market that has benefited from the US central bank’s interest rate increases this year is so-called “leveraged loans”.
Such loans are typically debt issued to riskier companies, often to finance acquisitions. Unlike bonds, which pay a fixed coupon, the cost of leveraged loans are dictated by an underlying fluctuating benchmark — overwhelmingly the London interbank offered rate (Libor).
A solid company might promise to pay 3.5 percentage points above three-month Libor, while dicier ones might have to pay 6 percentage points above the benchmark’s rate. The Fed’s rate rises and shrinking balance sheet have lifted the three-month Libor from 1.57 per cent a year ago to about 2.74 per cent.
But the S&P/LSTA Leveraged Loan Total Return index has sagged more than 2 per cent since late October, due to fears over the frothiness of the leveraged loan market — which swelled to $1.3tn in 2018 — and fading expectations for Fed rate rises in 2019. The leveraged loan gauge is now up just 0.7 per cent in 2018. Disappointing, but still one of the best performances of a major asset class this year. Robin Wigglesworth
Brazil: comeback kid
Brazil can usually be relied upon to keep investors on their toes and 2018 was no exception. Local investors who took a punt on the Bovespa stock index in late-June have earned nearly 25 per cent. For foreign investors, who must take the currency into account, the best entry point was in the second week of September, just as October’s elections came into view. Since then, the MSCI Brazil (dollar-based) index is up 22 per cent, compared with a 6 per cent loss for the broad MSCI EM index.
Bernd Berg of Woodman Asset Management was among those diving in, anticipating a “Bolsonaro rally” before the first of two rounds in the presidential election. “I remain euphoric for the outlook for Brazilian markets,” he said when Jair Bolsonaro, the far-right former army captain, won the second round on October 28.
“We are in Brazil on a two-year horizon,” he added. “The first test will come in June next year,” when he hopes to see progress on long-awaited fiscal reforms. “There is a lot of scepticism among foreign hedge funds, but if they do the reforms there will be a big move and foreigners will be chasing Brazilian assets again.” Jonathan Wheatley
Turkey: not for the faint-hearted
As long ago as January 2017, GAM’s EM debt fund manager Paul McNamara wrote in the FT that Turkey was a “crisis candidate”, noting that a crackdown on dissent against the government and official unease at a shadowy “interest rate lobby” posed grave risks to the currency. It was, for him, a favoured underweight position.
It took some time for this to crystallise, but the blow-up in Turkish assets in 2018 was spectacular. On the campaign trail for elections in May, president Recep Tayyip Erdogan labelled interest rates the “mother of all evil”, hitting the lira hard. A team of more market-friendly advisers was forced to quickly hop on a plane to London to douse down the rhetoric for alarmed London fund managers.
But President Erdogan did not back down, sending the lira into full-blown crisis. It was not until the central bank plucked up the courage for a large rate rise in September that the situation came under control.
At that point, Mr McNamara wrote that EM slumps were often followed by “savage bounces”. He flipped his position as the lira began an impressive recovery. A bright spot in a harsh year for EMs. Katie Martin
Italy: profitable hunting ground
For some hedge funds, Italian bonds provided one of the most mouthwatering trades of the year.
Billionaire Alan Howard’s Brevan Howard and Robert Citrone’s Discovery Capital scored big gains when Italian two-year yields posted their worst trading day in decades in late-May, on fears the country would loosen ties with the EU and write off debt. Both chalked up further gains in late-September when the Italian government shocked markets by significantly widening its budget-deficit target.
But many other investors missed out. Data from IHS Markit show bets against bonds were not large going into May’s spike in yields, with many funds only putting on bets afterwards. Fears of further European Central Bank intervention and painful memories of fruitless trades against European debt during the QE era deterred investors. Moreover the biggest move happened not in the 10-year yields, which most managers were watching, but in the two-year.
Tim Wilkinson, head of investment research at Aurum Research, said hedge funds had been eyeing volatility in the spread between Germany and Italy, but added: “It’s a difficult one to trade.” Laurence Fletcher
Red October: bearish bets reap rewards
Autumn’s abrupt slide in global markets was a blow for many hedge funds, but it was not universally cruel, with some bearish funds reaping the rewards. Crispin Odey’s fund made 7 per cent that month, helping to make Odey Asset Management one of the best performing hedge funds of the year, but only after similarly bearish bets generated a ghastly 50 per cent drop in 2016.
Fellow hedge fund Fanasara Capital also made 10 per cent in October. Laurence Fletcher
Happy hedging: timing is everything
Whether by luck or by judgment, Pictet Wealth Management placed some cannily well-timed hedges in 2018.
Chief investment officer Cesar Perez Ruiz told the FT that he bought put contracts for protection against lurches lower in stocks in both January and October, immediately before markets swooned.
“We bought them as volatility was low,” he explained. He had no real hunch that markets were about to fall, he said. Otherwise he would have sold outright. But the contrast between fizzy markets and cheap volatility set up an irresistible combination.
Next year is likely to be marked by similar lurches high and low, he added, labelling 2019 as the year of the bull, the bear “and the kangaroo”. Katie Martin