Hedge Funds Interest Rates

Hedge Funds Profit on Rise in US Long Term Interest Rates

The increase in long-term US interest rates is actually good news for several hedge fund managers who positioned themselves to gain from the rise. John Paulson and other managers bet on an increase in yields on US Treasury securities by purchasing options that would become profitable when rates went up. Paulson explained his strategy, "“It will be difficult for the government to withdraw the economic stimulus. An increase in the monetary base leads to an increase in the money supply, which leads to inflation.” Many hedge funds have been able to net large gains in the economic recovery this year.

Bond prices fall as yields rise, and Mr Paulson told the Financial Times last week that he has been hoping to benefit in the Treasury market by buying options that would become profitable if rates headed higher. TPG-Axon’s Dinakar Singh has been making similar options trades, according to a person familiar with the matter.

The yield on the 10-year Treasury, which hit a crisis low of 2.055 per cent last year, has moved from 3.2 per cent last month to 3.75 per cent on Tuesday.

Hedge fund managers, however, have been hesitant to engage in short sales of Treasury bonds to profit from the rising yields – and falling prices – because of the Federal Reserve’s heavy involvement in the market. This has led some to buy options – dubbed “high strike receivers” – that would enable them to profit from sharply higher Treasury yields, hedge fund managers say. These trades, which are relatively cheap to execute because they are so out of the money, are based on the thesis that yields could hit 7 or 8 per cent. Source

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