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#MoneyBeat Hedge Funds Brace as QE Turns to QT

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NocRoom    0

With the great unwind of quantitative easing underway, some hedge fund executives are bracing for further trouble ahead.

Andrew McCaffery, global head of client driven and multi-manager solutions at Aberdeen Standard Investments, said he had cut risk levels in his portfolios ahead of the recent market selloff.

Over the past three-to-six months, he said, he’s been working with clients to build portfolios likely to do well in a crisis. Mr. McCaffery is responsible for the firm’s strategic client mandates for the firm’s investment division with more than £250 billion ($350 billion) in assets.

Monaco-based Altana Wealth, headed by former Tudor Capital manager Lee Robinson, has been recommending clients switch from portfolios betting on rising prices to portfolios betting on both rising and falling prices since before last week’s market slump.

The effects of QE, and the extent to which it has propped up markets and economic growth, are still unclear. Even less understood is what happens when QE is withdrawn – a process termed QT, or quantitative tightening.

“The fact that QE is turning to QT this year, and you’re going from an absolute peak of QE in the summer of 2017 to this year when it looks like overall QT, to me that warrants caution,” said Mr. Robinson, who previously co-founded hedge fund Trafalgar.

If QE has “taken so much potential future demand from the future, at some point you’re going to pay a price for that,” said Aberdeen’s Mr. McCaffery. “That price is going to be that [economic] growth is potentially going to come to a shuddering halt.”

Some executives believe the 8% drop in the Dow Jones since its Jan. 26 record high, including the slump of Feb. 5, could mark a fundamental change in the market environment.

Sandy Rattray, chief investment officer at Man Group, the world’s biggest listed hedge fund firm, and co-inventor of the Cboe Volatility Index (VIX), said “it certainly feels as though the long period of low volatility may well have come to an end.”

The ECB has halved the pace of its bond purchases as of January, with the program now set to run through September. The Fed began reducing holdings of long-term bonds in October and will do this at an increasingly rapid pace.

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“The risks are significantly underappreciated,” said Anthony Todd, chief executive and co-founder of Aspect Capital, which runs $8 billion. “I think investors are underestimating the potential for the unwind not to go as smoothly as they would like.”

Aspect’s flagship fund had been betting on rising Treasury prices for much of 2017 from the spring onward, but in the fourth quarter started betting on falling Treasury prices, while last month it started betting on falling U.K. bond prices.

“Everyone is looking at the equity market for the next crisis, but I think the next crisis will come in the fixed income market,” said Mr. Todd.

Not everyone sees such dangers in unwinding QE.

Michael Hintze, founder of hedge fund CQS, said that QE could add to overall economic growth levels and central bankers were aware of the damage withdrawing it too fast could cause.

Man Group chief executive Luke Ellis said forced bond-buying by pension funds and insurance companies would help stabilize bond yields and central banks weren’t about to tighten policy excessively.

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