21st Century Business Herald reporter Chen Zhi Shanghai report As the pace of the Federal Reserve's reduction of QE is getting closer, Wall Street hedge funds have once again set off a wave of "policy arbitrage" investment.
A Wall Street hedge fund manager told reporters that there has been a marked increase in hedge funds that have cut dollar bears over the past week. A number of hedge funds have reduced the proportion of short USD holdings in their portfolios across their portfolios from 3.5% in early October to about 2%.
"However, at present, Wall Street is permeated with a strong atmosphere of buying expectations and selling facts. That is, many hedge funds have been pushing for the rise of the us dollar for the past two days, and once the Fed cuts the QE boots on Thursday and finally lands, they will instead sell the us dollar high and leave the market. The above-mentioned fund manager said bluntly. After all, these hedge funds believe that the current dollar index hit the 94 line, which basically reflects the influence of the Federal Reserve to reduce QE, and excessive speculation to buy the dollar will lead to greater investment risk.
Notably, the Fed is narrowing its QE pace and is curtailing hedge funds' enthusiasm for inflation trading.
The U.S. Commodity Futures Trading Commission (CFTC) released the latest data showing that in the week ended October 26, hedge fund-led asset managers cut their net long positions in WTI crude oil futures options by 5,992,000 barrels from the previous week.
The reason for this is that more and more hedge funds are worried that the Fed's reduction of QE will make the DOLLAR continue to rise, which will cause commodity futures prices to bear greater downward pressure.
A director of the asset allocation department of a large US asset management institution revealed to reporters that the main capital force currently cutting inflation transactions is a quantitative investment hedge fund. They have always believed that there is a high negative correlation between the dollar and commodity futures prices, and as long as the dollar continues to rise, they will increase the intensity of commodity short selling.
"However, this kind of arbitrage investment around the Fed's reduction of QE may not last long." He said that once the Fed shrinks its QE boots and causes the dollar to soar and fall, these quantitative investment funds will become a new force for inflation trading.
<h4>Hedge funds buying up the dollar refers to "the Fed raising interest rates early."</h4>
"After the core PCE price index for September in the United States, released on Friday, rose 3.6 percent year-on-year (the highest since 1991), Wall Street suddenly set off a wave of dollar buying." The above-mentioned Wall Street hedge fund manager revealed to reporters that this made the dollar index quickly recover its lost ground and return to above the 94 round mark again.
"During this period, many hedge funds were buying up the dollar index, and it seems that they believe that buying the dollar will become the most likely arbitrage investment in the coming week." He said that even many hedge funds with bold and aggressive investment styles began to buy dollar call options that expired at the end of the year and were executed at prices around 95.5-96, betting on the dollar index to rise to 96 before the end of the year.
The reporter learned from many sources that behind this, more and more hedge funds are betting on the Fed to raise interest rates in advance.
Goldman Sachs economist Jan Hatzius released his latest report on Friday, pointing out that high inflationary pressures and supply chain disruptions will force the Fed to pull the rate hike button in July 2022, half a year earlier than market expectations.
According to the CME FedWatch, current traders believe that the probability of the Fed raising rates for the first time in June is 65%; the probability of the second rate hike occurring in September is 51%, and the probability of a third rate hike in December 2022 is also more than 50%.
"After all, the Fed's QE cuts have been fully digested by financial markets, so many hedge funds prefer to inflate the Fed's interest rates early and ultimately get arbitrage gains by buying up the dollar." James Marple, senior economist at TD Economics, noted.
Correspondingly, while actively buying up the US dollar, many hedge funds have spared no effort to short short-term US Treasuries (with maturities in the 2-year period) and bets on long-term and short-term US Treasury yields. The reason for this is that hedge funds believe that the Fed's reduction of QE and the increase in expectations of early interest rate hikes will lead to an acceleration in short-term US Treasury yields (corresponding to a larger decline in bond prices), thus creating specific US Treasury arbitrage investment opportunities.
According to the data, the current 2-year and 10-year US Treasury yield differential has narrowed to the lowest value since August this year - 1.072%, which has made many hedge funds participating in the above-mentioned arbitrage investments reap great returns.
"At present, there are many quantitative investment hedge funds that use 4-6 times of capital leverage to participate in arbitrage investments that short short-term US Treasuries and bet on the narrowing of the yield gap between long and short-term US Bonds, and once the Fed announces the reduction of QE and releases the signal of early interest rate hikes at the monetary policy meeting on Thursday, such arbitrage trading will become more crazy, and some quantitative investment hedging foundations will expand the leverage of funds to 8 times." A U.S. bond broker noted.
<h4>Inflation trading forced to "stop"? </h4>
It is worth noting that the pace of the Fed's reduction in QE is approaching, invisibly suppressing the enthusiasm of hedge funds to continue to pursue inflation trading.
The latest CFTC data shows that in the week ended October 26, hedge fund-led asset managers cut 15,159 (1 is 25,000 pounds) of comex period copper net long positions from the previous week. Currently, the hedge fund's total NET COPPER position in the COMEX period is 16,072.
"This means that hedge funds have created more than 90% of their COMEX period copper net short positions over the past week." A Wall Street macroeconomic hedge fund manager pointed out that this shows that more and more hedge funds are worried that the Fed will shrink QE and the expectation of an early interest rate hike will continue to make the dollar index continue to rise, putting more downward pressure on commodities such as copper and crude oil.
He admitted that there is a big disagreement between the current wall street types of hedge funds on the sustainability of inflation trading - many macroeconomic hedge funds believe that inflation will fall by the middle of next year, because the initiator of high inflation is the supply chain disruption, once the supply chain recovers quickly, inflationary pressure will soon fall, so that hedge fund inflation trading will quickly ebb; however, many commodity investment hedge funds still firmly believe that high inflation pressure will last longer than market expectations. Because the continued high energy prices are bringing about a more severe high inflation situation, inflation trading will continue to be active for a long time.
"Despite the ongoing debate between the two sides over the continuity of inflation, the Fed's scaling back QE and its assessment of early rate hikes during the week will largely dampen their enthusiasm for inflation trading." The manager of the above-mentioned macroeconomic hedge fund told reporters. These hedge funds are in the inflation trading strategy investment model, significantly increasing the weight of the dollar factor - as long as the dollar index continues to rise, they will temporarily withdraw from inflation trading.
For more information, please download the 21 Finance APP