London hedge funds shed nearly 100 rates traders after bond losses

London hedge funds shed close to 100 European government bond traders and portfolio managers after losses on leveraged fixed income strategies, eFinancialCareers reported.

Industry sources estimate the number leaving funds rose from about 75 to nearly 100 in recent weeks. Some exits were voluntary, including traders leaving to establish independent funds with external capital, and not all departures were performance related, the report says.

For allocators, the departures turn a manager's rates headcount into a diligence item. A thinner European rates team is not by itself evidence that a book lost money. The diligence questions are which portfolio managers left, whether leverage limits in French and Italian government bond carry changed with them, and how much of the roughly 100 was voluntary.

The losses were concentrated in leveraged carry trades in French government bonds, known as OATs. Funds used repo financing to hold sovereign debt and earn the spread between bond yields and borrowing costs. Rising French yields amid political instability pushed bond prices down, pressuring leveraged positions.

Traders cited by eFinancialCareers said some portfolio managers had taken losses on similar strategies earlier this year. Attention has widened to Italian government bonds, where widening BTP spreads could add pressure on leveraged fixed income portfolios. Banks could absorb some of the displaced traders, the report says, as they seek expertise in European Central Bank exposure and sovereign bond portfolios.

Non-compete terms and pay differences may slow moves. Some hedge fund rates traders previously earned more than $1m a year. The report does not give the size of the losses or break the departures down by fund or by reason.