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Hedge Funds Caught By Surprise Bond Market Moves

Hedge fund managers try to find profitable returns in just about any sector they believe will help it make a profit. They invest in stocks, commodities, options and bonds. Smart fund managers do not concern themselves with gauging their performance against   indexes and other benchmarks. Managers make what they hope are good investment decisions and have the sole focus of generating as much of positive returns as possible regardless of economic conditions.

The  mid-June meeting of the Federal Open Market Committee (FOMC) reminded hedge fund managers and investors of the need to pay close attention to the Fed’s monetary policy going forward, because of language—sometimes unintended—that can lead to marketplace volatility and a bond sell off.

Fed’s quantitative easing policy

In 2007, the Federal Reserve portfolio consisted of between $700 and $800 in Treasury notes. In late 2008, the Fed implemented a monetary policy called “quantitative easing.”

The Fed begin its new initiative by purchasing $600 in MBSs with the intentions of shoring shore up the  housing market  and general economy by making low-cost money available for consumers and business.

In September 2012, the Fed increased it asset buying program to purchase of assets to $85 billion a month –$40 billion in MBSs and $45 in Treasury securities. Today, the portfolio has a combination of Treasury notes and mortgage-backed security of close to $4 trillion.

Asset scale-down causes concern

The FOMC’s monetary policy on the purchase of mortgage-backed securities and Treasuries has a direct impact on the bond market after the Fed concluded it monthly meeting on Wednesday June 19, Chairman Ben Bernanke held his press conference and stated that the Fed might scale back its portfolio of mortgage backed securities (MBS) holdings later this year and end the program  entirely  by mid-2014.

In addition, Bernanke stated that the Fed might actually sell some of its holdings. This part of the statement caught hedge funds off guard . Unfortunately, it occurred just days before the scheduled auction of  $179 billion of Treasury bills and notes.

July 31 policy meeting

The last meeting by the FOMC  did not provide any guidance on the direction of the QE program, which cause some anxiety. However, since that meeting, hedge fund managers can relax a little after Bernanke clarified the Fed’s short-term approach to ratcheting down its asset-purchasing program over the coming months by saying it will remain on its current course of action.

The Fed will continue buying mortgage-backed securities and Treasury securities at the pace of $85 billion a month. The press release did not specify when the FOMC might start tapering back it purchases.

The Fed will continue buying mortgage-backed securities and Treasury securities at the pace of $85 billion a month. The press release did not specify when the FOMC might start tapering back it purchases.

The news is positive hedge fund managers and investors. Nonetheless, all parties need to be cautious and be ready for FOMC policy changes and other market conditions. The Fed has already made know that as the labor market and general economy continues to improve, it will be just a matter of time before the quantitative easing policy ends.

 

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