By Nell Mackenzie
LONDON (Reuters) - Hedge fund Exodus Point was up about 2% for the year to the end of March, according to a letter it sent to investors, benefiting from a bond market basis-trade that has regulators worried about financial stability risks.
Basis and rates trading form over a fifth of the trading strategy's risk allocation at the $11.8 billion fund, the letter seen by Reuters this week showed.
Exodus Point is a multi-strategy hedge fund housing many different trading techniques. It employs a pass through fee model where investors cover fund expenses including staffing and technology costs. In addition, investors also pay a 20% performance fee.
Multi-strategy hedge funds have had a positive start to 2024, with Exodus Point multi-manager peers like Schonfeld posting a 6.2% performance in its flagship fund and its larger competitor Citadel, with a 5.75% return in its flagship Wellington fund, Reuters reported on April 4.
While Exodus Point uses basis and inflation trades in U.S. Treasuries, it also made money from government bond trading in Japan and Europe, the letter showed.
Emerging market and trades based off of macro economic drivers contributed the most to the positive performance. This included currency trading in Asia and Latin America, as well as commodities trades in metals and energy, the letter also showed.
Despite the fund's overall positive result, quantitative trading which uses algorithms, detracted, the letter said.
Exodus Point did not immediately return a request for comment.
Basis trades, a popular trade with the largest hedge funds, exploit the difference between any cash instrument and a derivative based on it - such as the trade which has caught regulators' attentions, buying U.S. government bonds and selling futures contracts based on them.
The Bank for International Settlements warned last year that the huge build-up in speculators' Treasuries positions "is a financial vulnerability."