As governments worldwide face a massive sell-off in sovereign debt and borrowing costs in the US and Europe climb to multi-decade highs, hedge funds relying on quantitative trading strategies have recorded substantial gains this year.

The yield on 10-year US Treasuries has risen from roughly 4% in late February to more than 5.2%, while French, British, and Italian bonds have also fallen sharply. The conflict involving Iran and recent unexpectedly strong US economic data have fueled investor concerns about inflation.

According to people familiar with the matter, Connecticut-based Graham Capital's Tactical Trend fund has gained more than 31% year-to-date, including a 3.3% rise last month. London-based Winton's Diversified Macro fund, founded by billionaire Sir David Harding, is up 17.5% for the year as of last Friday. Aspect Capital's flagship fund has risen 21% year-to-date, with a nearly 5% gain last month.

A director at a quantitative fund said: "The embers of inflation are still glowing red." "Starting from around July, our risk has been pointing toward bonds, energy, and foreign exchange."

Benchmark Brent crude has risen approximately 40% since the conflict broke out in February, pushing global bond yields and rate hike expectations higher. Trend funds typically perform best in years with clear, sustained trends over multiple months. One of the industry's best years was 2022, when central banks persistently raised rates to combat stubborn inflation, and quant funds profited by shorting government bonds.

US Regulators Adjust Private Market Fee and ETF Rules

US regulators last week proposed changes to rules governing retail investor access to private asset markets, while other changes could restrict wealthy investors' ETF tax strategies. The Securities and Exchange Commission unanimously voted to propose amendments to rules on individual investor access to private markets, including allowing retail funds to charge performance fees, as part of the Trump administration's effort to bring alternative assets to the masses.

The regulator also proposed changes to the structure of so-called interval funds, potentially allowing private vehicles flexibility in adjusting how frequently redemption requests are permitted, and creating conditions for such vehicles to issue multiple share classes. The move follows a surge in redemption requests that unsettled some private asset funds as investors grew nervous about declining returns and the rise of artificial intelligence, though recent pressure has eased.

These changes come after the US Department of Labor proposed earlier this year allowing employers to include private market investments in 401k plans, underscoring SEC Chair Paul Atkins' ambition to expand retail access to private markets. Critics say the proposed rules would weaken investor protections. Benjamin Schiffrin, securities policy director at advocacy group Better Markets, said in a statement: "The SEC is supposed to protect retail investors from high-risk private market assets," but "the proposed rules leave retail investors to fend for themselves."

Additionally, the US Treasury warned it may crack down on "potentially abusive" strategies and issued a ruling targeting aggressive use of ETFs to avoid taxable gains. The Treasury said in a notice that it is investigating strategies that "claim to produce tax outcomes that may be inconsistent with the purpose and proper application of the relevant federal tax rules." In an accompanying ruling, the IRS targeted a strategy known as 351 conversion, which allows investors holding appreciated assets to adjust their portfolios without generating taxable gains.

In recent years, strategies helping wealthy Americans minimize their tax bills have grown increasingly popular, driven by the US stock market boom, with some investors shifting focus to "tax alpha," or gains achieved through reducing tax liabilities.

German Bunds Emerge as Safe Haven in Global Bond Sell-off

Over the past month, as global bond markets plunged, German government bonds became the primary safe haven. Concerns about an overheating US economy and fiscal problems in other parts of Europe have left investors with few alternatives.

Reinout De Bock, head of European rates strategy at UBS, said that amid a bond sell-off driven by a "unique economic cycle of resilient growth, energy price risks, and expanding capital needs," "demand for safe assets — German Bunds — is rising."

Ales Koutny, international rates head at Vanguard, said: "European core countries are becoming safe-haven allocations," noting that borrowing costs in Germany, as well as the Netherlands and Switzerland, fell by almost equally large margins this week. "First, they benefit historically from lower debt-to-GDP ratios, better fiscal credibility, and lower policy uncertainty," he said. He added that as hedge funds were forced to unwind popular trades such as betting on Italian bonds outperforming German Bunds, "the scale of trade liquidation we're seeing is absolutely crazy."

Data showing strong US economic growth in recent weeks has triggered a sharp sell-off in US Treasuries, with investors betting the Federal Reserve will need to keep rates higher for longer to prevent the economy from overheating. US Treasuries recorded their worst monthly performance since 2022 in September. Meanwhile, France's looming budget and next year's heated presidential election have refocused investor attention on the region's unsustainable debt problems.

De Bock said on Friday that he advises clients to buy German bonds and short previously popular Italian bonds after the recent sell-off. He said he had previously recommended clients buy EU bonds, but "I prefer to go long on instruments that truly focus on the safest assets, namely German Bunds."