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Hedge fund hit by JGB fallout
A $3bn London hedge fund lost more than a quarter of its value on Monday as it fell victim to the unwinding of a popular Japanese government bond trade that hit many rivals this week. Endeavour Capital, run by former Salomon Smith Barney fixed-income traders, told investors it fell 27% as a highly leveraged bet on the spread between short- and long-dated JGBs was hit by contagion from the US financial crisis and domestic concerns. The loss triggered conditions in bank borrowing agreements, forcing Endeavour to close other trades in an effort to reduce its leverage from 18 times to almost nothing. Hedge funds scrambled to unwind the so-called “box trade” – betting that 20-year bond and swap spreads would widen as seven-year spreads narrowed – early Monday when the market moved sharply against them.
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