The US Securities and Exchange Commission has raised concerns over Rokos Capital Management after the hedge fund was forced to hand over large amounts of cash to its banks as collateral when an outsized bet on US government bonds backfired earlier this month.
SEC chair Gary Gensler brought up the hedge fund during calls with UK regulators this week after it faced larger margin calls than peers, according to people familiar with the conversations.
The US regulator does not supervise London-based Rokos but is on high alert for tensions in financial markets after a spate of recent blow-ups in the banking sector. UK regulators agreed to keep an eye on the hedge fund, one of the people said.
The conversation points to regulatory fears that the rapid unwinding of concentrated hedge fund bets could exacerbate strains in the US government bond market, which forms the bedrock for asset prices around the world.
The episode stems back to the failure of Silicon Valley Bank earlier this month and concerns around the broader health of the US regional banking system. After SVB collapsed, investors snapped up Treasuries, as they bet that the US Federal Reserve would slow the pace of interest rate raises to shore up financial stability.
When bond prices climbed, many hedge funds were wrongfooted in the rally, but industry participants say Rokos was one of the biggest short-term losers. The fund, which manages about $15.5bn, was down by 12.5 per cent for the month, the Financial Times reported on March 17, when multiple counterparties requested that it put up more assets to meet margin calls, said two people familiar with the matter.
However, counterparties contacted by the FT said they were not concerned about Rokos’s ability to meet the margin calls.
Unlike many other macro hedge funds, which tend to be more diversified, the vast majority of Rokos’s leverage is in government bond markets.
Billionaire Chris Rokos, who co-founded hedge fund Brevan Howard before striking out on his own, hit the headlines in late 2021 when he was caught out by a huge sell-off in short-term government debt. He subsequently reduced the amount of market risk he was taking and made more than 50 per cent last year, before this month’s losses.
Rokos, the UK Financial Conduct Authority, the Bank of England and the SEC declined to comment.