Bill Gross leveraged up his bond fund through the use of futures during the first half of this year, only to suffer big losses on those tied to interest rates.
Gross, who as manager of the Janus Henderson Global Unconstrained Bond Fund has struggled to generate returns and attract capital, increased his average futures exposure as much as 13-fold from January through June, according to a filing. The derivative bets may help explain the fund's turbulence — because while investments in futures can boost potential returns, they can also generate out-sized losses.
Gross realized almost $153 million of losses on interest-rate futures in the first half, a significant dent for what was a $2 billion fund at the time. It suffered several big swings during the first six months of this year, most notably a 3% plunge on May 29. That drop, which was the year's largest single-day decline by a big bond fund, jarred investors and increased scrutiny of Gross' stewardship.
"Losing 3% in a day in equities is not calamitous, but in bonds it is enormous," said Richard Klitzberg, an asset management consultant to institutions and high-net-worth families. "He was running billions of dollars and either got the trade completely mis-positioned or was very highly levered."
Erin Passan, a spokeswoman for Janus Henderson Group, declined to comment. Gross didn't respond to requests for comment.
The fund's share price has yet to fully recover from the May 29 decline, which Gross attributed to a bet that yields on German bunds and U.S. Treasuries would converge. After the 3% plunge, Janus said in July that the fund had scaled back the money-losing convergence bet.
The Aug. 30 filing suggests Gross used futures to double down on the strategy, only to have it go awry.
Interest rate futures would be the simplest way to execute Gross' convergence trade, said David Ader, chief macro strategist at Informa Financial Intelligence, adding that the Janus fund could go long on 10-year Treasuries futures and short on those for 10-year bunds.
Janus disclosed that the fund did hold some futures tied to U.S. and German debt, as well as options on such futures, as of March 31 and June 30. The filings don't show positions on other days during the first half of the year like May 29, instead reporting the average exposure to futures during the period.
Unconstrained bond funds, which represent a $120 billion niche within the fixed-income world, free managers like Gross to hold various types of assets, ranging from cash to banks loans and derivatives. Gross's strategy has been to invest most of his assets in lower-rated corporate bonds while employing derivatives to enhance returns.
The strategy has backfired this year, with Janus Unconstrained down 5.6% through Sept. 11, among the worst performers in its class. Its assets dropped to $1.15 billion as of Aug. 31 from about $2.2 billion at the end of December.
The average value of the fund's futures contracts purchased rose to $1.45 billion in the first half of this year from $112 million reported for the six months ended Dec. 31, according to the filings. The average value of its futures contracts sold also rose, to $1.1 billion from $214 million, over the same time period.
Janus Unconstrained's combined losses on futures tied to commodities, currencies, equities and interest rates totaled $212 million during the first half of this year, including the $153 million lost on interest-rate bets. Though the total was partially offset by roughly $86 million of gains on options, that's a lot of money for any fund to lose on futures, said Ader.
"It gives new meaning to the term unconstrained," he said.