Bill Gross finally figured out a way to execute what he called his “shorts of a lifetime.”
Gross accurately predicted earlier this year that German government debt and Chinese stocks were poised for a slump, but didn’t directly wager against these markets. Instead he sold insurance on German bunds, which depressed returns at his Janus Global Unconstrained Bond Fund in late April and May when the bonds fell faster and further than Gross had anticipated.
Now the manager known as the bond king has recouped some of those losses after adjusting his strategy. He has sold short German bunds and the U.S. stock market, which he said would become more volatile when Chinese equities sink. His bet against equities equaled almost 10 percent of the fund’s assets as of June 30, according to documents on Janus’s website.
Janus Global has returned 0.8 percent during the past month, ranking it at the top of 41 unconstrained bond funds tracked by Bloomberg. Since the start of the year, the fund gained 1.6 percent, a performance that places it ahead of 90 percent of peers.
Erin Freeman, a spokeswoman for Denver-based Janus Capital Group Inc., declined to comment.
Gross is using the short positions to hedge trades he put on to benefit from inflated fears over volatility. In return for premiums, his fund enters into options contracts with investors seeking protection against losses on stocks, bonds and currencies.
He’s betting that investors are overpaying to shield themselves from big swings and that markets ultimately won’t move too much in either direction — the upside capped by lackluster economic growth and the downside supported by central banks ready to step in as soon as markets get shaky.
Gross put this strategy to work when he identified his first “short of a lifetime” on April 21, urging investors to bet against the 10-year German bund. Yields on the bonds touched a record low of 0.049 percent on April 17, down from a high of about 1.5 percent a year earlier, as the European Central Bank embarked on a plan to purchase 60 billion euros ($66.9 billion) of debt each month.
Instead of actually shorting German bunds, Gross sold put and call contracts on futures tied to the debt, a wager that they would trade within a narrow, less volatile, range than prices on the derivatives implied. In writing this insurance, the fund became exposed to losses when the bonds plummeted more than Gross had expected the following month.