Crypto cool, ‘El Loco’ and a 2900 per cent gain in 20 seconds

ETFs: Speculation run wild

In a year when red-hot US stocks and crypto sparked furious risk-taking, ETFs (exchange traded funds) have been day traders’ go-to investment. Wall Street pounced on the public’s desire for speculative wagers, launching all kinds of derivative-powered bets, from a bulled-up ETF designed to deliver twice the return of bitcoin, to income-generating products that short the biggest names in corporate America.

For those on the other side of the risk spectrum, there is now a money market ETF.

Trading boomed in products that allow investors to amp up bets on the world’s most popular equities, with investors pouring a record of more than $US6.5 billion into such “single-stock ETFs” – vehicles that track just a single company but use derivatives to intensify bullish or bearish wagers.

A major winner in this category was a fund from GraniteShares, which provides two times the daily returns of market powerhouse Nvidia. The strategy, which trades under the ticker NVDL, saw assets explode to a peak of $US6.7 billion in late November, with returns exceeding 350 per cent this year. Funds tracking MicroStrategy, Tesla and Coinbase Global have followed similar paths.

This year also set a record for US ETF fund flows, with Trump’s presidential victory giving already emboldened investors even more incentive to double down. And while funds that track the S&P 500 took the most flows, one of this year’s most notable new entrants, BlackRock’s Bitcoin ETF, was also one of the biggest successes, drawing the third-most inflows this year.

Stocks: Market timers schooled

Day traders may have made a killing across speculative fringes of the investment industry, but it’s been a real struggle in the more mainstream world of large-cap stocks. Thank awkward market timing. Retail investors loaded up on so-called meme stocks in the first half of the year, only to see buzzed-up companies trail the broader market after surging for no rhyme or reason.

In the second half, mom and pop then ditched financial companies en masse – only for the cohort to ride the “Trump trade” wave and become the S&P 500’s biggest gainers between July and November. And like many investors during the brief market crash in August, the retail crowd panic-sold some of their hottest assets, including Nvidia and Tesla – all at the lows. That proved painful. Shares of Elon Musk’s EV-maker, for example, have almost doubled since then.

It’s not just the so-called dumb money, though. Even in a climate ripe for stock pickers, the mutual-fund pros, who make a living picking securities, have been caught flat-footed.

As the S&P 500 soared 5.7 per cent in November in its best run in a year, just 23 per cent of large-cap mutual funds outperformed their benchmarks, the group’s worst performance since the Fed started hiking rates in March 2022, according to Bank of America. The underperformance is particularly stark, given that more than half of S&P 500 members outperformed the index – a broadening of the market rally that, in theory at least, should have been a boon for active managers.

Argentina: Shock-ing gains

Long-suffering investors in Argentina were running for the exits ahead of a key presidential vote last year. Sovereign dollar bonds were trading below 30¢ on the dollar as the economy buckled under triple-digit inflation and a labyrinth of currency controls. The surprise emergence of outsider Javier Milei as the winner in the primary vote only added to worries.

The radical libertarian – distinguished by his mop of unruly hair, Elvis sideburns, and four cloned Mastiff dogs – had promised to dollarise the economy and close the central bank altogether. And yet by the time he won the election in November, investors had bought in. Now, roughly one year into his term, Milei’s “shock therapy,” including stringent fiscal austerity to balance the budget and bring down inflation, appears to be working, boosting confidence about the economic trajectory among voters and investors.

The country’s debt delivered some of the best returns in emerging markets this year, surging 104 per cent, according to data compiled by Bloomberg. Firms that scooped up the notes throughout 2024 – such as Neuberger Berman, Grantham, Mayo, Van Otterloo & Co, and Lazard Asset Management – saw major windfalls.

“We essentially made the call that Milei could be transformational,” said Gorky Urquieta, portfolio manager for emerging-markets debt at Neuberger.

Unlike Milei’s dogs, the 2024 rally is unlikely to be replicated any time soon, and many questions remain. Milei has yet to lift currency controls, foreign investment has declined, and the country is in talks with the International Monetary Fund ahead of debt payments that go up substantially in 2025 and 2026. Still, as first years go, “El Loco” proved a boon for investors.

Treasuries: Cash is bond king

Fixed-income investors reaped big and easy rewards by following a strategy of not trading at all: stashing their money into risk-free Treasury-bills – an equivalent to cash – to beat US government bonds in style.

US Treasuries gained 0.7 per cent on average this year through December 18, compared with a 5.1 per cent return in T-bills. It marked a fourth year that bonds underperformed cash, a record since Bloomberg started compiling the data on T-bill returns in 1991. Over the past four years, bills returned a total of 12 per cent, compared with a loss of 10 per cent in government bonds.

US money-market funds – which hold cash-like instruments such as T-bills and commercial paper – have grown by more than $US800 billion ($1.3 trillion) this year, swelling their assets to $US7 trillion for the first time as investors piled in. Also among the hoarders? Warren Buffett’s Berkshire Hathaway, whose Treasury bill holdings more than doubled this year to approach $US300 billion as of the third quarter.

It wasn’t supposed to be this way. At the start of 2024, the consensus view was for slowing US growth, perhaps even recession, and a series of as many as seven Federal Reserve interest rate cuts. This, it was thought, would pave the way for a banner year for bonds. Instead, a resilient economy led the central bank to deliver less easing than expected, and prompted policymakers at their most recent meeting to scale back their forecast for rate cuts in 2025. That’s kept yields on risk-free cash equivalents at elevated levels even as longer-term US debt endured swings.

Things are beginning to change, though, and next year is likely to be more challenging for the “T-bill and chill” crowd. After a more than two-year stretch during which rates on bills exceeded those on longer-term US debt, that yield advantage has disappeared, erasing a gap that was almost 1.5 percentage points as of the beginning of 2024. The trend is likely to continue if the Fed keeps lowering rates as expected, though Donald Trump’s pro-growth push for tariffs and tax cuts may muddy the path for policymakers.

More importantly, bonds have re-emerged as a hedge for risky assets, such as stocks whose valuations are at historic highs. “If equities were to fall, you’re going to get appreciation on your Treasury portfolio,” said Ford O’Neil, a bond manager at Fidelity Investments. “That obviously won’t be the case in T-bills.”

‘Arbageddon’: Hell in a handbag

What was expected to be a comeback year for merger arbitrage turned out to be anything but. The trading strategy was the worst performer this year among more than 30 hedge-fund styles tracked by Bloomberg through October. Its 3 per cent return in the period barely rewarded investors for the risk.

While the volume of global announced deals climbed in 2024, arbs’ playbook – betting on whether and when proposed transactions will close – came under pressure, with the regulatory backdrop under Biden and his hard-charging head of the Federal Trade Commission, Lina Khan, making even agreed-upon deals tough to get done.

One of the more painful episodes involved a proposed handbag tie-up meant to unite Tapestry and its Coach and Kate Spade brands with Capri Holdings’ Michael Kors label. Even after the FTC challenged the $US8.5 billion deal on antitrust grounds, a raft of investors, including Millennium Management, maintained positions in Capri, wagering that a subsequent legal appeal brought by the companies would be decided in their favour. Instead, a federal judge in October sided with the FTC and blocked the deal, sending shares of Capri down nearly 50 per cent and dealing a huge blow to the arb crowd.

A little over a month later, the FTC scored another win as a judge ruled to block the $US24.6 billion grocery merger between Albertsons and Kroger, while the pending $US14 billion ($22 billion) sale of United States Steel to a Japanese competitor is on shaky ground amid mounting opposition from unions as well as Biden over national security concerns. As some of traders’ biggest wagers went sour throughout the year, staff at Millennium, Balyasny Asset Management and Schonfeld Strategic Advisors paid the price, with all three firms cutting some portfolio managers specialising in the strategy.

Japan: Keep calm and carry on

On the first Monday of August, a reliable and highly popular trade involving borrowed yen to buy risky securities collapsed suddenly, driven by a small policy shift from the Bank of Japan – and it fuelled a global market meltdown in its wake. Investors rushed to exit positions in everything from Australian bonds and US mega-cap stocks to bitcoin, fearing a breakdown in the leverage cycle amid uncertainties over the monetary and economic outlook.

Among the biggest losers: Emerging-market carry trades funded by the Japanese currency, with most of the strategy’s gains for the year wiped out as investors unwound a whopping 75 per cent of their investments. Then, as is now Wall Street folklore, the great market crash of 2024 ended almost as soon as it began, and risk appetite returned with a vengeance across assets.

Boosting currency-market sentiment afresh in October: Japanese Prime Minister Shigeru Ishiba on his first day in office said the economy was far from ready for fresh monetary tightening.

In turn, a basket of emerging-market currencies funded by the yen has now returned about 13 per cent this year through Thursday despite the volatility, with the Japanese currency defying projections from the likes of BNY that it could strengthen to as high as 100 per dollar as more shorts were unwound.

Cue vindication of sorts for FX brokers at the likes of AT Global Markets and Pepperstone Group, who were quick to call the revival of the infamous yen-funded trade.

Commercial real estate: Lease on life

For investors this year, office real estate has been a tale of 2008-style losses and surprising wins. A slew of bondholders stuck with old debt tied to offices have taken hits, even in the safest bonds.

In May, buyers of AAA-rated tranches of a bond tied to a building in midtown Manhattan at 1740 Broadway got less than three-quarters of their original investment back. That was the first such loss of the post-crisis era, and more pain may be coming. Yet amid this trouble, a cohort of bargain chasers are likely to have flourished.

Ellington Management Group, Beach Point Capital Management, Balbec Capital, Mica Creek Capital Partners, and TPG Angelo Gordon have all been active CMBS buyers this year.

One source of potential gains is when there’s fear of a key tenant walking away from a building, and the corporate occupant instead ends up renewing its lease. For example, the riskiest portions of a $US271 million bond tied to the 11-storey office and retail building at 85 Tenth Avenue in New York, by the Chelsea Market, were trading at around 63¢ on the dollar at the start of the year.

The building is largely dependent on a single tenant whose lease was up for renewal: Google. When the tech giant announced it would renew the lease in October, the bonds’ price jumped, and they are now trading at almost 90¢ on the dollar, delivering big returns for dip buyers along the way.

Distressed Debt: AI to the rescue

To get a sense of how the AI euphoria suddenly changed the game for corporate America, consider the case of Talen Energy. Following the nuclear energy player’s fall into bankruptcy last year, the firm’s fortunes took a marked turn for the better after it struck a deal to sell a data centre campus and supply energy to Amazon Web Services.

Creditors-turned-shareholders promptly enjoyed a jump in the value of their equity, up now more than 200 per cent on the year. Given the vast amounts of power needed to fuel the artificial intelligence boom, the likes of Talen are on a tear.

Another once-unloved name that saw a boost from AI was Lumen. Last year, the telecommunications firm conducted one of the largest and most controversial distressed-debt exchanges ever.

The company cut a deal with a group of investors including Ken Griffin’s Citadel to swap some securities tied to one of its units into longer-dated, higher-coupon maturities, while raising fresh funding. In return, those investors received priority claims on assets, stripping other creditors of their collateral.

This year, the trade turned into a big win even for the creditors that had been left out of the transaction, as the company has been able to tap into growing demand for its fibre network among AI-focused firms. As of August, the company had secured $US5 billion ($8 billion) in new business, including a deal with Microsoft to expand its network capacity.

China: Twin revival

China-focused investors entered 2024 disappointed, with many still feeling burned after an expected economic revival failed to materialise despite government efforts to stoke growth and relieve an entrenched property crisis. As the doldrums of the world’s second-largest economy weighed on assets from the Australian dollar to the Thai baht, Fidelity International made a bet on Chinese bonds – one that paid off handsomely.

‘Chinese stocks obviously offer more bang for your buck in terms of trying to get China right next year.’

Matthew Quaife, global head of Multi Asset Investment Management

Since at least January, the money manager had favoured Chinese debt, wagering in part that the central bank would need to loosen monetary policy. Abrdn, meanwhile, had started to go long 10-year and 30-year notes since October. What transpired was a record-breaking rally in Chinese bonds so strong that authorities ramped up intervention measures, while big banks were seen selling government bonds to try and cool the market.

How hot was the rally? An ETF tracking 30-year Chinese government bonds has returned some 21 per cent this year.

Expectations are growing the rally will extend after the Politburo, the Communist Party’s decision-making body, pledged a “moderately loose” monetary policy to support the economy, in language not seen since the global financial crisis.

Chinese stocks, too, have paid off for investors after touching a low in January. The benchmark CSI 300 Index is up more than 14 per cent this year in dollar terms, its first annual gain after three years of losses. Fidelity International is maintaining its bet in Chinese bonds, though expects the nation’s stocks to offer a better return going forward should the economy finally start to gain meaningful moment.

“Chinese stocks obviously offer more bang for your buck in terms of trying to get China right next year,” Matthew Quaife, global head of Multi Asset Investment Management, said.

Spain Gain: A 2900 per cent payout

Perhaps the wildest and most out of the blue rally of them all comes from a niche market in Madrid, Spain. How wild? Try 2900 per cent in the span of seconds.

The whole thing was some 20 years in the making. The short version: A bond was issued in the early aughts by a bank that was taken over by a bank that was taken over by another bank, and at some point in all of that manoeuvring, investors gave up on the bond. Most wrote it off as practically worthless, due to all the ownership shenanigans.

And so it remained for years until one day in September they received a note from Banco Santander (the last of the acquirers) informing them that the bond – a special note that banks issue to raise capital levels – would be honoured after all.

Its value skyrocketed instantaneously. Santander never said much about why it made the payment, but observers speculate it was related to the tidying up of its balance sheet.

Bloomberg L.P.

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