The Oil Shock That Caught Hedge Funds Off Guard

Hello and welcome back to the Market Maker podcast. And what a week it's been so far. It is Thursday. I'm conscious that by the time this goes out, there is one final remaining trading day of the week. So by the time this hits your ears, it could well be way out of date, but we'll do our best to turn this around. And in this conversation, we're going to talk less about the whole political side of things as we normally try to stay clear of. But many things have happened, including the International Energy Agency offloading a huge volume of crude onto the market, which was something we were highly anticipating if you listened to our previous macro episode. We'll also have a look at the US's contribution to that and a bit of the historical precedence of how things have shaken out after they've done these types of actions before in the past. The other things then are implications from a macro perspective on central bank monetary policy expectations. And subsequently then, that's a nice segue into how that's burned a number of the largest macro hedge funds on the street. And we'll look at some of the general tactics that they deploy in the market and how this latest bout of unforeseen volatility has really hurt them as we come into the final part of Q1. But first of all, Piers, what do you make just generally? I mean, you've been in the market since what, 2000, 2001? How does this compare, do you feel, to some of those other periods of uncertainty that you've been part of?

Yeah, I mean, unfortunately though, like maybe my first response is unfortunately geopolitical flareups are not uncommon. So on the one hand, I've seen many of these again, unfortunately. I mean, the most recent being of course the Russia invasion of Ukraine and people kind of, I mean, even like, I don't know, memories are very short in markets, but people forget. I mean, that was only 4 years ago, right? And the oil price movement then, in many ways was the same because we were trading, I'm looking at Brent, the Brent crude oil chart and coming into the end of 2021, we actually dropped down, we traded about $70, right? Then the Russia-Ukraine situation unfolded, which presented huge oil supply risk as well as other commodity supply risks, given the fact that Russia and Ukraine actually are major producers of lots of different commodities. But anyway, the price of oil went from $70 to actually peaked at $120. Those numbers might sound familiar because that's basically what's just happened this week.

That's remarkable actually. Now you say that. Yeah. 'Cause we went, I think the high that we've hit this week, which was the beginning of the week or in this period, has been $119.50. Yeah.

It's gone from basically $70 to $120. I mean, that's not a fluke, by the way. That's not like coincidence. Oh my God, it's almost exactly the same. It's the same because that's what happened last time, right? There's a muscle memory in markets which is shaped and driven by human behavior, and it's shaped and driven by humans building algorithms to do the job for them, right? And so those ranges are kind of holding as they were last time. So obviously we're right in the moment and clearly, like from a humanitarian point of view, this is a disaster. I think from a market's point of view, Yeah, people, I think if all you do is, if you are new to markets or if all you do is read the kind of mainstream media, then wow, this is like the biggest thing that's ever happened. But unfortunately it isn't. But that said, there are a hell of a lot of differences between this situation, just purely from a supply risk perspective. It's different supply risk than the Russia-Ukraine situation. Which just kind of makes it a little, I'd say it's a bit more complex and we're going to try and dive into some of that complexity today. But yeah, look, in the main, you know, we've seen this lots of times before. But what I'll maybe finish with, and I'll pass back to you, one stat that, and it kind of maybe ties into, you mentioned some of the hedge funds kind of got whacked. So crude oil futures, Right. Well, actually, here's your quiz question number one for the day, Anthony Cheung. When, what year did crude oil futures as a kind of financial product, how long have they been trading for? What year did crude oil futures become a thing and a tradable product? Would you reckon?

Well, after the '70s, probably they created that instrument to then take advantage of Future price spikes. So early '80s.

Spot on. 1983.

Oh, the year I was born, baby. I should know that. Come on.

All great things.

Me and crude oil futures, we're like that. We're like brothers in arms.

Well, my stat is that last week crude oil futures spiked 36% up. In a week. And actually that puts it at the largest ever weekly percentage increase in the history of this financial product. So whilst I said before, you know, we've seen this all before kind of thing, I mean, actually the kind of, it's the speed. So we went from $70 to $120 last time, but it took weeks. This time it took seconds, right? So you, you're getting the same kind of overall move. It's just the speed of it is just wildly increased. And here's my favorite stat. If you want to get into your statistics, and this is what a lot of hedge funds will be doing, this was what, what's called the, the size of the move based on normal average volatility levels. Okay? This size, it was a, what's called a 6 6 sigma event, assuming a normal distribution. Okay. Now, statistically, a 6 sigma event is only supposed to happen once every 4 million years. So that's how statistically unlikely last week's move was, which I think is why it caught out these hedge funds. We'll come on to how in a sec, but yeah, so We've seen it all before, but it's just happened a lot faster because markets are more efficient and they just move more quickly. There's obviously algorithms that are all over this and it just speeds everything up.

It's interesting because yeah, you talk, when you talk about that level of market movement, you do think algorithms, you do think of these kind of the manipulation of how the market is constructed. That can cause these dramatic price shifts. But I was talking to Joseph in our commodities team who very much works closely with, obviously we have simulations more in early careers, but we do work with some commodity trading houses with their traders. And he was saying he was catching up with them and I was like, oh, what's the vibe then? This is one of the biggest commodity trading firms. And he was like, yeah, it's interesting because Yeah, the traders are literally sleepless nights. They're on it permanently in this current state. And your mind goes to, well, you look at some of the profits they were reaping during that Russian-Ukraine situation when it first happened, and you just think, oh, it must be easy money. But actually he was saying it's so stressful because we talk about it in a, I guess in a derivative sense. They're talking about it from a physical trade perspective. And he was saying, you know, you've got a client who you've promised to deliver a cargo container full of energy products, oil or gas, and then your client's saying, well, you need to fulfill your obligation of your contract to deliver. And so you're scrambling, your cargo ship is costing you money. It's sat there in the strait at the moment. You can't do anything, you can't get insurance for it. but your client still needs to receive, be the recipient of the hard tangible product. And so they're trying to scramble to find oil here, there, and everywhere. And he was saying like sometimes with gas, like we talked about the squeeze last week in Europe and how, you know, you're going to Italy and you're trying to pick up some from France and just to meet tomorrow's needs, otherwise business can't actually resume. So yeah, interesting from there. I guess a career perspective, you're thinking about these sort of different trading seats. If you're sitting there in a high-frequency, more electronic trading role at a buy-side hedge fund compared to a trading house, like a physical trading house on the commodity side, completely different, right?

Yeah. And actually now you've said that in terms of kind of scrambling to try and find any supply. I was looking at some stats with regards to traffic coming into and out of the Straits of Hormuz. And so obviously when this kind of first broke as a situation a week ago, like normally, like pre, pre this situation, you were maybe getting 90 to 100 vessels like entering the neck of, of the Straits of Hormuz per day. Okay. Then that kind of dropped right off to about 10. For about a week, then it kind of popped back up to about 50. This is boats going out, right? Going, trying to get out of the Gulf, the Persian Gulf. It jumped up to about 50, and now overnight it's obviously escalated again with some container ships and some oil tankers being directly targeted and hit with various missiles, right? So it's now dropped back to virtually zero again. So the problem with the Straits of Hormuz, or I should say the problem with the Persian Gulf, it's a cul-de-sac. You know, if you go in, there's only one way out, and that's an in and out is through the Straits of Hormuz. As we've been saying on the last episode, ships are trying to get out and now it's gone back to basically zero again because of what happened overnight. But ships going in is basically dropped to zero and is staying at zero. Now what's happened is if you think about Saudi Arabia, which actually on their kind of east coast borders the Persian Gulf, right? And typically of the 7 million barrels per day that Saudi Arabia export, almost all of it goes out through the Persian Gulf and through the Straits of Hormuz. Now they did build an east to west pipeline, right? Which can get some of that supply piped to the west coast. On their west coast is the Red Sea. Okay. So actually what you've got happening right now, I was reading about it this morning, there are 30 oil tankers that have bombed around the, the kind of the south of like Oman and Yemen and are bombing up through the Red Sea to try and hit this place called Yanbu, which is where that kind of east-west pipeline fetches up. Okay. Now the Saudi Aramco have said that they're looking to try and pivot and send 5 million barrels per day through the pipe across to the West Coast. So you've got 30 ships chugging up to this Yambu port. Normally that Yambu, and I don't know if the infrastructure's gonna take it because normally that port only has about 2 ships per month who turn up. There's 30 that are about to hit the place at the same time. And you've got Chinese ships, you've got Greek ships, you've got lots of But most of this stuff is for picking up oil and look, each tanker can hold about 2 million barrels of crude oil. Now there is the Houthi risk going round that corner of Yemen. The Houthis have stepped back from bombing vessels going up through the Red Sea since the Gaza ceasefire. Who knows whether that's now a risk? I mean, it definitely is a risk, right? So that's something that they've got to try and navigate. It's not like that's a completely safe route in and of itself. And if they pick up at Yanbu, I mean, what do they do then? 'Cause this oil's going to Asia, so they need to turn around and come back out. But do they then go through the gauntlet, the Houthi gauntlet again? Or there is another route 'cause the Red Sea's not a cul-de-sac thanks to the Suez Canal. So you could bomb up Suez Canal, but then you've gotta go out through the Med, down around Africa. You know, that's gonna add weeks and weeks to your journey to China, let's say. So I don't think that's a particularly attractive option.

But yeah, we talked about last week how a lot of that Persian Gulf crude is actually going eastbound servicing India and China. A stat I saw this morning was Japan actually imports 90% of its crude from the Middle East.

Yeah. And of that, of its total, like 70% comes through the Straits of Hormuz. They're actually the easily, well, that them and South Korea, actually South Korea, about 50 to 60% of their crude comes through the Straits of Hormuz. So those two way above every other country are most exposed to the kind of Straits of Hormuz channel.

So just going back to the volatility then, because earlier in the week what happened was prices came off quite quickly and there was some sort I guess de-escalation type rhetoric coming out of Trump. I'll be willing to talk to Iran, you know, all these sorts of noises. But one of the things that happened on the Iranian side was of course that they've appointed now their new Supreme Leader. So who's the new Supreme Leader and what's the general consensus over what that means as far as de-escalation is concerned?

Yeah, well, the new leader's the son of the old leader. So Khamenei's son is basically an absolute shoo-in here from their perspective and has got very strong ties with the kind of Revolutionary Guards and, you know, is an absolute successor in the waiting and is thought to be even more hard-lined, if anything, than his father with one little, not little at all, one added kind of motivation here because in those original day one strikes where Khamenei was taken out along with a lot of other very senior people in the administration. So the younger Khamenei, obviously his father got killed in that strike, but also his mother got killed and his wife and his son got killed all in those day one strikes. So yeah, I mean, Trump's thing about this, we're almost done, and the White House kind of signaling an off-ramp and look, we're ahead of schedule. And I mean, there is zero, zero, zero evidence to suggest that any of that is anywhere near remotely true. 'Cause you know, history, if you think about, you know, Iraq I, Iraq II, Now I think after the kind of first Iraq War, they were kind of, you know, it went very quickly to start with in the first week, pretty much job done. And everyone was like, wahey, brilliant. And then the talk out of the White House was, you know, this is perfect. You know, now there'll be a democratic election and democracy will rule and we'll have a phenomenal new democracy, you know, in the Gulf region. You know, obviously fast forward, what are we now? 20? No, sorry, 35 years later, and that ain't the case. Afghanistan, Syria, I mean, this is like Iran would be like Syria plus plus. So, you know, the idea that somehow this situation's going to quickly resolve itself in some amazing Iranian democracy, you know, stability in the region, there is absolutely zero, zero evidence that that's going to be the case. So, but if you look at the price of oil, I mean, some people are believing it. And look, there's two things here. It's Trump kind of giving it that big one about, ah, we're nearly done. This is almost over. But then obviously you've also got the International Energy Association, you know, coming out with what they're saying is their kind of big game changer releasing, you know, a record-breaking number. So 400 million barrels of oil. Are, have been released, I should say. I think the release happened today or overnight. So you've got 400 million barrels of strategic reserves hitting the market. You've got Trump saying, guys, we're almost done. And so oil having hit $120 on the 9th of March, actually, if we talk about overnight on the sort of 10th into the 11th of March, it got all the way back. I'm talking about Brent crude, got all the way back down to $83. So we basically went from roughly that, I mean, it pretty much unwound most of the move. We were trading around $83 just before, you know, if you take the first week of March where oil had ticked up a little bit in anticipation, 'cause there was a lot of, you know, amassing of military force from the US into the Persian Gulf. Something's going on here. So oil went from $70 to $83, right? That's pre the original strikes. So we're at $83, then the strikes happened and bang, it went to $120, then it came all the way back to $83. So actually reversing all of that original kind of move off those initial strikes.

What was a lot of that due to the fact that you mentioned there record breaking, so 400 million barrels, so that dwarfs what we had in response to the, I think it was the Biden double tap. So I think this is the 6th time that this has been done in terms of this lever being pulled. So quick, we've gone from chemistry to geography to now history in terms of our podcast lessons. So those other 5 times apart from now, so the first one, actually, you kind of were talking about just a moment ago. So 1991, the first Gulf War, Operation Desert Storm. Then you had 2005, Hurricane Katrina, the disruption in the Gulf of Mexico production. Then the Libyan Civil War in 2011. And then you had a March-April double tap and initial and secondary responses to the Russian-Ukraine outbreak. So was it that the market in the first instance was just like, wow, that's a lot. Because we were talking last week about the US, although it's been refilling almost the oil coffers, it was running a little dry. And do they really want to fire that bullet to that magnitude just yet? Because they might then, the market might call their bluff that they can't react in kind next time should there be one. So yeah, and maybe we could talk a little bit about the US's contribution because like all things, I think when you talk about a global order or global collective, whether it's NATO and defense budgets and it's like, well, how big is your country and economy and how much do you contribute? And so here what's interesting is Trump has said, this was as of yesterday, so midweek, that the administration would release 172 million barrels from the US Strategic Petroleum Reserve. That's in conjunction with the IEA, the International Energy Agency. So their contribution is pretty much half. Of that oil. But I was looking into this and I was like, because in my head all sounds great and I was just thinking about, well, what's the actual kind of mechanics of that? What's the economics of that? And I come up with a couple of interesting things. So one was the Republicans' 2025 budget reconciliation package. Included just $171 million. $171 million. That's a lot of money, but that's not a lot of money at all when you're talking about this sort of volume. And that was for future SPR purchases. That's enough for roughly 20 million barrels at a $60 price. Yeah. So don't forget. The US have just committed here 172 million barrels from the SPR. They've already budgeted for roughly 20 million at a price significantly lower than the current price. The next thing that I was reading, which was interesting, was, you know, you kind of naively in your mind's eye, you just think of like a warehouse, like a Costco full of barrels of oil. Well, I think I do. And it's just like you open the door, the guy comes out, He opens the door for you and you're like, yeah, I'll take a couple barrels, please. Put 'em on the back of the car and off you go. It's just that on scale, but actually logistically apparently is far more difficult in terms of replacing barrels and releasing them. And actually there was some, there's a body called CERA or C-E-R-A, and their analysis found that even a fully funded SPR refill effort fully funded, because we've just said it's woefully funded at the moment, at its fastest potential speed, it would be 4 million barrels per month. So given the timelines we're talking here with what the US are doing, you'd be talking well into the 2030s to replenish this. So, right. Yeah.

To replenish just, just this, the 171, 172 million barrels. Don't, Don't forget the SPR had already been plundered by Biden over the last sort of half decade, meaning that the emergency reserves are half empty already.

So it's always tempting to, obviously, I always feel like the intellectual argument is the weakest hand against Trump when it comes to this sort of thing, because I've just explained to you here why in reality what he said is absolute nonsense in terms of that, but that doesn't matter, right? I mean, that's, you need to park those kind of feelings and it's, he's saying this for the reason of taking action, right? I mean, that's exactly why administrations do this and Biden was no different during the Russian-Ukraine period, right?

Absolutely.

Yeah.

I mean, look, so look, overall, if you think about it, 400 million barrels being released from emergency reserves sounds like, sounds like a lot. Isn't, is not a lot. In fact, if you want to put it just purely in Persian Gulf kind of disruption volumes, it, that basically offsets 12 days of Persian Gulf disruption. 12 days. Okay. It's like a drop in the ocean. So again, it all comes back to how long is this going to last? So fine, if the Straits of Hormuz are back open and fully operating, in 12 days' time, well, fine, that maybe that was enough. But I mean, what's happening at the moment to kind of compound all the problems? 'Cause talking about price, so back to Brent crude, remember it went from 80, 80-odd spike to 120, collapsed back to 83 because of these emergency reserves, you know, being tapped and Trump's rhetoric, right? But overnight it spiked back briefly over $100, and that's because these, some of these ships have directly been targeted in the Straits, well, in the Persian Gulf, I should say. It's kind of dropped back to about 96 as I speak. But the problem is with targeting infrastructure and targeting ships, from a legal contract perspective, this enables the producer or the shipper to call what's called a force majeure declaration, which actually means then this is a situation that's wildly out of their control and actually releases them from their legal obligation to deliver oil to China, for example. And so what's happening, these ships are obviously now again, just parked doing nothing. Then it becomes a storage capacity problem. So if you think about Saudi Arabia, right, producing 7 million barrels a day, bosh, bosh, bosh. Great. Well, normally, goes onto the boats, gets shipped off, right? There's obviously a storage facility between underground where the oil is and then getting it out, and then they put it in the storage facility on the, at the port, and then the boats come in and fill up and fine, right? But what happens if the boats aren't filling up? Well, the storage facility's increasing in, in terms of its capacity level, and it's now at capacity. So the problem is that Saudi Arabia, they can't put it anywhere. Fine, they have this pipe, East-West pipeline, but can they? I mean, I don't know. I'm not sure I believe that can cater for 5 million barrels a day, right? So actually you're getting production cuts just when we need production increases to try and bring the price back down. We're getting production cuts because there's nowhere to put it now because the ships aren't able to unload the storage facilities and ship it over to the customer. So you've got production cuts right in the mix here. So you're getting spikes back up to $100 despite the fact that IEA are saying, look, we're going to tap the reserves for 400 million barrels.

I was just having a quick look at floating flotillas, which is the— because it was something I remember during COVID Because if you remember during COVID obviously literally overnight the world just grounded to a halt.

Right.

And so the most famous flotillas occurred during that April 2020, just when the globe went into shutdown in March of that year. Volumes peaked around 300 million barrels. So what this means is that, you know, you mentioned like you're storing the oil underground, it comes out and fills the ships. This would be like basically storing them on sea in vessels. Yeah, right. But obviously this is a big COVID, there's no one around. Whereas now that would be, if you know, that would be the perfect target, right? So as much as targeting infrastructure from an Iranian perspective, you would target— so that rules out, I guess, the use of that. And it would just require more defensive measures, I guess, which then just further draws down on your own military, I guess, munitions in that sense. So.

Yeah.

Yeah.

And you're right, has that ace card of Trump and the IEA, have they played their ace card? Right. Here's 400 million barrels. If that doesn't work, as in the Straits of Hormuz are still closed in 2 weeks, well then what? Each time they play that ace card again, it will reduce in terms of the impact it's going to have on the price of oil. And of course there's so many ace cards they've got in the deck. Because obviously there's a finite capacity to these reserves. And like the worst, worst, worst, worst, worst, worst case scenario is these reserves get completely emptied out. Then we're in a whole new world. I don't know where price goes then. I mean, I'm not suggesting this is going to happen. There is reserves still there, but if there isn't, the whole point of these reserves that were started back in the, in the, you know, '70s and '80s, Following that oil crisis, it was to never allow the price of oil to get out of control again. But if the reserves are gone, I mean, pick a number, $200 a barrel, $300 a barrel. I don't know. So that's kind of your worst-case scenario from a global economic sort of impact perspective to this situation. But look, that's a way down the track and we hopefully don't get there, but that's a risk.

Well, look, I won't open Pandora's box and get into the history and geopolitics and so forth, because that's not what we're here for. But one thing we are here for though is then let's translate a lot of what we've talked about into— we've specifically talked mainly about how this is impacting energy prices, but how does energy prices impact, as we've sort of touched on before, inflation and therefore rate expectations and therefore asset managers have been positioned for this sort of thing and where does this bring in then the hedge funds and their exposure to this level of market movement?

Well, and so one point to make maybe, because everyone focuses on crude oil, right? But there is the natural gas element to this and Europe is highly exposed, but it goes way beyond energy, right? Because one of the components following post-refinery of crude oil, one of the components, and again, a bit of chemical, a bit of chemistry lesson here. One of the kind of after cracking crude oil, one of the components is naphtha, which I'm sure you've heard of, but many people might not quite understand what's the use case for naphtha. Well, it's basically, it's the main feedstock used to make the basic chemical building blocks of plastics. Now, a lot of China's export industry is products that contain plastics, right? And so if you've got no crude oil, you don't have any naphtha, you ain't got any plastics. So this, I mean, long term, this goes way beyond energy price spikes. It could feed into basically the entire suite of physical products that you can think of. I mean, what doesn't have plastic these days, right? That's something to consider. So when you kind of feed this through to an economic perspective, well, this is an inflation risk situation. And so clearly, I mean, the ECB, we're already pricing a rate hike from the ECB. We discussed this last week. The Bank of England are basically on hold. If you go and look at mortgage rates here in the UK, mortgage rates have spiked above 5% again for a short-term 2-year mortgage. The last time that happened was the Liz Truss crisis. And like mortgage providers are pulling mortgage products off the market. There's proper kind of panic mode going on. And you know, from a Fed perspective, well then, you know, you basically at the moment were thinking, forget any more cuts. We were pricing 2 rate cuts in the second half of 2026. Forget that, right? If this situation continues for even another 2 weeks, people are going to start to reconsider how long this is going to take, and then that's going to feed straight through to forget rate cuts. We may be even talking hikes, right? Such was the mishandling of the inflation crisis in 2022 when Biden, or well, not Biden, Powell, I should say. Well, and Biden, kind of missed it and said, look, it's transitory, it's not a problem. And they didn't hike rates to contain inflation, and then inflation became a massive issue. So there's that, that's in the back of everyone's mind. Let's not make that mistake again. So I wonder whether if central banks are going to be a little bit more trigger-happy on rate hikes if this situation continues, right? So look, there's all that backdrop going on. Now, normally when you get these macro swings, And these are definitely macro swings, right? Normally hedge funds, yeah, this is like perfect hunting ground for them where you're getting wild gyrations in markets and this price action is where they're living and operating and generating a lot of their profits. But the speed of some of this move has gone even beyond them, as I was saying, with that Six Sigma event on the oil price move, right? Actually, hedge funds have been really burnt last week. So here are some kind of names everyone will have heard of, like Citadel and Millennium and Point72 and Balyasny and Exodus Point. You know, all these lot got really hurt last week. So if you think about Millennium, so Millennium Management, they manage $86.7 billion. They lost around about $1.5 billion last week. Now that sounds like a lot of money and it is, but they're still up on the year. So we're halfway through March, right? And even what, you know, a huge whack for them in such a short space of time. They're still up on the year though. They're up 0.75% for the year, right? So, you know, it could be worse. 0.72, they lost about $1.5 billion. Citadel's main Wellington Fund lost $1 billion. That's part of their kind of fixed income and macro. Business, Ballyasney, they lost $1 billion. That included $700 million in their fixed income business. So hang on, I'm starting to talk about fixed income here. Well, isn't this an oil price situation? Well, there's kind of two schools of thought here about, because look, they're very secretive. You never quite know what these strategies, how they're constructed, but you know, we can guess and there's a couple of schools of thought as to how this kind of sharp loss might have happened. So one's centered around what was called the reflation trade, right? So heading into March, a lot of these macro funds were positioned where they were long oil because they were betting on a price rise. Well, that seems to have been a phenomenal position, right? Well, right when it's going up. Don't forget it hit $120 and then it crashed to $83 again. So we've actually had massive downside moves over the last few days, but long oil, but then short bonds. Okay. Short bond prices because they're expecting an inflation, a reflation. So inflation to go back up. So that tends to lead to bond yields rising and bond prices falling. So that's how they were kind of set up. But then when the eye— so this was like a perfect trade, right? Or maybe they put it on as this crisis was beginning and unfolding and right, your position, well then until stuff like the IEA announced 400 million barrel release and Trump signals the war might end very soon and suddenly the price of oil goes 120 to 80. That's where they've been really killed. They were in the right trade, they just weren't expecting the reverse so soon. And the issue is with these trades, they're quite systematic. So As soon as they start triggering some of their stops, well then they get out. But of course, getting out of the trade then just exacerbates the reversal. So I think one of the reasons why you've had such a wild ride on crude oil is because of hedge fund market impact as they get into the trades and then they get stopped out from those trades very quickly. That's one thing. Another trade was a bit more technical and purely in the fixed income space, which is a curve steepener trade. So this is looking to try and go long and short bonds of different durations to try and play how the yields, you know, at different durations behave relative to one another. So for a steepener, you'd be buying short-term bonds. All right. And because you're expecting yields to drop, and this is because, well, if you think rate cuts, right? Was the Fed, we're going to cut rates another 2 times this year. So maybe you're long that short end, long price so that you're profiting when yields drop and prices go up as you get cuts, right? And then you're short the long end. Okay. So long the short end and short the long end. But then of course what's happened here with this oil situation is that suddenly rate cuts are off the table, hikes are back on. So short-end yields have gone up sharply. Okay, that means prices have dropped. Well, that's where they're long. Bad news, losing money. But also you're getting a flight to safety into that long end of the curve, which is driving up prices and yields down. So you've got a curve flattener in response to this when a lot of these hedge funds were positioned for curve steepening.

Is there not a way to have an element of some volatility hedge in play with those trades, or is it just the cost of holding the hedge over a period, which is obviously this has happened. You cannot determine when these things specifically from a time perspective will occur. And so the cost implication outside of these what are anomaly events. It just wouldn't make sense.

Yeah, I, I don't, yes, I think, look, you can, I mean, I'm sure there are clever hedged strategies. The issue you've got is if your main trade is in some of the absolute most liquid markets on the planet, right? Where you can really leverage up and you can have monster-sized positions. Which are hedged in of themselves, don't forget. So if you're long the 2-year and short the 10-year, you're— that's a relative value trade. You're market neutral. So that's hedged in of itself. But because it's so liquid and you can put on so much size, I wonder whether these funky extra little hedges on the side, the liquidity in those products is probably not there to kind of get on a full hedge, I imagine. So Yeah.

So is it chicken and the egg then? So as you've described it then, that leverage, and they are trading such big unprecedented size because these hedge funds are bigger than they've ever been. Is that what's leading to the Six Sigma move then?

Yeah, that's right. Exactly.

So the direction of travel for the future is history would say the geopolitical storm will pass, the oil volatility will pass. The hedge funds will get bigger, so the order of magnitude of future shocks will get greater.

Yeah. And the, well, don't forget the order currently, the order of magnitude of this shock is not greater. It's the same as Russia-Ukraine, 80 to 120. It's the speed, right? All right.

Well, look, let's wrap it up there. I'm sure there's going to be a Plenty of questions. So if there is, then please do drop us a comment. If there's a point of view or some information you'd like to contribute and share, just drop it in the comments, whether it's on Spotify or YouTube. And don't forget to subscribe to the channel if you're new or you're a consistent watcher, but not subscribed. We've got more of these coming out on a weekly basis and then an M&A segment at the start of every week as well. So Piers, a pleasure as always.

Thanks very much.