Bill Gross Succumbs To His Nemesis


Although younger readers might not believe it, there was a time when Janus Henderson’s Bill Gross was the biggest bond trader in the world. In fact, there was even a book which proclaimed him the original “Bond King”.

During his tenure at PIMCO, Bill spent four decades building the West Coast money management firm into a behemoth that managed over $2 trillion. However, in a surprising move in September 2014, Bill left PIMCO for the firm of Janus Henderson. This was viewed as quite the coup for the smaller money manager. There Bill set out to recreate what he had accomplished at PIMCO.

Unfortunately, it appears that “Bill-alone” wasn’t the entire secret sauce for PIMCO’s success over the decades, and after some mediocre returns at Janus, last week Bill announced he was hanging up his skates and retiring.

During an exit interview at Bloomberg, Bill fessed up to what he believed to be the main reason for the poor performance of his fund, but before we get into the meat of the post, a quick aside about another potential reason. It has long been known that money managers who are experiencing a divorce or other personal negative events underperform their peers. Heck, I recall reading about one of David Einhorn’s biggest supporters who made an exception in his case because he believed the rule didn’t apply to David. He concluded by saying there should be no exceptions.

Well, it’s difficult to argue that Bill’s divorce has not been on his mind.

It’s tough to post good returns when you are taking time out of the trading day for those kinds of stunts.

But according to Bill, the biggest problem with his fund’s performance is not his divorce, but rather the confounding US/German 10-year yield spread. Here is Bill coming clean with Tom Keene on Bloomberg TV:

“for the past three or four years, the negative trade… has been Germany versus the United States. In terms of the spread, 10-years German bunds started out in my portfolio at 190 basis points over [US Treasuries] and they are now 250 basis points over. It’s been the big decider and probably one that I shouldn’t have put as many chips on the table. The old Ed Thorpe term - the gambler’s ruin concept said that you only bet 2% of your total capital and certainly I had positions… that were significantly more than that, especially the German-US Treasury note trade and that was probably too much. It was an unconstrained portfolio and investors were expecting hedge-fund-like returns…”

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