The heavy losses suffered by Bill Gross’s Unconstrained Bond Fund have been widely discussed, as market commentators have loudly mused about the veteran manager’s tabloid divorce and the continued success that his former colleagues at PIMCO have enjoyed in his absence. And in the latest update on travails facing Gross and his remaining investors, Bloomberg reported Thursday that Gross’s losses have been exacerbated by the conspicuously high leverage ratio he employed at the fund.


According to BBG, Gross pushed the leverage ratio at his Unconstrained Bond Fund to 13:1 during the first half of the year, even as the Treasury yield curve continued to flatten in defiance of his expectations that long-term bund and Treasury yields would converge. 

But unfortunately, as Mario Draghi reaffirmed Thursday morning, the collapse of the “global synchronized growth” narrative has smothered any immediate incentive for the ECB to unwind its massive monetary stimulus, allowing continued “policy divergence” to push spreads wider.

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.

Investors have yanked roughly half a billion dollars from Gross’s fund so far this year, according to MorningStar data, as it has suffered several vertigo-inducing pullbacks, including a 3% pullback on May 29 that was the biggest one-day drop of the year among large bond funds. During the first half alone, Gross’s losses totaled $153 million on what was a $2 billion fund at the beginning of the year.

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 percent 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’s stewardship.

“Losing 3 percent 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.”

Gross said in July that his fund has scaled back his convergence bet. Yet, an Aug. 30 filing suggests Gross used futures to double down on the strategy, only to have it once again blow up in his face. These losses have left Janus’s Unconstrained fund down nearly 6% on the year.

Interest rate futures would be the simplest way to execute Gross’s 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.


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.

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.

Since early this year, Gross’s poor performance has weighed on Janus’s stock, which is down more than 20% this year. And Gross’s boss is quickly growing tired of his one-time star hire’s performance. In a rare public rebuke last month, the company’s CEO described Gross’s performance as “disappointing.”  Meanwhile, Gross’s former employees at Pimco are proving that the firm is thriving without him, a reality that would bruise the ego of even the most mellow investment managers (and as anybody who has followed Gross’s antics over the past three years will know, Gross is anything but mellow).

We wonder: Have the twin humiliations of his divorce and Pimco’s continued success caused the one-time “bond king” to go on tilt? Or is he seeing something that the rest of the market is missing?

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