By Laurence Fletcher

Caxton Associates LP was at the forefront of an October rebound by hedge funds profiting from a surge in government-bond yields.

The New York-based firm, which manages around $7.6 billion in assets and is headed by U.K.-based Chief Executive Andrew Law, gained 5.1% last month to Oct. 26, according to an investor, helped by the recent bond-market selloff.

That was its best monthly performance in more than three years and means the fund, which had been in the red, is up 2.3% in 2016.

London-based Rubicon Fund Management also made big gains in October, thanks to bets on bonds and on currencies, including the yen, said a person who had seen its numbers. The fund gained around 7.8% during the month, paring losses this year to around 13%, the person said.

So-called macro funds bet on bonds, stocks and currencies but struggled in recent years in markets dominated by central-bank bond-buying, losing money in three out of the previous four calendar years, according to Hedge Fund Research.

Many were caught out when bets that the U.S. Federal Reserve would raise interest rates earlier this year failed to pay off. Instead, bond yields, which move inversely to prices, continued to fall.

But October was a boon to these funds, as concerns over inflation and the limitations of loose central-bank monetary policy have pushed up yields.

The U.S. 10-year Treasury yield, for instance, which fell to a multidecade low last summer, has jumped to 1.82%, from 1.60% a month ago. The U.K. 10-year yield has risen to 1.14% from 0.65%.

"This theme is starting to pick up [for macro funds] withthe Fed set to hike in December," said Stephen Coltman, senior investment manager at Aberdeen Asset Management, which runs about $11 billion in hedge-fund assets. He said many funds have put on trades such as betting on lower yields for shorter-dated bonds while betting on higher yields at the longer end.

In a recent letter to investors, reviewed by The Wall Street Journal, Caxton's Mr. Law said that unconventional central-bank monetary policies have helped lead to "crowding and significant distortions" in many markets.

"Most, if not all, of these distortions will have to reverse at a future point," he said. "In our view, it is a question of when rather than if."

Also profiting was Greenwich, Conn.-based Tudor Investment Corp., founded by Paul Tudor Jones, which gained 2.1% last month to Oct. 21, said two people familiar with the fund's performance.

Discovery Capital Management gained 2.1% during the month. The fund hasbeen betting the euro will fall relative to the dollar, said one of the people, a position that also paid off as expectations grew for a U.S. interest-rate rise.

Another winner was Brevan Howard, one of Europe's biggest hedge funds, run by billionaire Alan Howard. The fund is into its third calendar year of losses but gained around 0.6% last month to Oct. 21, said two people who had seen the fund's performance. That reduces this year's losses to about 2.7%.

U.S.-based Moore Capital Management LLC gained about 0.6% in its main fund.

The rebound in macro funds' performance is in contrast to computer-driven hedge funds that bet on market trends and patterns. These so-called CTAs, or commodity trading advisers, have profited in recent years from big bets on steadily falling government-bond yields and were hit as the market turned.

Such funds were down 3.5% last month to Oct. 28, according to early numbers from Hedge Fund Research.

Among the funds losing money was Man Group's AHL Diversified fund, which was down 3.2% in October, extending its losses this year to 9%.

Computer-driven funds and some discretionary-run funds "had a challenging month as bonds sold off, reversing some of the strong year-to-date rally," said Anthony Lawler, portfolio manager at GAM Holding.

Write to Laurence Fletcher at laurence.fletcher@wsj.com

(END) Dow Jones Newswires

November 01, 2016 17:30 ET (21:30 GMT)

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