Money manager Kenneth Heebner, convinced that a growing U.S. economy will eventually prompt the Federal Reserve to boost interest rates, has bet 21 percent of his CGM Focus Fund on a decline in U.S. Treasurys.
The $1.44 billion fund, which Heebner uses to make concentrated wagers on stocks, had sold short $300 million of U.S. Treasury bonds at the end of last year, according to a filing Tuesday with the U.S. Securities and Exchange Commission. That is up from $190 million at the end of the third quarter and $80 million halfway through last year.
Heebner, who turned CGM Focus into the top performing diversified U.S. stock mutual fund for the decade ended 2007 before losing his touch in the financial crisis, is doubling down on a bet that left him trailing peers and the stock market over the past year. Wall Street experts such as Nassim Taleb and James Rogers have recommended betting against Treasurys, though timing that wager has proven difficult as investors flocked to U.S. government debt in search of a safe haven from economic turmoil in Europe.
“The risk reward has changed considerably over the past several years” for shorting Treasurys, said Duncan Hennes, who formerly worked as chief executive officer of George Soros’s hedge fund and now is a managing partner at Atrevida Partners LLC in Rye, New York.
CGM Focus has generated an annual average loss of 9.9 percent during the five years ended Feb. 25, worse than 99 percent of other mutual funds that follow a similar strategy, according to data compiled by Bloomberg. The fund rebounded over the past three months when Treasurys fell, beating 99 percent of peers. It slumped again this month as an inconclusive election in Italy damped optimism about the global economy.
“We established a significant short position in U.S. Treasury bonds in anticipation of what we believe will be a stronger U.S. economy going forward,” Heebner said in a Jan. 2 letter included in the filing.
Unlike most mutual funds, CGM Focus Fund has the ability to short sell securities. The fund, which mostly invests in stocks, employs a “flexible” investment style and can invest in fixed- income securities, according to a prospectus filed with the SEC.
The SEC filing showed that CGM Focus had sold short $200 million of 2.75 percent Treasurys and $100 million of 3.125 percent bonds that mature in August and February 2042 respectively.
Investors use short selling to profit from a decline in the value of a stock or bond. The technique involves borrowing and then selling a security in anticipation of buying it back in the future at a lower price.
The fund had 29 percent of its assets invested in banks including Bank of America Corp., Citigroup Inc., and Morgan Stanley, with another 24 percent devoted to homebuilders D.R. Horton Inc., Lennar Corp. and PulteGroup Inc.
During 2012, Heebner positioned CGM Focus to benefit from greater economic growth “than actually occurred,” the money manager said in the filing, leading the fund to “modestly” underperform the Standard & Poor’s 500 Index.
In an interview last week, Heebner said that a rebound in housing will translate into a strong financial position for consumers, boosting the U.S. economy and prompting the Federal Reserve to end stimulus programs known as quantitative easing.
“The Fed will eventually change its policy by moving away from QE3 and then raising rates,” Heebner said, without specifying a time frame.
Martha McGuire, a spokeswoman for Capital Growth Management LP in Boston, said Heebner wasn’t immediately available to comment.
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