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By Bloomberg

GCI Systematic Macro Fund, which earned 167 percent on Japanese government bond futures in 13 months, is scanning computer models to profit further as global monetary policy diverges.

The hedge fund employs a computerized global macro strategy to invest in exchange-traded securities, mainly in developed countries, said Kyo Yamamoto, head of the quantitative research and strategy group at Tokyo-based GCI Asset Management. The gain since inception in February 2014 was also supported by European bond future bets, he said. The Chicago-based Hedge Fund Research Inc.’s index tracking similar funds globally returned 17 percent in the same period.

The $2.85 trillion global hedge-fund industry is seeking to profit from a race among global central banks to revive growth while keeping inflation in check. The Bank of Japan’s unprecedented bond buying and the European Central Bank’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing program have sent yields to record lows, just as the Federal Reserve moves toward raising borrowing costs for the first time since 2006.

“We’re expecting that long-short positions will be forming based on signals from the monetary policy divergence around the world,” Yamamoto, 33, said in an interview on March 13. “Such trades could be going short on U.S. Treasuries while holding long positions in Japan and Europe.”

Cutting Costs

The 4.7 billion-yen ($39 million) fund consists of about 15 different asset classes with a targeted annual return of 40 percent to 50 percent, Yamamoto said. To cut costs, the fund avoids hedging with options or credit-default swaps, and instead finds investments with low correlations and pairs them by shorting and longing, which involves bets on losses or gains in the market. The fund has leverage of 2.5 times, he said.

JGB futures contracts were “moving upward in a straight line throughout the year, so while they were steadily rising, we remained long and when they became volatile, we reduced our position to adjust,” Yamamoto said. The biggest hedge against its JGB bets last year was long positions in North American stock indexes, he said.

The 10-year JGB futures gained 2.2 percent in the 13 months through Feb. 28, compared with a 2.1 percent advance in U.S. Treasury contracts covering the same maturity.

Falling Yields

The BOJ is buying as much as 12 trillion yen of local sovereign debt a month in unprecedented stimulus to beat deflation. The central bank is projected to step up its easing later this year, once it becomes clear it’s unlikely to achieve a 2 percent increase in consumer prices in or around the 12 months starting in April, according to a Bloomberg News survey of economists.

Japan’s 10-year yield fell to a record 0.195 percent in January and was 0.420 percent on Monday, while that on the five- year bond dropped below zero for the first time after the BOJ expanded debt purchases in October.

“Japanese government bond yields look set to fall further under pressure from the BOJ’s monetary policy,” Shuichi Ohsaki, a Tokyo-based rates strategist at Bank of America Corp., said at a seminar in Tokyo on Monday. “There aren’t that many trades right now.”

The yield on the 10-year JGB may fall to 0.1 percent by the end of the year, he said.

Europe Follows

Yields have also plunged in Europe since the ECB revealed plans to start buying 60 billion euros a month of public and private debt at least until September 2016 to revive inflation in the region. Ten-year borrowing costs declined to an all-time- low of 0.186 percent on March 12 in Germany while those in Switzerland were minus 0.029 percent on Monday.

“JGBs have too much risk and look unattractive now,” said Fumio Nakakubo, the regional chief investment officer for Japan at UBS Group AG’s wealth management division. Instead, UBS favors buying European high-yield notes that offer higher returns and are supported by the start of quantitative easing there, he said.

By contrast, the Fed’s meeting this week comes against a backdrop of reports showing strength in the U.S. labor market, fueling speculation policy makers will lay the groundwork for a rate increase. The odds of a rate boost by the central bank’s June meeting were 20 percent, according to futures data compiled by Bloomberg.

GCI’s fund has also outperformed Japanese peers. The Eurekahedge Japan Hedge Fund Index climbed 5.2 percent in 2014 and has added 0.2 percent in the first two months of this year.

“The key is to piece and pair up many different assets, which will lead to less loss-cut trades, while the probability of returns with greater upside will increase,” said Yamamoto, who wrote a paper titled “Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: An Application to Hedge Fund Replication” after receiving a Ph.D. in Economics from the University of Tokyo in March 2010. “What we aim is to reduce costs to the minimum and boost returns to the maximum.”