Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

BlueCrest Capital Management’s decision to return all outside client money -- and shut down its debt funds -- highlights a drastic structural change in credit markets.

BlueCrest, one of Europe’s biggest hedge funds, which is run by former JPMorgan derivatives trader Michael Platt, said on Tuesday that it would become a private partnership and return most of outside clients’ $7 billion of assets before the end of March, according to Bloomberg reporters Stephanie Ruhle, Katherine Burton and Saijel Kishan. It will keep its stock, emerging-markets and an internal fund open but will close everything else.

This is a huge retreat for the London-based firm, which was once a star of the asset-management industry. BlueCrest’s assets peaked at $37 billion in 2013.

BlueCrest specializes in making fast bets to take advantage of “smaller, more esoteric anomalies that are often overlooked,” according to the firm’s website. The concept was highly appealing to investors, especially big institutions that wanted the promise of safety and reliable returns that didn’t rely on markets to move in a certain direction.

Once upon a time, that arbitrage strategy worked fairly well in debt markets. But that time is ending, as illustrated by BlueCrest. The firm’s returns have been unimpressive. Investors have pulled cash. Star traders left. The fund posted its first annual loss in 2013, falling 1.6 percent.

The Waning Boom
The race to invest in relative-value debt hedge funds has leveled off.
Source: Hedge Fund Research Inc.

Part of the problem with debt arbitrage is that it’s becoming more and more difficult to exploit subtle differences in values between cash bonds and derivatives, or even between futures and swaps. Different indexes are failing to track one another as well as they once did.

Off Track
Derivatives aren't following Treasuries as closely as they historically have.
Source: Bloomberg

 The reason is multifaceted: New regulations have made it less profitable for big banks to trade credit-default swaps. Investors were slow to move back into the derivatives market in the wake of the worst financial crisis since the Great Depression. This led to less activity in markets that were once among the most liquid and lucrative for Wall Street traders.

The drop in credit-derivatives trading has been significant. Net wagers using single-name swaps -- once the biggest part of the market -- have dropped to $646 billion from $1.59 trillion in October 2008, according to Depository Trust & Clearing Corp. data. Distortions have arisen in other derivatives markets, including interest-rate swaps, which aren’t tracking benchmark rates as predictably as they once did.

Meanwhile, it’s getting harder to make reliable bets on macroeconomic trends, which are increasingly dominated by central bankers’ edicts and policies rather than discernible fundamental shifts in growth and trade.

Now investment firms need to go big or go home. There’s no safe bet anymore, no predictable way to both hedge against downside risk while delivering solid returns to investors.

“Everyone knows the landscape has changed,” Platt said in an interview with Bloomberg News. “We will run the fund with more leverage -- we would like to be our own investors now.”

BlueCrest’s bold move shows just how big of a shift has occurred. It won’t be the last asset manager to throw in the towel on a promise of consistent, reliable returns.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at

To contact the editor responsible for this story:
Daniel Niemi at