As Gross exit sank in, traders saw confusion, then opportunity

Thu Oct 2, 2014 4:50pm EDT
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By Richard Leong, Shankar Ramakrishnan and Michelle Sierra

(Reuters) - As bond traders began what they thought would be a quiet day last Friday, a simple headline crossed their screens: “William H. Gross joins Janus Capital."

Confusion ensued. Several asset managers and traders wondered whether the news was about Pimco's co-founder, known to most on Wall Street simply as Bill Gross, or someone else with the same name.

"The question was, 'Is it THAT William H. Gross?'" said Lou Brien, a veteran market strategist at DRW Trading, a 22-year-old trading firm in Chicago active in futures markets.

It was indeed. The 70-year-old fund manager had quit as chief investment officer of the $2 trillion asset manager and portfolio manager of the world's largest bond fund, the Pimco Total Return Fund, after more than four decades amid tensions with management.

As the news sank in, fixed income traders jumped. Several said they first tried to figure out the biggest holdings of the Total Return Fund, which had $222 billion under management before Gross bolted.

Then, they began selling assets that they believed to be the biggest holdings of the fund, including U.S. Treasuries, Treasury Inflation-Protected Securities (TIPS) and high-yield bonds, anticipating massive redemptions. Clients immediately started withdrawing funds, sending assets in the direction of rivals TCW, DoubleLine Capital, BlackRock Inc and Western Asset Management Co.

The Total Return Fund saw $23 billion in outflows in September, with its worst day of withdrawals in its history on Friday. Pimco declined to comment for this story.

"People scrambled to see what their positions were. People were trying to front-run any liquidation," DRW’s Brien said.   Continued...

The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012. REUTERS/Lori Shepler