Hedge funds are beginning to rebuild positions in UK interest-rate markets after a sharp sell-off earlier this month forced traders to unwind a number of sterling rates strategies, according to a report by Risk.net.

The move into the market comes more than a week after a surprisingly hawkish European Central Bank meeting triggered a broad repricing across European rates. The resulting volatility hit positions including curve steepeners and trades that had positioned for gains in the front end of the UK rates market.

Some hedge funds are now returning to sterling rates as the latest round of central bank meetings has passed, although trading activity remains cautious.

The ECB meeting was the catalyst for a particularly abrupt adjustment in European rate expectations, with the resulting moves spilling over into sterling markets. The volatility forced investors to reduce or close positions as moves in the front end and along the UK yield curve moved against them.

The subsequent meetings of the US Federal Reserve and Bank of England have provided traders with greater clarity on the immediate central-bank policy landscape, potentially creating an opportunity for hedge funds to reassess sterling positions.

The return of some investors nevertheless follows a period in which rates traders have had to manage significant volatility across developed markets. For hedge funds running relative-value and macro strategies, the rapid reversal highlights the risks of maintaining positions through major central-bank events.

Sterling rates therefore remain a market where positioning is being rebuilt rather than simply restored, with hedge funds weighing fresh opportunities against the potential for further sharp moves in rate expectations.

The developments underline the sensitivity of hedge fund rates strategies to shifts in the relative outlook for the ECB, Federal Reserve and Bank of England, particularly when changes in one major European rates market feed rapidly into another.