Jeff Gundlach's trade call last month returned a quick 22%. Now, he's saying back off

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Jeffrey Gundlach speaking at the 2019 SOHN Conference in New York on May 6th, 2019.

Adam Jeffery | CNBC

A trade that bond fund manager Jeffrey Gundlach recommended a month ago at the Sohn Investment Conference has paid off handsomely for anyone who gave it a shot.

At the May 6 gathering in New York, the head of DoubleLine Capital recommended that investors take advantage of bond market volatility he expected to happen due to wavering Federal Reserve policy. Specifically, he called for a “straddle” play, using option puts and calls at the same same strike price, or the point where investors had the ability to buy or sell.

If the rate rose or fell more than the total premium on the option, investors stood to gain — perhaps 50% to 75% over the next 12 months he told the conference, which features market calls from top Wall Street pros. Attendees are urged to donate some of the profits from the calls to charity.

In a tweet Wednesday evening, Gundlach said the strategy has returned 22%. The bad news: “If you put it on, taking it off now makes sense.” Gundlach, through a spokesman, declined further comment.

He said investors could express the trade by using the iShares 20+ Year Treasury Bond ETF, which tracks the long end of the government bond market.

By itself, the fund has returned about 4.45% since Gundlach’s call as bond yields have plunged and prices have surged. The 30-year yield has been trading around its lowest level since October 2016.

The bond market overall has been subject to extreme volatility as investors have worried about the escalating trade war between the U.S. and China and a potential new front in Mexico.

A gauge that tracks bond market volatility, the Merrill Lynch MOVE Index, has exploded more than 62% higher since Gundlach’s call. The measure is akin to the CBOE Volatility Index, which is considered a fear gauge for the S&P 500.

Charting bond volatility

Source: FactSet

The bond volatility call comes as his $52.1 billion DoubleLine Total Return Bond fund underperforms. It is up just 3.67% year to date, putting it in the 94th percentile of Morningstar-rated funds in the category. The fund, composed largely of bonds bundled together through a process called securitization, has underperformed its category by 1.54 percentage points.

The fund, however, was in the fourth percentile in 2018 and in the first percentile in 2015. On a five-year basis, the fund has posted average returns of 3.26%, good for the 16th percentile.

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