LONDON Winton Capital, one of the world's most successful hedge fund firms, has seen clients pull $1 billion of cash out of its portfolios amid falling returns from computer-driven fund managers.
The firm set up by Cambridge physicist David Harding, one of Britain's richest financiers, said that assets had dropped to about $26 billion at the end of 2012, from $29 billion in May.
While part of the drop was down to performance losses, about $1 billion had been withdrawn by clients, a spokesman told Reuters.
The heavy outflow is likely to have stemmed from Winton's decision during the credit crisis to cut risk levels - a move that makes it attractive to more conservative investors such as pension funds but does not always suit investors chasing higher returns.
"David Harding made the decision in 2008 to reduce the risk in Winton and cut volatility. That decision not to target high levels of risk appears to still resonate well with institutional and pension fund investors," the Winton spokesman said.
Hedge fund investors have become increasingly concerned that so-called CTAs (commodity trading advisers) - computer-driven funds aiming to profit from market trends - are failing to reproduce the bumper returns they generated during the credit crisis.
Winton's main strategy was one of the few to make money in 2011, gaining 6.3 percent, but it lost 3.6 percent last year.
AHL, co-founded by Harding in 1987 but now owned by Man Group (EMG.L), lost 6.4 percent in 2011 and 1.3 percent last year. BlueTrend, meanwhile, made marginal gains in both years.
The $1 billion outflow, therefore, marks an abrupt reversal for Winton, which has become one of the most in-demand hedge funds in recent years.
In 2011, for instance, Winton attracted an incredible $1 in every $8 invested into hedge funds globally.
The firm's success led to Harding's net worth almost doubling to 800 million pounds in last year's Sunday Times Rich List, which also said he was likely to be Britain's highest-paid person.
Pension fund investors have been particularly attracted to CTAs because of their low correlation to equity markets - such funds can profit from both rising and falling market trends.
However, returns have been lacklustre in recent years, partly because of the lack of clear market trends and also because of very low interest rates on the high levels of cash they hold.
Gains of more than 18 percent during the market chaos of 2008 seem a dim and distant memory now. The average fund lost 2.5 percent last year and 3.5 percent in 2011, according to figures from data group Hedge Fund Research.
The CTA sector has ballooned in size since the credit crisis, almost doubling between 2008 and the end of 2011 to $188 billion, HFR says.
But flows have slowed as returns have faded. Net inflows more than halved between 2011 and 2012.
One investor told Reuters that he had reduced exposure to CTAs by about two thirds since 2008 because of poor returns.
However, CTA performance has picked up since December, helped by a rally in riskier assets such as equities. Winton is up about 2.5 percent this year, AHL has gained 2.1 percent since January 1 and BlueTrend rose 3.8 percent in January.
"Performance in 2011 and 2012 was poor," said Chris Topple, global head of prime clearing services at Newedge. "They (CTAs) definitely need a good year in 2013."
(Editing by Sinead Cruise and David Goodman)