Turning market hits "trend-following" quant funds

LONDON Thu Jun 27, 2013 5:37am EDT

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LONDON (Reuters) - The global equity pullback over the last month hit "trend-following" quantitative funds the hardest, but the strategy could remain the most profitable in the longer run, delegates at a leading industry event said on Wednesday.

Delegates at the "Battle of the Quants" in London - a gathering of leading hedge funds and traders - agreed markets were at an "inflection point" as the U.S. Federal Reserve prepares to scale back economic stimulus measures.

Strategies based on expectations that certain trends will be maintained were hit the hardest after the Fed's warning that it could soon scale back its bond-buying stimulus programme, abruptly ending an 11-month stock market rally in Europe.

On the HFRI Macro/CTA Index, which charts the performance of hedge funds, those that used trend-following strategies fell 2.2 percent in May, according to data from industry tracker Hedge Fund Research.

"We've been underallocating trend-following strategies for much of the spring, and switched into shorter term and other types of strategies," said Per Ivarsson, head of investment management at RPM.

One category of strategies which has benefited from the recent market moves is "statistical arbitrage", known as stat arb, based on the proposition that prices tend to revert to statistically normal levels instead of following trends - a strategy that performs better in volatile markets.

"Provided this volatility comes in a more structural way ... it could be quite a good environment for the stat arb space," said Claire Smith, research analyst at Albourne Partners.

Quantitative funds control close to a third of the assets in the $2.3 trillion hedge fund industry, data from Hedge Fund Research showed in April.

These funds tend to use mathematical formulae and computer models to dictate when to buy and sell securities, and are often run by highly qualified scientists and mathematicians who traditionally stick to strictly defined strategies.

However, the lines between different categories of funds are being blurred, said Andreas Clenow, principal of ACIES Asset Management.

"More and more of us are combining the strategies. Over the long run, trend following is still likely the most profitable one. But for about 10 years many were only trend following, and that's more unusual now," Clenow said.

"Trend following is probably the biggest profit generator of our time, but the volatility has become too big, and people are trying different things to get a better overall portfolio." (Editing by Jeremy Gaunt and Pravin Char)

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