Winton escalates computer-driven hedge fund arms race
LONDON (Reuters) - Winton Capital, one of the world's biggest hedge fund firms, has developed a new model of its flagship fund, hoping its greater allocation to equities and risk will produce better returns in a sector struggling to make money.
The move by Winton - a computer-driven trader set up in 1997 by multi-millionaire David Harding, the co-founder of Man Group's (EMG.L) flagship AHL fund - could affect tens of billions of dollars held by pension funds and other investors in its main Futures fund.
Winton has quietly overhauled its $40 million Evolution fund, which was previously focused on its best trading ideas, but had a mixed record - making money in 2010 and 2011 and losing money last year.
Evolution now has a bigger focus on equities and risk than the $24 billion Futures fund, which it could eventually supersede.
The move is part of an arms race between computer hedge fund traders, who control hundreds of billions of dollars and employ experts in fields such as statistics and astrophysics to fine-tune their automated trading systems.
However, the sector has struggled in recent years, with the average fund down 2.81 percent this year to August 5, according to Hedge Fund Research's HFRX index. Funds lost 2.51 percent last year and 3.54 percent in 2011, according to its HFRI index.
Winton, which has invested millions of dollars in the top-secret computer codes that drive its trading, attracted a massive $1 in every $8 invested in hedge funds globally in 2011 after strong returns during the credit crisis.
But it saw a $1 billion outflow in funds from May to December 2012, likely to have stemmed from its decision during the crisis to cut risk levels - a move which makes it attractive to more conservative investors such as pension funds but does not always suit those chasing high returns.
"The allocation to cash equities is closer to what we believe the optimum is," chief investment officer Matthew Beddall told Reuters of Evolution. "If it does better than the Futures fund then I imagine money will move (between the two)."
So far, the signs are good. In the year to July 24, the Evolution fund was up 7.34 percent.
The Futures fund has also been one of the better-performing funds in the sector this year, gaining 4.62 percent to July 24. Rival BlueTrend is down 11.21 percent this year to July 31, as measured by the performance of a feeder fund.
The Futures fund's large investor base means making major changes to this fund is tricky, hence Winton's decision to experiment with Evolution.
MORE EQUITIES AND RISK
Many computer-driven hedge funds make money following trends in global futures markets. But some, notably Winton, have been trying to develop other programmes as well, such as equities trading or predicting the effect of climate on crop prices.
While the Futures fund has 20 percent of its risk in equities trading - which is set to be raised to 25 percent over time - Evolution now has 40 percent of its risk in equities and 60 percent in futures trading.
Evolution also has a higher volatility target than the Futures fund, at 12 percent compared with 10 percent.
Winton, which spends around $30 million a year on research, has developed its equities trading system using metrics such as value, volatility and company size to try and predict if a stock price will rise or fall.
Founder David Harding is one of Europe's wealthiest hedge fund managers with an estimated fortune of 700 million pounds, according to the Sunday Times Rich List.
A large part of Evolution's assets currently comes from senior Winton staff. Last month Winton launched a U.S. version of Evolution.
(Editing by Mark Potter)