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Pressure on black box hedge funds after missing first-quarter rally
April 4, 2012 / 2:06 PM / 5 years ago

Pressure on black box hedge funds after missing first-quarter rally

LONDON (Reuters) - Some of Europe’s biggest computer-driven hedge funds have failed to profit from the stock market’s rebound in 2012, once again frustrating investors in a sector that has sucked in tens of billions of dollars in assets in the wake of the credit crisis.

The so-called managed futures or CTA (commodity trading advisors) sector - dominated by names such as $29 billion Winton Capital, $21 billion AHL and $13.6 billion BlueTrend - uses highly complex algorithms to try and latch onto and profit from market trends, either up or down.

These funds might have been expected to profit from the 7.2 percent rise in the Euro STOXX 50 that has lifted most other hedge funds, after the European Central Bank’s 1 trillion euro cash injection to head off another credit crunch.

However, as in the March 2009 rally, some CTAs’ algorithms haven’t taken advantage of the sudden rebound in equities, while they have also being caught out by choppy, volatile commodity markets. AHL said this week it was hit by a fall in energy prices.

This has left these portfolios, which tend to be more volatile than most other hedge funds, down 3.9 percent this year on average, according to Hedge Fund Research’s HFRX index.

Whilst all these funds’ trades are decided by computers, the losses nevertheless highlight the difficulties the programmers who build these models can face when deciding whether to focus on shorter-term market trends, which can whipsaw investors, or longer-term trends, which can be hard to spot early on.

The losses also add to the frustration of some investors who had been attracted by CTAs’ 18 percent gains in 2008, during the worst of the credit crisis, but who have seen many funds in the sector lose money both last year and in 2009.

“It’s not been a fantastic area and I have to say we are a little disappointed (with CTA returns),” said a London-based fund of funds investor who has been investing in CTAs for more than 10 years, speaking on condition of anonymity.

The lackluster performance comes just as the hedge fund sector as a whole is rebounding from a frustrating 2011, gaining 3.1 percent so far this year with some star names delivering high double-digit gains.

In contrast, among the biggest CTAs, BlueTrend, part of fund manager BlueCrest and headed by Brazilian-born Leda Braga, is down 2.5 percent so far this year, according to figures seen by Reuters. AHL is up 0.7 percent, while Winton - set up by David Harding, the ‘H’ in AHL - has seen its main Futures Fund lose 0.9 percent.

“CTAs are having a bit of a tougher time,” said Morten Spenner, chief executive of fund of funds firm International Asset Management.

“For years it’s been a bit tricky. Some people are scratching their heads ... and thinking ‘it would be a good year for them to perform’.”


One CTA industry executive, who asked not to be named, said that markets were offering few opportunities for these funds to profit.

“Nothing’s really happening at the moment,” the executive said. “The situation in 2009 was very similar. Equity markets did well in March and most CTAs didn’t catch the equity boom.”

Managed futures funds tend to do best from long-standing trends in futures markets. This was seen clearly in 2008, when stocks fell whilst the oil price rose in the first half of the year then fell in the second half, helping funds to an 18.1 percent gain.

That performance, when most hedge funds were suffering heavy losses, helped the industry suck in tens of billions of dollars in assets. According to HFR, assets in the macro sector, which it defines as including CTAs and global macro funds among others, have swelled nearly 60 percent since 2008.

However, the sector has endured a frustrating time since then, with many funds failing to provide gains during last year’s turbulent markets for investors who had bought them to hedge positions in other types of funds.

Some funds have also cut risk to attract clients, which reduces potential losses but also makes it harder to deliver the type of profits seen in 2008.

AHL fell 6.4 percent last year after its algorithms found it hard to cope with rapid changes in market direction. Tulip Trend fund was down 20.9 percent, although it is up nearly 8 percent this year, while the largest subset of Rotterdam-based Transtrend’s Diversified Trends strategy was down 8.6 percent in 2011 but is also up this year.

Winton was a stand-out performer last year with a 6.3 percent gain.

“We mustn’t forget that many of these new investors that have helped the growth came into the CTA market after 2008,” said Christoffer Dahlberg, managing director at Finnish-based Estlander Partners, which manages $1 billion, speaking at last week’s CTA World Congress in London.

“You haven’t really seen the tremendous performance you may have been expecting when you entered the market. So I think it’s very important for us as an industry that we show in 2012 our ability to perform.”

Additional reporting by Tommy Wilkes; Editing by Peter Graff

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