Hedge funds retrench after getting pummeled during wild March

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Traders work on the floor of the NYSE in New York
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 7, 2023. REUTERS/Brendan McDermid/File Photo

LONDON/NEW YORK/HONG KONG, March 31 (Reuters) - March's market turmoil has forced many macro and trend-following hedge funds to cut bait on bad portfolio bets and caused at least one bank that lends to them to scrutinize its clients' exposure, according to sources and preliminary data reviewed by Reuters.

The sudden collapse this month of two regional U.S. banks and Swiss lender Credit Suisse rocked stock, bond and currency markets, catching many hedge funds off-guard and leaving them with unexpected losses.

Macro and trend-following hedge funds dropped 3.2% this month through March 29, while algorithmic commodity trading advisor funds (CTAs) dove 6.8%. Those funds are down 2.7% and 6% for the year through March 29, respectively.

Hedge fund strategies based around macroeconomic ideas like those run by Rokos, DG Parters and EDL Capital fund posted negative performances in March, sources and bank data said.

HSBC Research showed EDL Capital lost 6.4% in March while DG Partners lost 8.1% this month through March 28. EDL said it had recouped March losses and was positive for the year but did not add further details. DG Partners declined to comment.

Edouard de Langlade, founder and owner of EDL Capital, said in a letter last week that he believed the move in rates was caused by CTAs unwinding positions because of risk-control purposes.

"There is a lot of pain out there and the other big question we must ask ourselves is how much of the fast money has been unwound," de Langlade wrote.

London-based Rokos Capital Management was down 12% on the year through March 24 due to market losses, said a source familiar with the matter. Rokos declined to comment; it told investors last week it decided to cut risk after the hit.

Trend-following hedge funds, which trade on systematically programmed ideas, also posted big losses. Progressive Capital Partners, Systematica, and Man Group (EMG.L) had funds which posted losses of 19.8%, 13.1% and 7.6% in March, respectively, said HSBC. Systematica and Man Group declined to comment.

Progressive said losses sustained by its Tulip Trend fund stemmed from fast moves in interest-rate markets. The fund gained 29% in 2022, it said.

Jim Neumann, chief investment officer of alternatives advisory firm Sussex Partners, said many funds were caught off guard in short positions in sovereign debt markets. The blowup in banks caused investors to flee to the safety of bonds, sending yields down at a rate not recorded since the 2008 financial crisis.

Market volatility in rates

“The violent swings in the global rates markets took their toll on many discretionary and systematic (CTAs) managers," said Neumann, adding portfolio managers on average cut risk exposure by 50% following the selloff.

CTAs cut their entire long exposure of roughly $60 billion in equities in two weeks and are also cutting credit exposure, UBS said in a note to clients. Funds exited numerous trades, including hedges that failed to shield investors from market volatility, according to a prime broker at a large bank.

The bank decided not to change clients' borrowing limits, but it has increased diligence oversight on the hedge fund exposure, including new clients, the broker said.

Trend-following funds tend to bail quickly on trades that stop working, said a pension fund director who invests in hedge funds. He does not plan to reduce his investment in trend funds because he believes trend-following strategies will work over the year.

Macro funds which lost money might face investor redemptions, said Don Steinbrugge, founder and chief executive of Agecroft Partners.

"For people who invest in CTAs, they tend to understand if you have sharp reversals, they are not going to do well staying with them," said Steinbrugge.

Reuters Graphics
Reporting by Nell Mackenzie in London, Carolina Mandl in New York, and Summer Zhen in Hong Kong; Treasury graphic by Lewis Krauskopf; Editing by Josie Kao

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