Quantitative funds hit by reversals in government bonds as investors rethink their interest rate expectations
Hedge funds that try to make money by betting on prevailing trends in global markets are struggling to repeat their bumper 2022 as violent swings in asset prices and rapid shifts in investors’ interest rate expectations throw them off balance.
So-called commodity trading advisers (CTAs), including Leda Braga’s Systematica and Stockholm-based Lynx Asset Management, have posted losses of close to 10 per cent year to date, according to numbers seen by the Financial Times, while others have struggled to make money.
Such funds use vast quantities of computing power to find and exploit market trends and patterns and were among the world’s top-performing hedge funds last year, as gains for commodities and sharp declines for stocks and government debt paid off.
But this year investors have struggled to gauge the path for global interest rates, hurting the performance of many trend followers, which tend to need clear, persistent trends in order to profit. Unexpected market moves, such as the spike in European natural gas prices, have also dented profitability.
“Equities, interest rates and commodities have all suffered violent oscillations this year — not a good environment for trend followers,” said Andrew Beer, managing member at US investment firm Dynamic Beta Investments. “One month you look like a genius, the next you feel like a moron.”
That has meant reversals for some of the industry’s biggest names. Systematica, which manages roughly $17bn in assets, has lost 9.6 per cent in its Bluetrend fund this year to mid-August after gaining 30 per cent last year. The firm declined to comment.
Lynx, which runs $7bn, has suffered a 9.3 per cent fall in one if its main funds this year to the end of July, after making 36.8 per cent in 2022.
Another, Quest Partners, which follows short-term trends and manages $1.6bn in assets, is down 12.1 per cent to August 11, having delivered a 25.2 per cent gain last year.
Martin Källström, deputy chief executive at Lynx, said: “Many of the trends that offered good trading opportunities last year reversed in the first half of 2023, leading trend followers like Lynx to give back some of last year’s profits.”
While funds have slightly different trading strategies, many suffered in March when markets quickly dialled down their bets on how much further interest rates would rise following the collapse of banks including Silicon Valley Bank and Credit Suisse.
Trend followers had been positioned for bond prices, which had been pushed lower by central bank rate rises, to fall further. “At the start of March, most CTAs were short bonds and long stock indices,” said Carsten Schmitz, co-chief investment officer of CTA Winton, which manages $10bn in assets and whose funds are up this year.
But turmoil in the banking system boosted Treasury prices, as investors bet that the US Federal Reserve would slow the pace of interest rate raises to shore up financial stability. Yields move inversely to prices.
“We were not overly leveraged at the portfolio level, however, we were near our maximum allowed risk in fixed-income markets,” said Christopher Reeve, director of risk at Aspect Capital, which is also up this year.
Even firms that immediately switched strategies and started betting on bond prices increasing and equities falling were immediately punished.
“It didn’t work out for us because Janet Yellen [Treasury secretary] said she would backstop the bank,” said an executive at one trend following hedge fund.
A model portfolio run by Société Générale, which aims to replicate the positions typically taken by computer-driven trend-followers, has suffered its greatest losses in bonds this year, in a sign of the pain suffered by these funds. The two-year Treasury yield, for instance, has moved from above 5 per cent to less than 3.8 per cent and then back above 5 per cent in less than six months.
Some funds have also suffered losses on natural gas prices after European prices unexpectedly spiked this summer on fears over a strike in Australia that could disrupt global supplies of liquefied natural gas. Trade unions will vote to ratify a deal in coming days that would call off the potential industrial action, and natural gas prices have tumbled this week.
“This month has been horrible” because of moves in the gas price, said an executive at one such fund.
Source: Financial Times
