By Laurence Fletcher
The prospect of interest rate increases in the U.S. and U.K. is
playing havoc with the trades of several large hedge funds.
Computer-driven funds have been trying to profit for months from
steady declines in the dollar, British pound and government bond
yields. But many took a battering last month when the Federal
Reserve and Bank of England pointed to future interest rate rises,
sending those assets into reverse.
While some funds have clawed back some ground in the early days
of this month, many are nevertheless finding that this September
slump has dented their 2017 performance.
The losses highlight how many hedge funds and more traditional
investors have been positioned for current benign economic
conditions to continue -- conditions in which inflation and
interest rates stay low while bonds and stocks edge higher.
Among funds losing money is the $4.8 billion Bluetrend fund, run
by Brazilian financier Leda Braga's Systematica Investments. It
lost 4.7% last month, according to numbers sent to investors and
reviewed by The Wall Street Journal. Despite a 1% gain in the first
week of October it is down 6% for the year.
London-based Aspect Capital, which runs $6.6 billion, suffered a
4.4% loss in its Diversified fund last month, according to numbers
sent to investors. Despite a 2.6% gain in early October, it is down
2.1% this year, said a person who had seen the numbers. Man Group,
the world's biggest listed hedge fund firm, lost 5.7% in its $3.1
billion AHL Diversified fund. It has clawed over half of that back
this month and is up 2.1% this year, according to numbers from the
company.
Trillions of dollars of central bank stimulus around the world
has helped push down bond yields in many cases and dampened
volatility, making it a dangerous game for traders betting against
this.
September "proved to be a challenging month" for quantitative
funds that bet on market trends and other patterns, said Russell
Barlow, head of hedge funds at Aberdeen Asset Management.
He said interest rates in the U.K., U.S. and Europe drove
returns. "Funds with the larger drawdowns [losses] had more
significant long rates exposure. Anyone who ended the month with a
modest negative to positive performance was typically short rates,"
he said.
The losses are the latest setback in a tough year for many
quantitative hedge funds. They've received tens of billions of
inflows from investors in recent years, even as funds run by humans
have suffered large outflows, as investors hunt for other ways of
making money in markets driven by central bank stimulus.
However, many quant funds have recently failed to live up to
expectations, with many of the market trends they like to track
proving short-lived. Chicago-based data group HFR's index of quant
funds that bet on market patterns is down 3% through September,
with most of that loss coming last month. In contrast hedge funds
overall are on average up 5.7%.
Both the dollar and the 10-year Treasury yield spiked after the
election of U.S. President Donald Trump in November. But their slow
and steady declines this year have provided moneymaking
opportunities for these quant funds, which are programmed by Ph.D.
mathematicians and the like. They funds often follow similar
trading strategies, trying to latch onto market trends and
patterns. Some funds have also profited from the decline in the
U.K. 10-year yield.
But an unexpectedly aggressive tone from the Fed last month,
when officials signaled they expect four rate increases by the end
of 2018, sent the dollar and Treasury yields sharply higher.
Across the Atlantic, sterling and gilt yields jumped after the
Bank of England said markets may be underestimating how soon
interest rates may rise.
Société Générale SA's Trend Indicator, a model portfolio that
simulates the bets these funds may place, had been positioned for
falling 10-year Treasury yields and a falling dollar in September
-- trades that would have delivered losses.
"The main drivers were a sharp reversal in the dollar, from a
weakening trend to dollar strength, and rising global bond yields,"
said Doug Greenig, founder of London-based Florin Court Capital
Also losing money was Netherlands-based Transtrend, which runs
$4.7 billion. It lost 6.4% last month in its Diversified Trend
Program last month, according to numbers sent to investors. It is
regained most of that this month but is still down 3% for the year,
according to numbers from the company.
The fund's largest losses came from "typical Brexit positions,"
said Harold de Boer, Transtrend's head of research and development,
meaning bets against the pound and bets on rising U.K. bonds. The
fund also lost money in U.S. Treasurys and other bonds.
Winton Capital, one of the world's biggest quant hedge fund
firms with around $30 billion in assets, lost 2.1% in its
approximately $10 billion flagship fund last month. This year
through the first week of October it is up 0.9%, said a person
familiar with the matter.
Switzerland-based Progressive Capital Partners' Tulip Trend fund
fell 17% last month, according to numbers sent to investors. So far
this year through early October it is down 13.3%.
Write to Laurence Fletcher at laurence.fletcher@wsj.com
(END) Dow Jones Newswires
October 18, 2017 03:50 ET (07:50 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.