London Quantitative Hedge Funds Report Second Year of LossesJesse Westbrook and Chris Larson
Hedge funds that use computers to follow trends lost money for a second straight year in 2012 as political debates over the U.S. fiscal cliff and Europe’s sovereign-debt crisis roiled markets.
The Newedge CTA Trend Sub-Index, which tracks the performance of the largest computer-driven, or quant funds, fell 3.4 percent last year after a 7.9 percent decline in 2011. David Harding’s $10 billion Winton Futures Fund Ltd. slid 3.5 percent in 2012, its second annual decline since opening in 1997, investors in the pool said. Man Group Plc’s $17 billion AHL Diversified fund fell 2.1 percent, while BlueCrest Capital Management’s $14 billion trend-following fund gained 0.02 percent, said the investors, who asked not to be identified because the figures are private.
The performance of the funds belies their popularity with investors, who’ve poured $108.2 billion into the pools since the end of 2008, according to Fairfield, Iowa-based BarclayHedge Ltd. While quants made money during the financial crisis when other hedge funds didn’t, they’ve since stumbled as market sentiment swung from optimism to pessimism following political announcements in Washington and Brussels, breaking up the trends they try to follow. That may force investors to withdraw money.
“In 2008, we had very nice returns, and it was a pleasure being invested,” said Gabriel Garcin, a portfolio manager at Europanel Research and Alternative Asset Management in Paris. “Since then, it’s been a complete disaster” for trend-following hedge funds, he said.
Europanel Research reduced its investments in such firms to the lowest level ever over the past year, Garcin said. Garcin has been shifting money to hedge funds that use computers to spot other types of investments, such as instances in which two related securities trade outside their typical band, he said.
Trend-followers try to profit by tracking momentum in prices, whether rising or falling. They often use technical indicators, such as moving averages or Bollinger bands, to predict movements for stocks, bonds and commodities. Quants use mathematical algorithms to decide when to buy or sell and rely on computers to respond to price signals in fractions of seconds.
While Winton was “disappointed” with its performance in 2012, the firm expects to lose money once every six years, said Robin Eggar, a spokesman for the London-based fund. The only other year Winton had an annual decline was in 2009, when it lost 4 percent, according to data compiled by Bloomberg. The firm’s Futures fund gained 6 percent in 2011 when others lost money and has produced an annual average return of 16 percent since 1997. Winton, founded by Cambridge University-educated physicist David Harding, manages $26 billion.
AHL’s performance in 2012 was “better relative to peers, driven mainly by our broad diversification,” said Laura Humble, a spokeswoman for London-based Man Group. AHL declined 5.5 percent in 2011, according to data compiled by Bloomberg.
BlueCrest’s BlueTrend fund, whose backers include the Teacher Retirement System of Texas, jumped 1.5 percent in December, allowing it to recoup a decline in the first 11 months of the year and maintain its streak of annual gains in every year since starting in 2004, according to a January report to investors.
Still, the fund has made little money for investors over the past two years, as its 0.02 percent gain in 2012 followed a 0.3 percent rise in 2011, according to investors. Leda Braga, a former quantitative analyst on JPMorgan Chase & Co.’s derivatives research team, oversees BlueTrend. Ed Orlebar, a spokesman for London-based BlueCrest, declined to comment.
Not all quant funds have lost money. Cantab Capital Partners LLP’s $4.7 billion CCP Quantitative Fund rose 15 percent last year following a 13 percent increase in 2011, according to a report sent to investors this month and obtained by Bloomberg News.
The firm, started by former Goldman Sachs Group Inc. partner Ewan Kirk and based in Cambridge, profited in December as stocks rose on expectations U.S. lawmakers would reach an agreement to postpone the fiscal cliff, the combination of tax and spending cuts slated to take effect Jan. 1, according to the report.
Congress passed a bill on Jan. 1 making income-tax cuts started under President George W. Bush permanent for most households, while letting them expire for top earners, averting $600 billion in tax rises and spending cuts.
Quant funds’ growing losses may prompt some to pull money, investors said. The pools have swelled to $266 billion, more than any other type of hedge fund, BarclayHedge estimates. Pension funds were drawn by the funds’ 21 percent average gain in 2008, when the Standard & Poor’s 500 Index fell 38 percent. The funds lost money in three of the following four years, for a cumulative decline of 4.3 percent since the end of 2008, according to Newedge.
In his letter to clients, Cantab’s Kirk said investors have often “erroneously” concluded that quant hedge funds serve as a hedge against their holdings of stocks.
Unless computer-driven funds have a strong first-half of 2013 “they will see net outflows,” said Anthony Lawler, who oversees hedge-fund investments at GAM International Management Ltd. in London. “The base case for 2013 is that it’s similar to 2012, which wasn’t a good-trend following year.”