Quant Funds Feel Investor Bite After UnderperformingChris Larson
Investors are losing patience with hedge-fund managers who rely on computers to follow global market trends after three years of underperformance.
Quantitative hedge funds run by companies such as Man Group Plc and Michael Platt’s BlueCrest Capital Management LLP saw investors pull $4.9 billion in the last three months of 2013, the most in five years, according to Chicago-based data provider Hedge Fund Research Inc. That followed outflows of $1.1 billion in the second quarter and $668 million in the third, HFR said.
It was the largest quarterly outflows for the quant funds since the first three months of 2009, when investors desperate to get their hands on cash amid the financial crisis pulled $5.7 billion, according to HFR. In all, the funds had $1.7 billion of outflows last year compared with $9.5 billion of inflows in 2012 and a record $25 billion in 2011, HFR data show. HFR estimates quant funds now manage about $224 billion worldwide.
“The last three years have been a tough period for nearly all managed-futures funds,” Svante Bergstrom, who runs a quant fund at Stockholm-based Lynx Asset Management AB, wrote in a report to investors this month. “Some investors have started to become impatient and are considering moving their assets to investments where they believe they have better opportunities to achieve a good return.”
For pension funds and other institutional investors, three-year results are important in making allocations, and 2013 marked a third year of underperformance for the quants: the Newedge CTA Index, which tracks 20 large trend-following funds, fell 2.9 percent in 2012 and 4.5 percent in 2011. The funds climbed 0.7 percent in 2013, still trailing both the Bloomberg Hedge Funds Aggregate Index’s return of 7.4 percent and the Standard & Poor’s 500 Index, which rose 30 percent.
Over the three years ending Dec. 31, the Newedge index fell an average of 2.2 percent each year, while the Bloomberg Hedge Funds Aggregate Index rose 2.3 percent annually.
“Trend-following strategies are cyclical, and right now is not a great environment for them,” said Rob Koyfman, a senior strategist at Paris-based Lyxor Asset Management Inc., which reduced its assets in such funds late last year. “If it gets better, we’d like to move more money into them, but right now isn’t really favorable for those funds.”
The funds use computer models to try to predict movements of stocks, bonds and commodities. Sometimes called managed-futures funds or commodity-trading advisers, the funds then try to profit by buying and selling securities based on those forecasts. Each manager has its own computer models, which can lead to a wide range of returns.
Quant funds had one of their best years in 2008, when the Newedge CTA Index rose 13 percent, far outperforming the S&P 500, which fell 37 percent. All hedge funds dropped 19 percent that year, according to HFR’s Fund Weighted Composite Index.
The quants’ struggles over the past three years have come in part because of central bank activities such as quantitative easing, in which the banks buy bonds and other financial assets from commercial banks. Such interventions in the market can alter the expected movements of securities prices, managers say, leading to losses for the funds.
Last year’s performance was a “disappointment,” said Damien Loveday, the London-based global head of hedge fund research at Towers Watson & Co., even if it “was probably not that surprising in an environment where we saw such strong shifts in the markets due to geopolitics and central bank announcements and policy changes.”
Losses continued in January, when the Newedge index was down 2.4 percent. Among the European trend-following funds that lost money were Man Group’s AHL, BlueCrest’s BlueTrend and Cantab Capital Partners LLP, performance reports show.
Man’s AHL Diversified fund fell 1.5 percent in January after a 3 percent decline in 2013, according to an investment report. Its AHL Evolution fund rose 17 percent last year and declined 2.1 percent in January.
Publicly traded Man reported its AHL unit managed $12.5 billion as of Sept. 30, down from $23.6 billion at the end of 2010. The decline in assets, brought about both by investor withdrawals and market losses, led to a drop in revenue for the unit, and Man’s share price fell by 72 percent over the period.
Assets at BlueTrend, BlueCrest’s trend-following fund, dropped 12 percent in 2013, its first full calendar year of losses since it started trading in 2004, according to a performance report. The fund, overseen by former JPMorgan Chase & Co. quantitative analyst Leda Braga, almost doubled to $14.2 billion by the end of 2012 from 2008, making it BlueCrest’s largest hedge fund. As of Jan. 3, BlueTrend’s assets were down to $12.5 billion, according to the performance report.
Cantab, founded by former Goldman Sachs Group Inc. partner Ewan Kirk, saw a 7 percent decline in its main fund in January after a 28 percent fall in 2013, a performance report showed. The Cambridge, England-based Cantab had a “significant exposure to bonds and currencies” in June, Kirk said at the time, a month when both of those investment classes fell.
The Cantab strategy rose 15 percent in 2012 and finished that year with $4.7 billion in assets. By last Aug. 30, assets were down to $3.6 billion, mostly from investment losses, a performance report said. The fund saw $75 million in net outflows in September, Kirk said, which were the firm’s first significant outflows since February 2010. The strategy had $3.2 billion in assets at the end of 2013.
David Harding’s London-based Winton Capital Management Ltd. bucked the trend as its $10 billion Futures Fund climbed 9.4 percent last year, Chief Investment Officer Matthew Beddall wrote in a January letter to investors. The gains came in part from the fund’s holdings in both equity indexes and individual stocks. The Winton strategy fell 2.3 percent in January, according to a performance report.
Lynx, a $5 billion fund overseen by Stockholm-based Brummer & Partners, was up 12 percent last year before falling 5.3 percent in January, according to an investment report.
Spokesmen for all the funds confirmed the numbers and declined to comment on the performance.
Morten Spenner, chief executive officer of London-based International Asset Management Ltd., said that because the quants tend to perform differently from other hedge funds and the broader markets, the strategy continues to have merit. Still, he’s being far more selective.
“We have not recently had a huge amount of confidence to increase that allocation,” he said, declining to disclose the amount of his firm’s investments. “We plan to stay with what we’ve got at the moment.”