Hedge Fund Clients Dump Humans for Computers and Still Lose

  • Funds using mathematical models raise $21 billion this year
  • Investors seeking out good performance in tough times

Eisman of 'Big Short' Sees 'Massive' Hedge Fund Changes

Losses at Leda Braga’s computer-driven hedge fund this year are running at about twice the level suffered by a macro fund run by billionaire Alan Howard. Yet, while Braga has raised money, investors have pulled billions of dollars from Howard’s fund. 

The divergence is a sign of the sweeping changes underway in the $3 trillion global hedge fund industry, where investors are shunning flesh and blood traders and putting their faith, and hard cash, in algorithms to bet on macro economic trends.

Star traders are losing clients after years of poor returns in a near-zero-rate environment, with managers finding it tough to read economic indicators, predict markets and get an edge in an era of widespread access to information. Investors are turning to model-driven funds in the hope that machines, detached from all emotional bias, are better placed to make money or protect their capital should markets turn volatile.

“There is a general skepticism about the ability of discretionary macro managers to make money with rates at zero,” said Michele Gesualdi, who oversees $3 billion as the chief investment officer at Kairos Investment Management, which invests in hedge funds. “Investors understand trend following and think this is more predictable.” 

Funds that use mathematical models have raised $21 billion this year, according to data provider eVestment, while the rest of the industry suffered $60 billion of withdrawals.

Investors could be ditching their human money managers just when they’re needed most, Gesualdi said, with the U.S. Federal Reserve expected to increase interest rates and spur volatility in global markets. “This is usually the best environment for macro managers,” he said.

Braga, 50, who has a doctorate in engineering from Imperial College London, lost 7.1 percent in the first nine months of the year at her main $7.4 billion BlueTrend Programme, while her firm’s total assets under management held steady at $9.5 billion. That signals the losses were replaced by fresh capital.

Alan Howard’s $13.7 billion Master Fund was down 3.4 percent this year at the end of September, according to investor letters, and the firm saw assets decline by $6.4 billion to $17.3 billion during the period. The 53-year-old money manager, who started his firm in 2002, specializes in fixed income and foreign exchange trading.

Spokesmen for Braga and Howard declined to comment.

One reason investors are buying into computer-driven funds is their good performance in bad times, said Philippe Ferreira, head of research at Lyxor Asset Management which invests in hedge funds. “The flows this year show you that this is precisely what investors are looking for at present,” he said.

So far, the shift hasn’t been profitable. Three of at least four computer-driven hedge funds managed by Man Group Plc’s AHL division lost money through September this year. The unit added $2.1 billion to its assets during the period, according to a company filing. 

Winton Capital

Winton Capital Management, one of the world’s largest quantitative hedge fund firms that’s overseen by David Harding, managed $34.4 billion at the end of September, up from $33.7 billion at the end of last year, according to data compiled by Bloomberg. Winton’s main Futures Fund lost 1 percent during the period, while the Winton Evolution Fund declined 3 percent. A spokesman declined to comment.

“Investors are favoring liquid and transparent strategies at the expense of traditional macro hedge funds which bear a certain amount of key-man risk,” said Nicolas Roth, co-head of alternative assets at REYL & Cie SA, a Geneva-based investment firm. Computer-driven funds aren’t making money this year because some models were disrupted, he said.

“Most systems are not designed to benefit from the v-shape reversals that we have witnessed this year while the sell-off early 2016 has skewed a number of models,” Roth said.

Analytical Rigor

Billionaire Paul Tudor Jones, whose macro hedge fund has lost money this year, cut 15 percent of its staff and lowered some fees earlier to stem an exodus of investors, who’ve pulled $2.1 billion this year. His remaining managers have been paired with scientists and mathematicians to bring new analytical rigor to their trading as part of a quantitative revamp of the firm. Andrew Law’s Caxton Associates also trimmed management fees amid losses earlier this year.

Dan Loeb, founder of hedge fund Third Point, said in an investor letter Tuesday that the use of data sets and “quantamental” techniques is becoming increasingly important to remain competitive at stock investing.

Anthony Lawler, co-head systematic investments at GAM Holding AG that manages 119.1 billion francs ($122.6 billion), said discretionary macro hedge fund managers have run with low risk levels for about six years now and have therefore found it difficult to perform even when their trades are right.

“Investors feel that fundamental macro investors could be struggling because no one can trade the Fed surprise risk well,” London-based Lawler said. Investors maybe better off buying computer-driven funds “where there is more of a focus on price risk, not only fundamental expectations,” he said.

— With assistance by Saijel Kishan

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