Computer-Driven Hedge Funds Wrong-Footed on Bond Bets
Funds have been hit in recent weeks by a spike in U.S. and German government bond yields
By LAURENCE FLETCHER
Nov. 7, 2016 12:21 p.m. ET
LONDON—Computer-driven hedge funds’ big bets on bonds are coming back to bite them.
This $277 billion sector, which tries to profit from market trends and patterns, has been bulk buying government bonds in recent years, capitalizing on steady price rises.
But they have been wrong-footed in recent weeks by a spike in U.S. and German government bond yields on worries about inflation and the limitations of central bank bond-buying programs. The price moves have happened too quickly for many funds to respond immediately. Bond yields rise as prices fall.
Among funds to suffer losses is Stockholm-based Lynx Asset Management, which runs around $6 billion in its Lynx strategy. Its Lynx 1.5 fund lost around 9% in October, said two people familiar with the fund’s performance.
And London-based Aspect Capital Limited, which runs $6.2 billion in assets, fell 4% in October, taking losses this year to 7.7%, said a person who had seen the numbers. Cambridge, England-based Cantab CapitalPartners LLP, which manages $3.8 billion, lost 6.6% in its Quantitative fund, meaning it is now down 4.6% this year, according to numbers sent to investors and reviewed by The Wall Street Journal.
“Bonds were definitely the main driver [of performance] for trend-followers,” said James Walker, managing partner of London-based Solaise Capital. The fund made money in four out of the past five years, but is down 19% this year after losing 5.6% in October. Its assets have dropped from nearly $400 million to $35 million this year.
Computers don’t worry about ultralow or negative yields on bonds. That proved a big help over recent years as yields—fueled by massive central bank stimulus—sank much lower than most human traders had expected. That meant many traders missed out on the profits enjoyed by computer-driven funds.
However, U.S. 10-year yields jumped from 1.6% to 1.82% last month, while U.K. 10-year yields spiked from 0.65% to 1.14% and German yields leapt from -0.12% to 0.16% as investors’ expectations for future inflation and interest rates picked up. These computer-driven funds, known as CTAs or commodity trading advisers, tend to suffer when markets suddenly switch direction.
CTAs have since started to cut exposure to bonds or even bet on lower prices. French bank Société Générale’s Trend Indicator, a model portfolio that simulates the bets that these funds may place, had been positioned for falling bond yields for most of this year. However, it switched mid-October to bet on rising yields.
Robin Carpenter, head of New Hampshire-based data group Carpenter Analytical Services, said last month that CTAs’ exposure to fixed income was "impossibly high and dangerous”. However, funds are now in “retreat from over-bullish bond exposure,” he said.
However, some managers see other potential dangers. “While they have mostly closed out their bond positions they remain long equities and have thus had a tough beginning of November as well,” said Michele Gesualdi, chief investment officer of Kairos Partners in London, which oversees more than €8 billion in assets.
Also losing money recently was Netherlands-based Transtrend, which runs $5.5 billion in assets. It lost 3.9% in October after strong gains over the summer, according to data from the company, reducing gains this year to 3.9%.
CTA hedge funds on average lost 3.7% in October, according to early numbers from Chicago-based data group HFR, and are down just over 3% this year through November 3.
However, not all are faring badly. London-based Florin Court, founded by Douglas Greenig, a former chief risk officer at hedge fund giant Man Group’s AHL unit, gained 3.5% in October. That means it is up 5.4% this year, according to numbers sent to investors and reviewed by the Journal.
Robin Carpenter, head of New Hampshire-based data group Carpenter Analytical Services, said last month that CTAs’ exposure to fixed income was "impossibly high and dangerous”. However, funds are now in “retreat from over-bullish bond exposure,” he said.
However, some managers see other potential dangers. “While they have mostly closed out their bond positions they remain long equities and have thus had a tough beginning of November as well,” said Michele Gesualdi, chief investment officer of Kairos Partners in London, which oversees more than €8 billion in assets.
Also losing money recently was Netherlands-based Transtrend, which runs $5.5 billion in assets. It lost 3.9% in October after strong gains over the summer, according to data from the company, reducing gains this year to 3.9%.
CTA hedge funds on average lost 3.7% in October, according to early numbers from Chicago-based data group HFR, and are down just over 3% this year through November 3.
However, not all are faring badly. London-based Florin Court, founded by Douglas Greenig, a former chief risk officer at hedge fund giant Man Group’s AHL unit, gained 3.5% in October. That means it is up 5.4% this year, according to numbers sent to investors and reviewed by the Journal.
Write to Laurence Fletcher at laurence.fletcher@wsj.com |
