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Quants Post Worst Month Since October as Winton Falls 3.2%

July 06, 2012

Quants Post Worst Month Since October as Winton Slumps 3.2%

The euro ’s four-day decline against the dollar through June 28 was its longest streak last month. Photographer: Tomohiro Ohsumi/Bloomberg

Hedge funds that use quantitative strategies executed by computers suffered their biggest losses since October last month after being whipsawed by Europe’s sovereign debt crisis.

The Newedge CTA Index, which tracks some of the largest systematic funds, lost 3.1 percent in June, erasing this year’s gains. David Harding’s $10.2 billion Winton Futures Fund Ltd. slumped 3.2 percent, extending this year’s loss to 4.1 percent, according to a person familiar with the performance. Man Group Plc (EMG)’s AHL Diversified fund lost 3.4 percent, while the Bluecrest BlueTrend Fund dropped 5.4 percent in June, an investor said.

Trend followers, which make up the majority of quantitative funds, have struggled to make money in the last two years as sentiment lurched from optimism to pessimism in response to speculation about the outcome of Europe’s debt crisis. Newedge’s CTA index is little changed this year and slumped in 2011, contrasting with a 13 percent gain in 2008 as the global financial crisis gave markets a clear direction.

“Last Friday was a killer for CTAs,” said Gabriel Garcin, a portfolio manager at Europanel Research and Alternative Asset Management, a $550 million fund of hedge funds. “Most trend followers are on the same side of the trades, so when we get a risk-on environment, they get hammered hard.”

Euro-Region Optimism

Ed Orlebar, a spokesman for BlueCrest, declined to comment on the fund’s returns. David Waller, Man Group’s spokesman, also declined to comment, as did an executive at Winton. The investors providing returns data on BlueCrest and Winton asked not to be named because the information is private.

The euro’s four-day decline against the dollar through June 28 was its longest streak last month, and was followed the next day by the biggest gain since October as euro-area leaders surprised markets by agreeing to relax conditions on emergency loans for Spanish banks and possible help for Italy.

Global stocks and the euro jumped the most this year on June 29, and oil posted its biggest gain since 2009 on the news, sending the Newedge index down 1.4 percent, the most since August. Its trend-following sub-index dropped 3.7 percent in June, capped with a 2.2 percent slide on June 29, the largest decline since May 2011.

Trend followers employ strategies that aim to take advantage of momentum in prices, whether rising or falling. They look for signals that a trend will continue or is about to end, often using technical indicators, such as moving averages, Bollinger bands and price envelopes.

Trading Algorithms

Quantitative funds use mathematical algorithms to decide when to buy and sell, and use computers to respond to price signals in fractions of seconds. CTA stands for commodity trading advisor, referring to fund managers who have to register with the U.S. Commodity Futures Trading Commission, yet managers carrying that moniker today are mostly systematic traders of foreign exchange, equities and bonds, as well as raw materials.

“The advantage of these sophisticated systems is that, by removing the influence of human emotions, all investment decisions can be effectively back-tested,” Man Group says on its website. “This has been particularly prominent in times of crises, where the strategy has demonstrated its strength to diversify risk.”

That was the case in 2008 when AHL returned 33 percent, compared with a 19 percent loss for the Bloomberg global hedge fund index. Since then it has lost money, falling 17 percent in 2009 and 5.9 percent last year, interspersed with a 15 percent gain in 2010. It has fallen 4 percent this year through June.

Crisis Returns

Losses at AHL have contributed to the 75 percent plunge in Man Group’s shares over the past year, a decline that cost the world’s largest publicly traded hedge-fund company its place in the FTSE 100 Index of the U.K.’s biggest firms. It also prompted analysts to question whether the stock is so cheap that the company is a takeover target. AHL accounts for almost a third of Man Group’s $59 billion of assets under management.

Societe Generale analyst Michael Sanderson cut his estimate on Man Group to hold from buy today, citing “further AHL weakness” in the second quarter.

BlueTrend (BBTS) performed even better than AHL in 2008, returning 43 percent in the year that Lehman Brothers Holdings Inc. filed for bankruptcy and the U.S. government rescued American International Group Inc., formerly the world’s biggest insurer, and investment bank Bear Stearns & Co. It has yet to post an annual loss after rising 0.3 percent last year. Winton gained 6.3 percent in 2011 and 14.5 percent in 2010.

Fund Inflows

Even as they struggled to turn a profit in recent years, CTA funds have attracted new money. Assets under management at systematic funds were steady at $260 billion in the first quarter of this year after surging 15 percent in 2011 and almost 200 percent since 2005, according to data from Fairfield, Iowa- based BarclayHedge Ltd.

Winton has been one of the most popular hedge funds among investors in the past 18 months. The firm now manages $29 billion compared with about $19 billion at the end of 2010. That means Winton itself accounts for about 12 percent of the $86.9 billion of assets the hedge-fund industry has added since 2010, according to Chicago-based Hedge Fund Research Inc.

Biggest Firms

The biggest firms have had success raising money in recent years, in part, because pension funds and endowments have been making more investments in trend followers, said Alex Allen, a senior portfolio manager in London at Sciens Capital Ltd.

“The attraction of a big CTA is exactly that -- its size,” said Allen, whose firm invests in hedge funds. “I know of only a handful of CTA programs that manage more than $1 billion, so if you are an institutional investor and have $20 million to $30 million to allocate and you can’t be more than 10 percent of a program’s assets, you have to invest in a program that has more than $300 million.”

While trend followers experienced a poor month in June, it would have been much worse if they hadn’t pulled back from more aggressive positions, according to James Skeggs, head of research at Newedge Group in London, whose automated trend model was 9.2 percent lower last month.

“Where markets are becoming more volatile or more correlated they will have smaller position sizes, typically, as a way of reducing risk,” Skeggs said.

Markets were roiled in June by concern that the euro-region debt crisis will stunt the economy, with commodities entering a bear market on June 21, only to rally on speculation central banks would act to stimulate growth.

Current choppy market conditions, should they endure, may prove better for CTAs than for so-called discretionary funds, Garcin said.

“It’s an awful environment for CTAs at the moment, but also for discretionary managers,” said Garcin. “The edge you have with this type of algorithmic trading systems is that they don’t get tired. They keep cool and can take the same amount of risk no matter how much draw down they’ve had.”

To contact the reporters on this story: Matthew Brown in London at; Jesse Westbrook in London at

To contact the editor responsible for this story: Lars Paulsson at

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