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Written by Nell Mackenzie
LONDON (Reuters) – Hedge funds with systematic strategies outperformed their peers in the first quarter as record cocoa prices and market volatility driven by inflation and geopolitics helped investors and industry watchers say. It is said that
Systematic hedge fund managers use coding and algorithms to determine whether they find trades strong enough to become market trends. This is different from traditional managers who make trade decisions themselves.
According to Barclays Prime Brokerage, which tracked the performance of 40 “classic trend” hedge funds, these trend funds posted an average gain of almost 9% in the first two months of 2024, while hedge The overall fund industry increase was 2.6%.
Their success reflects how volatile the market has become and how its fortunes differ globally, the people said.
The U.S. S&P 500 index is up more than 11% since the beginning of the year, while Hong Kong’s Hang Seng Index is down about 2%. Japan’s Nikkei Stock Average rose more than 20%, European stocks lagged behind the 6% rise, and China rose about 3%.
Commodity markets are also mixed, but cocoa’s sustained rally toward record highs is a boon for systematic hedge funds.
Michael Oliver Weinberg, a Columbia Business School professor and hedge fund investor, said the diverse performance across regions and assets is good for these funds, which benefit from disparate markets.
“It’s a great market for systematic managers because the length and the shortness are usually the same,” Weinberg said. A short position is a bet that the value of an asset will decline. A long position is a bet that the price will rise.
In 2023, crowded positions in the “Magnificent Seven” U.S. tech stocks provided most of the gains for the hedge fund industry as a whole, but this year sharp divergences in stocks, bonds, and commodities have led to a decline in these specific types. created the perfect environment for the strategy. said Weinberg.
In Europe, for example, aerospace and defense stocks are up about 28% so far this year, while utility stocks are down about 7%.
hot chocolate
The best-performing systematic strategies and trend funds also took on the most risk.
These use different volatility thresholds to determine when a trade becomes too risky to abort.
The top 10 top-performing trend funds were nearly two-thirds more volatile than other funds in the first two months of this year, according to data from Barclays Prime Brokerage, which tracks hedge funds, shared with Reuters. The average return was approximately 20%.
The remaining funds with lower risk thresholds recorded an average return of 5%.
But even companies with lower volatility tolerances benefited from solid movements in agricultural products, currencies and energy, people familiar with the matter said.
According to two investment sources, long-term cocoa trading that began in the first half of 2023 boosted profits.
Cocoa prices have more than doubled in the past year due to poor harvests in top producers Ivory Coast and Ghana and processors scrambling to source cocoa beans.
British hedge fund firm Winton Capital tolerates about 9% volatility in its $2.8 billion systematic CTA (commodity trading advisor) strategy. Profits from cocoa, stock indexes, natural gas and the yen led to a 9.1% gain for the year to March 20, a person close to the company said.
Long bets in cocoa and short positions in grains helped Rotterdam-based investment manager Transtrend’s $5.4 billion profit rise to about 18% in the year to March 21.
It also benefited from short bets on carbon emissions permits. It was actively traded by companies that needed to pay for the carbon they emitted and speculators betting on its value.
Mark Van Loo of Transtrend’s Investor Relations team said: “A strong month like February, which brings near double-digit returns, is typically the result of a boom in markets across asset classes, such as wars or other crises. “It is triggered by a major event that has an impact.”
But February of this year was different, he said, as returns were simply driven by the strength of trends this first quarter.
The $8.6 billion Aspect Capital returned 12% in the year to March 19, benefiting from trends in cocoa, the Chilean peso, the yen, stock markets and European emissions, according to people close to the fund. It is said that he received it.
“What makes this macro environment so positive are the multiple destabilizing factors driving trend formation, whether it’s the effects of El Niño, the normalization of interest rates, or rising geopolitical risks. ” said Razvan Remsing, director of investment solutions. Aspect Capital. He declined to comment on the number of returns.
Bonds are the bottleneck for these funds, as the timing of rate cuts remains elusive.
“Bonds will be more difficult in 2024,” said Kathryn Kaminsky, principal research strategist at Boston-based Alpha Simplex. , the market was ahead of the Fed in lowering interest rates, then rising again.” .
At the end of February, the $8 billion company, backed by equity positions, energy and agricultural products, had a return of about 5%, according to bank research.
The company did not comment on this figure.
(Reporting by Nell Mackenzie; Editing by Dhara Ranasinghe and Susan Fenton)
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