Are Hedge Funds Losing Their Edge?

Hedge Fund ‘trend followers’ are enduring a tough year so far.

All heroes in the trading game are temporary. After justifying their existence in 2022, Quantitative Funds have been hit badly in 2023.

According to the Financial Times,?Hedge funds that try to make money by betting on prevailing trends in global markets are struggling as violent swings in asset prices and rapid shifts in investors’ interest rate expectations throw them off balance.

So-called commodity trading advisers, including Leda Braga’s Systematica and Stockholm-based Lynx Asset Management, have posted losses of close to 10 per cent year to date, while others have struggled to make money.

Such funds use vast quantities of computing power to find and exploit market trends and patterns and were among the world’s top-performing hedge funds last year, as gains for commodities and sharp declines for stocks and government debt paid off. But this year investors have struggled to gauge the path for global interest rates, hurting the performance of many trend followers, which tend to need clear, persistent trends in order to profit.

Unexpected market moves, such as the spike in European natural gas prices (which has subsequently reversed), have also dented profitability. “Equities, interest rates and commodities have all suffered violent oscillations this year — not a good environment for trend followers,” said Andrew Beer, managing member at US investment firm Dynamic Beta Investments. “One month you look like a genius, the next you feel like a moron.”

Anyone who has trading experience will tell you that this is a regular feeling and the only thing you can do is simply move on to the next trade. Trading is about averages. You need to be right most of the time, not all of the time. You also need to time it correctly as you can be right, just at the wrong time.

Computer based quant funds are taking over the market. Nobody wants to hire a ‘trader’ any more; they want an algorithmic based machines, but this year, they have discovered that computers also don’t know what’s going to happen to the markets.

This year has been horrible for some of the industry’s biggest names.

Systematica, which manages roughly ￡13bn in assets, has lost 9.6 per cent in its Bluetrend fund this year to mid-August. The firm declined to comment.

Quest Partners, which follows short-term trends and manages ￡1.26bn in assets, is down 12.1 per cent to August 11. They also declined to comment.

Lynx, which runs ￡5bn, has suffered a 9.3 per cent fall in one if its main funds this year to the end of July. Martin K?llstr?m, deputy chief executive at Lynx, said: “Many of the trends that offered good trading opportunities last year reversed in the first half of 2023, leading trend followers like Lynx to give back some of last year’s profits.”

While funds have slightly different trading strategies, many suffered in March when markets quickly dialled down their bets on how much further interest rates would rise following the collapse of banks including Silicon Valley Bank and Credit Suisse. Trend followers had been positioned for bond prices, which had been pushed lower by central bank rate rises, to fall further.

“At the start of March, most CTAs were short bonds and long stock indices,” said Carsten Schmitz, co-chief investment officer of CTA Winton, which manages ￡12.6bn in assets and whose funds are up this year. But turmoil in the banking system boosted Treasury prices, as investors bet that the US Federal Reserve would slow the pace of interest rate raises to shore up financial stability. Yields move inversely to prices.

“We were not overly leveraged at the portfolio level, however, we were near our maximum allowed risk in fixed-income markets,” said Christopher Reeve, director of risk at Aspect Capital, which is also up this year.

Even firms that immediately switched strategies and started betting on bond prices increasing and equities falling were immediately punished. “It didn’t work out for us because Janet Yellen [the US Treasury secretary] said she would backstop the bank,” said an executive at one trend-following hedge fund.

A model portfolio run by Société Générale, which aims to replicate the positions typically taken by computer-driven trend-followers, has suffered its greatest losses in bonds this year, in a sign of the pain suffered by these funds.

The two-year Treasury yield, for instance, has moved from above 5 per cent to less than 3.8 per cent and then back above 5 per cent in less than six months. Some funds have also suffered losses on natural gas prices after European prices unexpectedly spiked this summer on fears over a strike in Australia that could disrupt global supplies of liquefied natural gas.

Trade unions will vote to ratify a deal in the coming days that would call off the potential industrial action, and natural gas prices have tumbled this week. “This month has been horrible”.

Trading is a difficult game. It’s easy to see patterns when they’re behind you, but less so when there is a blank graph in front of you.

The aim isn’t to always be right. It’s to be right enough times that you make money each and every year. That way, compounded returns really start to add up.?This is what we aim to do at TPP. Some trades turn out to be huge, some less so, and some will be losers. This is just part of the job.

Experience teaches us that losers are fine. Just keep doing what you believe in, and if you’re good at it, you will make money.

The problem is when amateurs ‘give it a go’ but they do not have the experience to understand how it works. They will double down on the wrong trades, or get out of good trades that just haven’t worked yet.

Trading psychology is as important as the trade itself. Experience is what we look for at TPP and it’s worked so far; we’re sure it will keep on doing so for our customers.?All hedge funds have bad times, but so far, TPP has made money every year since inception and was up another 13% in the first half of 2023. Long may this continue.

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Closing comments:

The last couple of weeks have been challenging, but as we write this- many of our strategies are starting to move back in the right direction. We won't always be right,?but year on year- we expect to deliver.

Our strategies are designed with a remit of achieving 1.5 x their market benchmark, and ever since formation- performance has exceeded that.?Some are saying that TPP has the potential to change how the world invests.?We'll just keep doing what we're doing and see where it goes.

Elite and experienced traders wait for market movements like we have witnessed recently and?make tweaks to their portfolios, which often results?in extra portfolio gains.

It's what separates TPP from the masses. It's one of the many competitive edges that we have.

At TPP we offer a multitude of different strategies and trading techniques- they all have one thing in common.?They are all designed to beat their market benchmark.?Their track records suggest they will do exactly that.?

TPP has been built for frustrated investors. It's time to empower yourself and beat your market benchmark.

It's time for change.?No more exposure to underperforming?funds. More exposure to a game changing platform.

Don't just hear about the revolution:

Join it.

Welcome to the future of investing.???