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Hedge funds that aim to profit from prevailing trends in global markets are facing challenges in replicating their remarkable performance from 2022. Volatile swings in asset prices and sudden shifts in investors’ interest rate expectations have thrown them off balance.
Commodity trading advisers (CTAs) like Leda Braga’s Systematica and Lynx Asset Management in Stockholm have reported losses of nearly 10% year to date. Other funds have also struggled to generate profits.
These funds rely on advanced computing power to identify and exploit market trends and patterns. In 2022, they were among the top-performing hedge funds globally, benefiting from commodity gains and significant declines in stocks and government debt.
However, this year, investors have faced difficulties in predicting global interest rates, impacting the performance of many trend followers who rely on clear, persistent trends to generate profits. Unexpected market movements, such as the surge in European natural gas prices, have also affected profitability.
“Equities, interest rates, and commodities have all experienced turbulent fluctuations this year, which is not a favorable environment for trend followers,” explained Andrew Beer, managing member at Dynamic Beta Investments. “One month you may look brilliant, but the next you may feel foolish.”
This challenging landscape has resulted in reversals for some of the industry’s major players. Systematica, managing around $17 billion in assets, has experienced a 9.6% loss in its Bluetrend fund this year, following a 30% gain in 2022. Lynx, with $7 billion in management, saw one of its main funds decline by 9.3% by the end of July, despite a 36.8% gain last year.
Quest Partners, managing $1.6 billion and focusing on short-term trends, has faced a 12.1% downturn by August 11, following a 25.2% gain in the previous year.
Martin Källström, deputy chief executive at Lynx, remarked, “Many of the trends that offered favorable trading opportunities last year reversed in the first half of 2023, causing trend followers like Lynx to partially give back their profits from last year.”
Although funds employ slightly different trading strategies, many encountered challenges in March when markets swiftly adjusted their expectations regarding future interest rate hikes after the collapse of banks like Silicon Valley Bank and Credit Suisse.
Trend followers had positioned themselves for further declines in bond prices as central banks increased rates; however, market turmoil led to a rise in Treasury prices as investors bet that the US Federal Reserve would slow the pace of rate increases to ensure financial stability. Bond yields move inversely to prices.
“At the start of March, most CTAs were short bonds and long stock indices,” explained Carsten Schmitz, co-chief investment officer of CTA Winton, which manages $10 billion. Despite the challenges, Winton’s funds have performed positively this year.
Even firms that quickly adjusted their strategies to bet on rising bond prices and falling equities faced immediate setbacks.
“Our strategy didn’t work out because Janet Yellen [Treasury secretary] stated that she would support the banks,” disclosed an executive at a trend-following hedge fund.
A model portfolio managed by Société Générale, designed to replicate the positions typically taken by computer-driven trend-followers, has experienced significant losses in bonds this year, highlighting the challenges faced by these funds. Within six months, the two-year Treasury yield has fluctuated from above 5% to below 3.8% and back above 5%.
Some funds have also encountered losses in natural gas prices due to an unexpected spike in European prices this summer, driven by concerns over a potential strike in Australia that could disrupt global supplies of liquefied natural gas. The trade unions are expected to vote on a deal that would call off the potential strike, and natural gas prices have decreased this week.
“This month has been extremely challenging” due to the gas price movements, revealed an executive at one of these funds.
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